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Section 1: 10-Q (10-Q)

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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 June 30, 2018

 

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 August 6, 2018, 131,369,594 common units are outstanding.

 

 

 

 

 


 

Table of Contents

TABLE OF CONTENTS

 

PART I 

FINANCIAL INFORMATION 

 

 

 

 

 

 

Page

 

 

 

ITEM 1. 

Financial Statements (Unaudited)

 

 

ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES

 

 

Condensed Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017

1

 

Condensed Consolidated Statements of Income for the three and six months ended June 30, 2018 and 2017

2

 

Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2018 and 2017

3

 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and 2017

4

 

Notes to Condensed Consolidated Financial Statements

5

 

1.     Organization and Presentation

5

 

2.     New Accounting Standards

8

 

3.     Contingencies

9

 

4.     Inventories

9

 

5.     Fair Value Measurements

10

 

6.     Long-Term Debt

10

 

7.     Variable Interest Entities

12

 

8.     Investments

13

 

9.     Partners' Capital

14

 

10.   Revenue from Contracts with Customers

16

 

11.   Net Income of ARLP Per Limited Partner Unit

17

 

12.   Workers' Compensation and Pneumoconiosis

19

 

13.   Compensation Plans

19

 

14.   Components of Pension Plan Net Periodic Benefit Costs

21

 

15.   Segment Information

21

 

16.   Subsequent Events

24

ITEM 2. 

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

25

ITEM 3. 

Quantitative and Qualitative Disclosures about Market Risk

37

ITEM 4. 

Controls and Procedures

37

 

Forward-Looking Statements

39

 

 

 

PART II 

OTHER INFORMATION 

 

 

 

ITEM 1. 

Legal Proceedings

41

ITEM 1A. 

Risk Factors

41

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

41

ITEM 3. 

Defaults Upon Senior Securities

42

ITEM 4. 

Mine Safety Disclosures

42

ITEM 5. 

Other Information

42

ITEM 6. 

Exhibits

43

 

 

 

 

 

i


 

Table of Contents

PART I

 

FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

 

ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except unit data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

 

 

2018

    

2017

 

ASSETS

    

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

51,225

 

$

6,756

 

Trade receivables

 

 

178,675

 

 

181,671

 

Other receivables

 

 

443

 

 

146

 

Due from affiliates

 

 

19

 

 

165

 

Inventories, net

 

 

68,411

 

 

60,275

 

Advance royalties, net

 

 

1,510

 

 

4,510

 

Prepaid expenses and other assets

    

 

15,908

    

 

28,117

 

Total current assets

 

 

316,191

 

 

281,640

 

PROPERTY, PLANT AND EQUIPMENT:

 

 

 

 

 

 

 

Property, plant and equipment, at cost

 

 

3,013,346

 

 

2,934,188

 

Less accumulated depreciation, depletion and amortization

 

 

(1,547,224)

 

 

(1,457,532)

 

Total property, plant and equipment, net

 

 

1,466,122

 

 

1,476,656

 

OTHER ASSETS:

 

 

 

 

 

 

 

Advance royalties, net

 

 

50,903

 

 

39,660

 

Equity method investments

 

 

158,370

 

 

147,964

 

Equity securities

 

 

113,976

 

 

106,398

 

Goodwill

 

 

136,399

 

 

136,399

 

Other long-term assets

 

 

23,873

 

 

30,654

 

Total other assets

 

 

483,521

 

 

461,075

 

TOTAL ASSETS

 

$

2,265,834

 

$

2,219,371

 

 

 

 

 

 

 

 

 

LIABILITIES AND PARTNERS' CAPITAL

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

Accounts payable

 

$

89,698

 

$

96,958

 

Due to affiliates

 

 

717

 

 

771

 

Accrued taxes other than income taxes

 

 

20,574

 

 

20,336

 

Accrued payroll and related expenses

 

 

40,935

 

 

35,751

 

Accrued interest

 

 

4,999

 

 

5,005

 

Workers' compensation and pneumoconiosis benefits

 

 

10,766

 

 

10,729

 

Current capital lease obligations

 

 

30,954

 

 

28,613

 

Other current liabilities

 

 

15,756

 

 

19,071

 

Current maturities, long-term debt, net

 

 

61,500

 

 

72,400

 

Total current liabilities

 

 

275,899

 

 

289,634

 

LONG-TERM LIABILITIES:

 

 

 

 

 

 

 

Long-term debt, excluding current maturities, net

 

 

387,470

 

 

415,937

 

Pneumoconiosis benefits

 

 

72,896

 

 

71,875

 

Accrued pension benefit

 

 

41,774

 

 

45,317

 

Workers' compensation

 

 

45,159

 

 

46,694

 

Asset retirement obligations

 

 

126,790

 

 

126,750

 

Long-term capital lease obligations

 

 

40,744

 

 

57,091

 

Other liabilities

 

 

19,671

 

 

14,587

 

Total long-term liabilities

 

 

734,504

 

 

778,251

 

Total liabilities

 

 

1,010,403

 

 

1,067,885

 

 

 

 

 

 

 

 

 

PARTNERS' CAPITAL:

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

Limited Partners - Common Unitholders 131,395,987 and 130,704,217 units outstanding, respectively

 

 

1,300,011

 

 

1,183,219

 

General Partner's interest

 

 

 —

 

 

14,859

 

Accumulated other comprehensive loss

 

 

(49,907)

 

 

(51,940)

 

Total ARLP Partners' Capital

 

 

1,250,104

 

 

1,146,138

 

Noncontrolling interest

 

 

5,327

 

 

5,348

 

Total Partners' Capital

 

 

1,255,431

 

 

1,151,486

 

TOTAL LIABILITIES AND PARTNERS' CAPITAL

 

$

2,265,834

 

$

2,219,371

 

 

See notes to condensed consolidated financial statements.

1


 

Table of Contents

ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except unit and per unit data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

    

2018

    

2017

    

2018

    

2017

    

SALES AND OPERATING REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Coal sales

 

$

475,925

 

$

382,262

 

$

899,535

 

$

821,006

 

Transportation revenues

 

 

27,532

 

 

7,328

 

 

47,317

 

 

16,924

 

Other sales and operating revenues

 

 

12,680

 

 

9,130

 

 

26,407

 

 

21,870

 

Total revenues

 

 

516,137

 

 

398,720

 

 

973,259

 

 

859,800

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses (excluding depreciation, depletion and amortization)

 

 

311,201

 

 

237,904

 

 

588,439

 

 

499,931

 

Transportation expenses

 

 

27,532

 

 

7,328

 

 

47,317

 

 

16,924

 

Outside coal purchases

 

 

68

 

 

 —

 

 

1,442

 

 

 —

 

General and administrative

 

 

17,026

 

 

14,944

 

 

33,677

 

 

30,977

 

Depreciation, depletion and amortization

 

 

72,150

 

 

59,020

 

 

133,998

 

 

124,147

 

Settlement gain

 

 

 —

 

 

 —

 

 

(80,000)

 

 

 —

 

Total operating expenses

 

 

427,977

 

 

319,196

 

 

724,873

 

 

671,979

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INCOME FROM OPERATIONS

 

 

88,160

 

 

79,524

 

 

248,386

 

 

187,821

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense (net of interest capitalized for the three and six months ended June 30, 2018 and 2017 of $296, $166, $561 and $247, respectively)

 

 

(9,955)

 

 

(10,615)

 

 

(20,813)

 

 

(18,131)

 

Interest income

 

 

24

 

 

54

 

 

89

 

 

78

 

Equity method investment income

 

 

4,839

 

 

2,916

 

 

8,575

 

 

6,616

 

Equity securities income

 

 

3,854

 

 

 —

 

 

7,578

 

 

 —

 

Debt extinguishment loss

 

 

 —

 

 

(8,148)

 

 

 —

 

 

(8,148)

 

Other (expense) income

 

 

(542)

 

 

(375)

 

 

(1,389)

 

 

158

 

INCOME BEFORE INCOME TAXES

 

 

86,380

 

 

63,356

 

 

242,426

 

 

168,394

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INCOME TAX EXPENSE (BENEFIT)

 

 

 3

 

 

 4

 

 

(7)

 

 

(8)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

 

86,377

 

 

63,352

 

 

242,433

 

 

168,402

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LESS:  NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST

 

 

(187)

 

 

(122)

 

 

(335)

 

 

(270)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

86,190

 

$

63,230

 

$

242,098

 

$

168,132

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GENERAL PARTNERS' INTEREST IN NET INCOME OF ARLP

 

$

 —

 

$

604

 

$

1,560

 

$

20,750

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIMITED PARTNERS' INTEREST IN NET INCOME OF ARLP

 

$

86,190

 

$

62,626

 

$

240,538

 

$

147,382

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BASIC AND DILUTED NET INCOME OF ARLP PER LIMITED PARTNER UNIT (Note 11)

 

$

0.64

 

$

0.82

 

$

1.80

 

$

1.93

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DISTRIBUTIONS PAID PER LIMITED PARTNER UNIT

 

$

0.5150

 

$

0.4375

 

$

1.0250

 

$

0.8750

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

WEIGHTED-AVERAGE NUMBER OF UNITS OUTSTANDING – BASIC AND DILUTED

 

 

131,279,910

 

 

74,597,036

 

 

131,050,836

 

 

74,550,426

 

 

See notes to condensed consolidated financial statements.

2


 

Table of Contents

ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

    

June 30, 

 

June 30, 

 

 

 

2018

    

2017

    

2018

    

2017

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

$

86,377

 

$

63,352

 

$

242,433

 

$

168,402

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME (LOSS):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Defined benefit pension plan

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of prior service cost (1)

 

 

47

 

 

47

 

 

94

 

 

94

 

Amortization of net actuarial loss (1)

 

 

969

 

 

772

 

 

1,938

 

 

1,545

 

Total defined benefit pension plan adjustments

 

 

1,016

 

 

819

 

 

2,032

 

 

1,639

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pneumoconiosis benefits

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of net actuarial loss (gain) (1)

 

 

 —

 

 

(567)

 

 

 1

 

 

(1,134)

 

Total pneumoconiosis benefits adjustments

 

 

 —

 

 

(567)

 

 

 1

 

 

(1,134)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME

 

 

1,016

 

 

252

 

 

2,033

 

 

505

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME

 

 

87,393

 

 

63,604

 

 

244,466

 

 

168,907

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: Comprehensive income attributable to noncontrolling interest

 

 

(187)

 

 

(122)

 

 

(335)

 

 

(270)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME ATTRIBUTABLE TO ARLP

 

$

87,206

 

$

63,482

 

$

244,131

 

$

168,637

 


(1)

Amortization of prior service cost and net actuarial gain or loss is included in the computation of net periodic benefit cost (see Notes 12 and 14 for additional details).

 

See notes to condensed consolidated financial statements.

3


 

Table of Contents

ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

June 30, 

 

 

    

2018

    

2017

    

 

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

$

373,244

 

$

294,478

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Property, plant and equipment:

 

 

 

 

 

 

 

Capital expenditures

 

 

(120,646)

 

 

(67,517)

 

Increase in accounts payable and accrued liabilities

 

 

2,376

 

 

2,411

 

Proceeds from sale of property, plant and equipment

 

 

477

 

 

540

 

Contributions to equity method investments

 

 

(11,400)

 

 

(12,587)

 

Distributions received from investments in excess of cumulative earnings

 

 

1,191

 

 

1,829

 

Net cash used in investing activities

 

 

(128,002)

 

 

(75,324)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Borrowings under securitization facility

 

 

112,600

 

 

75,700

 

Payments under securitization facility

 

 

(123,500)

 

 

(100,000)

 

Payments on term loan

 

 

 —

 

 

(50,000)

 

Borrowings under revolving credit facilities

 

 

70,000

 

 

40,000

 

Payments under revolving credit facilities

 

 

(100,000)

 

 

(295,000)

 

Borrowings under long-term debt

 

 

 —

 

 

400,000

 

Payment on long-term debt

 

 

 —

 

 

(145,000)

 

Payments on capital lease obligations

 

 

(14,952)

 

 

(13,389)

 

Payment of debt issuance costs

 

 

 —

 

 

(15,033)

 

Payment for debt extinguishment

 

 

 —

 

 

(8,148)

 

Payment for purchase of units under unit repurchase program

 

 

(7,639)

 

 

 —

 

Contributions to consolidated company from affiliate noncontrolling interest

 

 

 —

 

 

251

 

Net settlement of withholding taxes on issuance of units in deferred compensation plans

 

 

(2,081)

 

 

(2,988)

 

Cash contributions by General Partners

 

 

41

 

 

905

 

Cash contribution by affiliated entity

 

 

2,142

 

 

 —

 

Cash obtained in Simplification Transactions

 

 

1,139

 

 

 —

 

Distributions paid to Partners

 

 

(137,443)

 

 

(106,440)

 

Other

 

 

(1,080)

 

 

(337)

 

Net cash used in financing activities

 

 

(200,773)

 

 

(219,479)

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

 

44,469

 

 

(325)

 

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

 

6,756

 

 

39,782

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

51,225

 

$

39,457

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL CASH FLOW INFORMATION:

 

 

 

 

 

 

 

Cash paid for interest

 

$

19,934

 

$

11,469

 

Cash paid for income taxes

 

$

34

 

$

 7

 

 

 

 

 

 

 

 

 

NON-CASH INVESTING AND FINANCING ACTIVITY:

 

 

 

 

 

 

Accounts payable for purchase of property, plant and equipment

 

$

18,012

 

$

10,643

 

Assets acquired by capital lease

 

$

835

 

$

 —

 

Market value of common units issued under deferred compensation plans before tax withholding requirements

 

$

6,142

 

$

8,149

 

 

See notes to condensed consolidated financial statements.

4


 

Table of Contents

 

 

ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.ORGANIZATION AND PRESENTATION

 

Significant Relationships Referenced in Notes to Condensed Consolidated Financial Statements

 

·

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

·

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

·

References to "MGP" mean Alliance Resource Management GP, LLC, ARLP's sole general partner and, prior to the Exchange Transaction discussed below, its managing general partner. 

·

References to "SGP" mean Alliance Resource GP, LLC, ARLP's special general partner prior to the Exchange Transaction discussed below and the holder of approximately 34.48% of the outstanding AHGP common units prior to the Simplification Transactions discussed below.  SGP is indirectly wholly owned by Joseph W. Craft III, the President and Chief Executive Officer and a Director of MGP, and Kathleen S. Craft, who are collectively referred to in such capacity as the "Owners of SGP."

·

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.

·

References to "AHGP" mean Alliance Holdings GP, L.P., individually, as the parent company of MGP prior to the Simplification Transactions discussed below, as a wholly owned subsidiary of ARLP subsequent to the Simplification Transactions, and not on a consolidated basis before or after the Simplification Transactions.

 

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 and completed its initial public offering on August 19, 1999 when it acquired substantially all of the coal production and marketing assets of Alliance Resource Holdings, Inc., a Delaware corporation ("ARH"), and its subsidiaries.  We are managed by our sole general partner, MGP, a Delaware limited liability company which holds a non-economic general partner interest in ARLP.  Prior to the Simplification Transactions, MGP was a wholly owned indirect subsidiary of AHGP.  Alliance GP, LLC ("AGP"), which is indirectly wholly owned by Mr. Craft, was the general partner of AHGP prior to the Simplification Transactions and became the sole owner of MGP subsequent to the transactions.  See discussions under Partnership Simplification regarding changes in ownership of ARLP and MGP as a result of the Exchange Transaction and Simplification Transactions.

 

Partnership Simplification

 

On July 28, 2017, the conflicts committee of the board of directors of MGP and AGP's board of directors approved a transaction to simplify our partnership structure. Pursuant to that transaction, which closed on the date approved, MGP contributed to ARLP all of its incentive distribution rights ("IDRs") and its 0.99% managing general partner interest in ARLP in exchange for 56,100,000 ARLP common units and a non-economic general partner interest in ARLP.  In conjunction with this transaction and on the same economic basis as MGP, SGP also contributed to ARLP its 0.01% general partner interests in both ARLP and the Intermediate Partnership in exchange for 28,141 ARLP common units (collectively the "Exchange Transaction").

 

On February 22, 2018, MGP's board of directors and the board of directors of AGP approved a simplification agreement (the "Simplification Agreement"), pursuant to which, among other things, through a series of transactions (the "Simplification Transactions"):

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i.

AHGP would become a wholly owned subsidiary of ARLP,

ii.

all of the issued and outstanding AHGP common units would be canceled and converted into the right to receive the ARLP common units held by AHGP and its subsidiaries,

iii.

in exchange for a number of ARLP common units calculated pursuant to the Simplification Agreement, MGP's 1.0001% general partner interest in our Intermediate Partnership and MGP's 0.001% managing member interest in our subsidiary, Alliance Coal, would be contributed to us, and

iv.

MGP would remain ARLP's sole general partner and would be a wholly owned subsidiary of AGP, and thus no control, management, or governance changes with respect to our business would occur. 

 

The Simplification Agreement and the transactions contemplated thereby were approved by the written consent of approximately 68% of the holders of AHGP common units outstanding as of April 25, 2018, the record date for the consent solicitation.  On May 31, 2018, ARLP, AHGP and the other parties to the Simplification Agreement completed the transactions contemplated by the Simplification Agreement.

 

As part of the Simplification Transactions, (i) each AHGP common unit that was issued and outstanding at the effective time of the Simplification Transactions was canceled and converted into the right to receive a portion of the ARLP common units held by AHGP and its subsidiaries, and (ii) SGP became the sole limited partner in AHGP.  Each outstanding AHGP common unit, other than certain AHGP common units held by the Owners of SGP, converted into the right to receive approximately 1.4782 ARLP common units held by AHGP and its subsidiaries.  The remaining AHGP common units held by the Owners of SGP were canceled and converted into the right to receive 29,188,997 ARLP common units which equaled (i) the product of the number of certain AHGP common units held by the Owners of SGP multiplied by 1.4782, minus (ii) 1,322,388 ARLP common units.  In addition, ARLP issued 1,322,388 ARLP common units to the Owners of SGP in exchange for causing SGP to contribute to ARLP its remaining limited partner interest in AHGP, which included AHGP's indirect ownership of a 1.0001% general partner interest in the Intermediate Partnership and a 0.001% managing member interest in Alliance Coal, resulting in an overall exchange ratio to the Owners of SGP equal to that of the other AHGP unitholders.  Upon the issuance of ARLP common units to the Owners of SGP in exchange for the limited partner interest in AHGP, ARLP became a) the sole limited partner of AHGP and b) through AHGP, the indirect owner of a 1.0001% general partner interest in the Intermediate Partnership and a 0.001% managing member interest in Alliance Coal. 

 

The Simplification Transactions are accounted for prospectively as an exchange of equity interests between entities under common control. Since ARLP and AHGP were under common control both before and after the Simplification Transactions, no fair value adjustment was made to the assets or liabilities of AHGP and its subsidiaries and no gain or loss was recognized on our condensed consolidated financial statements.

 

Basis of Presentation

 

The accompanying condensed consolidated financial statements include the accounts and operations of the ARLP Partnership and present our financial position as of June 30, 2018 and December 31, 2017, the results of our operations and comprehensive income for the three and six months ended June 30, 2018 and 2017, and the cash flows for the six months ended June 30, 2018 and 2017. All intercompany transactions and accounts have been eliminated. 

 

For the periods presented prior to the Simplification Transactions, MGP's interests in both Alliance Coal and the Intermediate Partnership are reported as part of the general partner's interest in the ARLP Partnership's condensed consolidated financial statements.  For the periods presented prior to the Exchange Transaction, MGP's managing general partner interest and IDRs in ARLP and the SGP's special general partner interests in ARLP and the Intermediate Partnership are also reported as part of the general partners' interest in the ARLP Partnership's condensed consolidated financial statements.

 

These condensed consolidated financial statements and notes are unaudited. However, in the opinion of management, these condensed consolidated financial statements reflect all normal recurring adjustments necessary for a fair presentation of the results for the periods presented.  Results for interim periods are not necessarily indicative of results to be expected for the full year ending December 31, 2018.

 

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

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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, 2017.

 

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.

 

Investments

 

Our investments and ownership interests in equity securities without readily determinable fair values in entities in which we do not have a controlling financial interest or significant influence are accounted for using a measurement alternative other than fair value which is historical cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same entity.  Distributions received on those investments are recorded as income unless those distributions are considered a return on investment, in which case the historical cost is reduced.    We account for our ownership interests in Kodiak Gas Services, LLC ("Kodiak") as equity securities without readily determinable fair values.  See Note 8 – Investments for further discussion of this investment.

 

Our investments and ownership interests in entities in which we do not have a controlling financial interest are accounted for under the equity method of accounting if we have the ability to exercise significant influence over the entity.  Investments accounted for under the equity method are initially recorded at cost, and the difference between the basis of our investment and the underlying equity in the net assets of the joint venture at the investment date, if any, is amortized over the lives of the related assets that gave rise to the difference. 

 

Our equity method investments include AllDale Minerals, LP ("AllDale I") and AllDale Minerals II, LP ("AllDale II") (collectively "AllDale Minerals"), both held by our affiliate Cavalier Minerals JV, LLC ("Cavalier Minerals"), and AllDale Minerals III, LP ("AllDale III") which is held through our subsidiary, Alliance Minerals, LLC ("Alliance Minerals").  AllDale III and AllDale Minerals are collectively referred to as the "AllDale Partnerships."  See Note 8 – Investments for further discussion of these equity method investments. 

 

We review our equity securities and our equity method investments for impairment whenever events or changes in circumstances indicate a loss in the value of the investment may be other-than-temporary.

 

Revenue Recognition

 

Revenues from coal supply contracts with customers are recognized at the point in time when control of the coal passes to the customer.  We have determined that each ton of coal represents a separate and distinct performance obligation.  Our coal supply contracts and other sales and operating revenue contracts vary in length from short-term to long-term contracts and do not typically have significant financing components.  Transportation revenues represent the fulfillment costs incurred for the services provided to customers through third-party carriers and for which we are directly reimbursed.  Other sales and operating revenues primarily consist of transloading fees, administrative service revenues from our affiliates, mine safety services and products, other coal contract fees and other handling and service fees.  Performance obligations under these contracts are typically satisfied upon transfer of control of the goods or services to our customer which is determined by the contract and could be upon shipment or upon delivery. 

 

The estimated transaction price from each of our contracts is based on the total amount of consideration we expect to be entitled to under the contract.  Included in the transaction price for certain coal supply contracts is the impact of variable consideration, including quality price adjustments, handling services, government imposition claims, per ton price fluctuations based on certain coal sales price indices and anticipated payments in lieu of shipments.  We have constrained the expected value of variable consideration in our estimation of transaction price and only included this consideration to the extent that it is probable that a significant revenue reversal will not occur.  The estimated transaction price for each contract is allocated to our performance obligations based on relative standalone selling prices determined at contract inception.  Variable consideration is allocated to a specific part of the contract in many instances, such as if the variable

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consideration is based on production activities for coal delivered during a certain period or the outcome of a customer's ability to accept coal shipments over a certain period.

 

Contract assets are recorded as trade receivables and reported separately in our consolidated balance sheet from other contract assets as title passes to the customer and our right to consideration becomes unconditional.  Payments for coal shipments are typically due within two to four weeks of performance.  We typically do not have material contract assets that are stated separately from trade receivables as our performance obligations are satisfied as control of the goods or services passes to the customer thereby granting us an unconditional right to receive consideration.  Contract liabilities relate to consideration received in advance of the satisfaction of our performance obligations.  Contract liabilities are recognized as revenue at the point in time when control of the good or service passes to the customer.

 

2.NEW ACCOUNTING STANDARDS

 

New Accounting Standards Issued and Adopted

 

In March 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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.  ASU 2017-07 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods.  The adoption of ASU 2017-07 did not have a material impact on our condensed consolidated financial statements.  The new presentation requirements in the guidance were applied retrospectively to all periods presented using the amounts of other components of net benefit cost previously disclosed in prior period footnotes. The requirement under the guidance to only capitalize the service cost component was applied prospectively.

 

In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities ("ASU 2016-01").  ASU 2016-01 will require entities to measure equity investments at fair value and recognize any changes in fair value in net income. The guidance removes the cost method of accounting for equity investments without a readily determinable fair value, but provides a new measurement alternative where entities may choose to measure those investments at cost, less any impairment, plus or minus any changes resulting from observable price changes in transactions for the same issuer.  ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of ASU 2016-01 did not have a material impact on our condensed consolidated financial statements. 

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers ("ASU 2014-09").  ASU 2014-09 is a new revenue recognition standard that provides a five-step analysis of transactions to determine when and how revenue is recognized.  ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017.  The adoption of the new standard did not have a material impact on our condensed consolidated financial statements, but requires 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 and a modified retrospective method.  We elected to use the modified retrospective method of adoption, which allows a cumulative effect adjustment to equity as of the date of adoption.  As there was no change in the recognition pattern of our revenues, we did not have a cumulative effect adjustment upon adoption of the new standard.  See Note 10 – Revenue from Contracts with Customers for additional information.

 

New Accounting Standards Issued and Not Yet Adopted

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments–Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13").  ASU 2016-13 changes the impairment model for most financial assets and certain other instruments to require the use of a new forward-looking "expected loss" model that generally will result in earlier recognition of allowances for losses.  The new standard will require disclosure of significantly more information related to these items.  ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted for the fiscal year beginning after December 15, 2018, including interim periods.  We are currently evaluating the effect of adopting ASU 2016-13, but do not anticipate it will have a material impact on our condensed consolidated financial statements.

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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.  The FASB continues to issue clarifications, updates and implementation guidance to ASU 2016-02 which we continue to monitor, such as ASU 2018-01, Leases (Topic 842) ("ASU 2018-01") and ASU 2018-11, Leases (Topic 842) ("ASU 2018-11") which provides practical expedients for transition to Topic 842.  ASU 2018-01 allows for companies that did not previously recognize land easements as leases to continue this practice for existing leases, but will still require the evaluation of new lease arrangements, including land easements.  ASU 2018-11 provides an option to apply the transition provisions of the new standard at its adoption date instead of at the earliest comparative period presented and permits lessors to not separate nonlease components from the associated lease component if certain conditions are met.

 

In 2017 and continuing into 2018, we established an assessment team to determine the effect of adopting ASU 2016-02.  As part of the assessment process, management has provided education and guidance to business units regarding the new standard.  We have compiled our current population of leases and are in the process of reviewing this population in addition to ongoing efforts to update the population for new leases. We are in the process of developing internal controls relating to our implementation and ongoing accounting for leases.  In addition to monitoring FASB activity regarding ASU 2016-02, we are continuing to monitor various non-authoritative groups with respect to implementation issues that could affect our assessment. 

 

3.CONTINGENCIES

 

On March 9, 2018, we finalized an agreement with a customer and certain of its affiliates to settle breach of contract litigation we initiated in January 2015.  The agreement provided for a $93.0 million cash payment to us, execution of a new coal supply agreement with the customer, continued export transloading capacity for our Appalachian mines and the rights to acquire certain coal reserves for $2.0 million from an affiliate of the customer.  The $93.0 million cash payment we received in March was the total compensation recorded in our condensed consolidated statements of income for the agreement.  We have paid or accrued in total, $13.0 million of legal fees and associated incentive compensation costs related to this settlement which resulted in a net gain of $80.0 million reflected in the Settlement gain line item in our condensed consolidated statements of income.

 

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:

 

 

 

 

 

 

 

 

 

 

    

June 30, 

 

December 31, 

 

 

 

2018

    

2017

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Coal

 

$

30,883

 

$

22,825

 

Supplies (net of reserve for obsolescence of $5,304 and $5,149, respectively)

 

 

37,528

 

 

37,450

 

Total inventories, net

 

$

68,411

 

$

60,275

 

 

 

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5.FAIR VALUE MEASUREMENTS

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

December 31, 2017

 

 

    

Level 1

    

Level 2

    

Level 3

    

Level 1

    

Level 2

    

Level 3

 

 

 

(in thousands)

 

Measured on a recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

 —

 

$

 —

 

$

6,800

 

$

 —

 

$

 —

 

$

6,800

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional disclosures:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

 —

 

 

497,154

 

 

 —

 

 

 —

 

 

541,147

 

 

 —

 

Total

 

$

 —

 

$

497,154

 

$

6,800

 

$

 —

 

$

541,147

 

$

6,800

 

 

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.

 

6.LONG-TERM DEBT

 

Long-term debt consists of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unamortized Discount and

 

 

 

Principal

 

Debt Issuance Costs

 

 

 

June 30, 

 

December 31, 

 

June 30, 

 

December 31, 

 

 

    

2018

    

2017

    

2018

    

2017

 

 

 

(in thousands)

 

Revolving Credit facility

 

$

 —

 

$

30,000

 

$

(6,280)

 

$

(7,356)

 

Senior notes

 

 

400,000

 

 

400,000

 

 

(6,250)

 

 

(6,707)

 

Securitization facility

 

 

61,500

 

 

72,400

 

 

 —

 

 

 —

 

 

 

 

461,500

 

 

502,400

 

 

(12,530)

 

 

(14,063)

 

Less current maturities

 

 

(61,500)

 

 

(72,400)

 

 

 —

 

 

 —

 

Total long-term debt

 

$

400,000

 

$

430,000

 

$

(12,530)

 

$

(14,063)

 

 

On January 27, 2017, our Intermediate Partnership entered into a Fourth Amended and Restated Credit Agreement (the "Credit Agreement") with various financial institutions.  The Credit Agreement provides for a $494.75 million revolving credit facility, 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"), with a termination date of May 23, 2019.  The Credit Agreement was amended on April 3, 2017 to extend the termination date of the Revolving Credit Facility as to $461.25 million of the $494.75 million of commitments to May 23, 2021 and effectuate certain other changes. 

 

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.  Borrowings under the Revolving 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 Eurodollar Rate, with

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applicable margin, under the Credit Facility was 4.44% as of June 30, 2018.  At June 30, 2018, we had $8.1 million of letters of credit outstanding with $486.7 million available for borrowing under the Revolving Credit Facility. We currently incur an annual commitment fee of 0.35% 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, scheduled debt payments and distribution payments. 

 

The Credit Agreement contains various restrictions affecting our Intermediate Partnership and its subsidiaries including, among other things, restrictions on 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 Credit Agreement).  The Credit Agreement requires the Intermediate Partnership to maintain (a) a debt to cash flow ratio of not more than 2.5 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 0.75 to 1.0 and 16.6 to 1.0, respectively, for the trailing twelve months ended June 30, 2018.  We remain in compliance with the covenants of the Credit Agreement as of June 30, 2018.

 

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.  The indenture governing 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 with the net cash proceeds of one or more equity offerings at a redemption price equal to 107.5% of the principal amount redeemed, plus accrued and unpaid interest, if any, to the redemption date.  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 governing 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. 

 

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").  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 January 2018 and matures in January 2019. At June 30, 2018, we had $61.5 million outstanding under the Securitization Facility. 

 

On October 6, 2015, 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.  Mineral Lending's obligation to make the line of credit available terminates no later than October 6, 2019.  Borrowings under the Cavalier Credit Facility bear interest at a one month LIBOR rate plus 6% with interest payable quarterly, and mature on September 30, 2024, at which time all amounts then outstanding are required to be repaid. The Cavalier Credit Agreement requires repayment of the principal balance beginning in 2018, 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. To secure payment of the facility, Cavalier Minerals pledged all of its partnership interests, owned or later acquired, in 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 June 30, 2018, Cavalier Minerals had not drawn on the Cavalier Credit Facility.  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. 

 

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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.  Alliance Minerals and Bluegrass Minerals contributed $143.1 million and $6.0 million, respectively, to Cavalier Minerals, which sufficiently completed funding to Cavalier Minerals for these commitments. 

 

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 and AllDale Minerals Management II, LLC, the general partners of AllDale I and AllDale II.  Distributions paid to Alliance Minerals and Bluegrass Minerals from Cavalier Minerals for each period presented are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

    

2018

    

2017

    

2018

    

2017

 

 

 

(in thousands)

 

Alliance Minerals

 

$

4,665

 

$

3,521

 

$

8,553

 

$

8,084

 

Bluegrass Minerals

 

 

194

 

 

147

 

 

356

 

 

337

 

 

Alliance Minerals' ownership interest in Cavalier Minerals is 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 Mr. Craft, 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 six months ended June 30, 2018, we paid $10.8 million of advanced royalties to WKY CoalPlay.  As of June 30, 2018, we had $40.6 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

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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

 

On May 31, 2018, as part of the Simplification Transactions discussed in Note 1 – Organization and Presentation, Alliance Coal and the Intermediate Partnership became wholly owned subsidiaries of ARLP and thus we no longer consider them variable interest entities.

 

8.INVESTMENTS

 

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, which is included in our Other and Corporate category (see Note 15 – Segment Information), committed to directly (rather than through Cavalier Minerals) invest $30.0 million in AllDale III which was created for similar investment purposes.  We account for our ownership interest in the income or loss of the AllDale Partnerships as equity method investments.  We record equity income or loss based on the AllDale Partnerships' individual distribution structures.  The changes in our aggregate equity method investment in the AllDale Partnerships for each of the periods presented were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended