1.ORGANIZATION AND PRESENTATION

 

Significant Relationships Referenced in Notes to Consolidated Financial Statements

 

 

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 our managing general partner, 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 (“AHGP IPO”) 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.

 

The Delaware limited partnership, limited liability companies and corporation that comprise our subsidiaries are as follows: Intermediate Partnership, Alliance Coal, Alliance Design Group, LLC, (“Alliance Design”), Alliance Land, LLC, Alliance Minerals, LLC (“Alliance Minerals”), Alliance Properties, LLC, Alliance Resource Properties, LLC, (“Alliance Resource Properties”), AROP Funding, LLC (“AROP Funding”), ARP Sebree, LLC (“ARP Sebree), ARP Sebree South, LLC, Alliance WOR Properties, LLC (“WOR Properties”), Alliance Service, Inc. (“ASI”), Alliance WOR Processing, LLC (“WOR Processing”), Backbone Mountain, LLC, Cavalier Minerals JV, LLC (“Cavalier Minerals”), CR Services, LLC, Excel Mining, LLC, Gibson County Coal, LLC (“Gibson County Coal”), Hopkins County Coal, LLC (“Hopkins County Coal”), Matrix Design Group, LLC (“Matrix Design”), MC Mining, LLC (“MC Mining”), Mettiki Coal, LLC (“Mettiki (MD)”), Mettiki Coal (WV), LLC (“Mettiki (WV)”), Mt. Vernon Transfer Terminal, LLC (“Mt. Vernon”), Penn Ridge Coal, LLC (“Penn Ridge”), Pontiki Coal, LLC (“Pontiki”), River View Coal, LLC (“River View”), Sebree Mining, LLC (“Sebree Mining”), Steamport, LLC, Tunnel Ridge, LLC (“Tunnel Ridge”), UC Coal, LLC, UC Mining, LLC, UC Processing, LLC, Warrior Coal, LLC (“Warrior”), Webster County Coal, LLC (“Webster County Coal”), White County Coal, LLC (“White County Coal”) and Wildcat Insurance, LLC (“Wildcat Insurance”).

 

The accompanying consolidated financial statements include the accounts and operations of the ARLP Partnership and present our financial position as of December 31, 2014 and 2013, and results of our operations, comprehensive income, cash flows and changes in partners’ capital for each of the three years in the period ended December 31, 2014.  All of our intercompany transactions and accounts have been eliminated.

 

On June 16, 2014, we completed a two-for-one split of our common units, whereby holders of record as of May 30, 2014 received a one unit distribution on each unit outstanding on that date.  The unit split resulted in the issuance of 37,030,317 common units.  All references to the number of units and per unit net income of ARLP and distribution amounts included in this report have been adjusted to give effect for this unit split for all periods presented.  Also, ARLP’s partnership agreement was amended effective June 16, 2014, to reduce by half the target thresholds for the incentive distribution rights per unit.

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Estimates—The preparation of consolidated financial statements in conformity with generally accepted accounting principles (“GAAP”) of the United States (“U.S.”) requires management to make estimates and assumptions that affect the reported amounts and disclosures in the consolidated financial statements. Actual results could differ from those estimates.

 

Fair Value of Financial Instruments—The carrying amounts for cash equivalents, accounts receivable, accounts payable, due from affiliates and due to affiliates approximate fair value because of the short maturity of those instruments.  At December 31, 2014 and 2013, the estimated fair value of our long-term debt, including current maturities, was approximately $833.4 million and $884.8 million, respectively (Note 8).

 

Cash and Cash Equivalents—Cash and cash equivalents include cash on hand and on deposit, including highly liquid investments with maturities of three months or less.  We had $0.4 million restricted cash and cash equivalents at December 31, 2014 and no restricted cash or cash equivalents at December 31, 2013.

 

Cash Management—The cash flows from operating activities section of our Consolidated Statements of Cash Flows reflects an adjustment for $1.7 million and $10.3 million representing book overdrafts at December 31, 2014 and 2012, respectively.  We had no book overdrafts at December 31, 2013.

 

Business Combinations—For purchase acquisitions accounted for as a business combination, we are required to record the assets acquired, including identified intangible assets and liabilities assumed at their fair value, which in many instances involves estimates based on third party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques.

 

Inventories—Coal inventories are stated at the lower of cost or market on a first-in, first-out basis. Supply inventories are stated at an average cost basis, less a reserve for obsolete and surplus items.

 

Property, Plant and Equipment—Expenditures which extend the useful lives of existing plant and equipment assets are capitalized.  Interest costs associated with major asset additions are capitalized during the construction period.  Maintenance and repairs that do not extend the useful life or increase productivity of the asset are charged to operating expense as incurred.  Exploration expenditures are charged to operating expense as incurred, including costs related to drilling and study costs incurred to convert or upgrade mineral resources to reserves. Preparation plants and processing facilities are depreciated using the units-of-production method.  Other plant and equipment assets are depreciated principally using the straight-line method over the estimated useful lives of the assets, ranging from 1 to 16 years, limited by the remaining estimated life of each mine. Depreciable lives for mining equipment range from 1 to 16 years. Depreciable lives for buildings, office equipment and improvements range from 2 to 16 years. Gains or losses arising from retirements are included in operating expenses. Depletable lives for mineral rights, assuming current production expectations, range from 1 to 16 years. Depletion of mineral rights is provided on the basis of tonnage mined in relation to estimated recoverable tonnage, which equals estimated proven and probable reserves. Therefore, our mineral rights are depleted based on only proven and probable reserves derived in accordance with Industry Guide 7.  At December 31, 2014 and 2013, land and mineral rights include $53.2 million and $45.5 million, respectively, representing the carrying value of coal reserves attributable to properties where we or a third-party to which we lease reserves are not currently engaged in mining operations or leasing to third parties, and therefore, the coal reserves are not currently being depleted.  We believe that the carrying value of these reserves will be recovered.

 

Mine Development Costs—Mine development costs are capitalized until production, other than production incidental to the mine development process, commences and are amortized on a units of production method based on the estimated proven and probable reserves.  Mine development costs represent costs incurred in establishing access to mineral reserves and include costs associated with sinking or driving shafts and underground drifts, permanent excavations, roads and tunnels.  The end of the development phase and the beginning of the production phase takes place when construction of the mine for economic extraction is substantially complete.  Coal extracted during the development phase is incidental to the mine’s production capacity and is not considered to shift the mine into the production phase.  At December 31, 2014 and 2013, capitalized mine development costs were $7.0 million and $33.1 million, respectively, representing the carrying value of development costs attributable to properties where we have not reached the production stage of mining operations or leasing to third parties, and therefore, the mine development costs are not currently being amortized.  We believe that the carrying value of these development costs will be recovered.

 

Long-Lived Assets—We review the carrying value of long-lived assets and certain identifiable intangibles whenever events or changes in circumstances indicate that the carrying amount may not be recoverable based upon estimated undiscounted future cash flows.  To the extent the carrying amount is not recoverable based on undiscounted cash flows, the amount of impairment is measured by the difference between the carrying value and the fair value of the asset.  We recorded an asset impairment charge of $19.0 million in 2012 (Note 4).  No impairment charges were recorded in 2014 and 2013.

 

Intangible Assets—Intangible assets subject to amortization include contracts with covenants not to compete, customer contracts acquired from other parties and mining permits.  Intangible assets are amortized on a straight-line basis over their useful life.  Intangible assets for customer contracts are amortized on a per unit basis over the terms of the contracts.  Amortization expense attributable to intangible assets was $3.0 million, $3.0 million and $2.6 million for the years ending December 31, 2014, 2013 and 2012, respectively.  Our intangible assets are included in prepaid expenses and other assets and other long-term assets on our consolidated balance sheets at December 31, 2014 and 2013.  Our intangible assets at December 31 are summarized as follows (in thousands):

 

 

Amortization expense attributable to intangible assets is estimated to be $9.6 million in 2015, $6.1 million in 2016, $3.2 million in 2017 and $1.0 million in both 2018 and 2019. The increase in 2015 and 2016 is due to amortization of customer contract intangibles that were acquired at December 31, 2014 and, therefore, had no amortization expense in the periods presented (Note 3).

 

Advance Royalties—Rights to coal mineral leases are often acquired and/or maintained through advance royalty payments.  Where royalty payments represent prepayments recoupable against future production, they are recorded as an asset, with amounts expected to be recouped within one year classified as a current asset.  As mining occurs on these leases, the royalty prepayments are charged to operating expenses. We assess the recoverability of royalty prepayments based on estimated future production.  Royalty prepayments estimated to be nonrecoverable are expensed.  Our advance royalties at December 31 are summarized as follows (in thousands):

 

 

Asset Retirement Obligations—We record a liability for the estimated cost of future mine asset retirement and closing procedures on a present value basis when incurred or acquired and a corresponding amount is capitalized by increasing the carrying amount of the related long lived asset. Those costs relate to permanently sealing portals at underground mines and to reclaiming the final pits and support acreage at surface mines. Examples of these types of costs, common to both types of mining, include, but are not limited to, removing or covering refuse piles and settling ponds, water treatment obligations, and dismantling preparation plants, other facilities and roadway infrastructure.  Accounting for asset retirement obligations also requires depreciation of the capitalized asset retirement cost and accretion of the asset retirement obligation over time.  The depreciation is generally determined on a units of production basis and accretion is generally recognized over the life of the producing assets (Note 17).  As changes in estimates occur (such as mine plan revisions, changes in estimated costs or changes in timing of the performance of reclamation activities), the revisions to the obligation and asset are recognized at the appropriate credit-adjusted, risk-free interest rate.

 

Workers’  Compensation and Pneumoconiosis (Black Lung) Benefits—We are generally self-insured for workers’ compensation benefits, including black lung benefits. We accrue a workers’ compensation liability for the estimated present value of workers’ compensation and black lung benefits based on our actuarially determined calculations (Note 18).

 

Income Taxes—We are not a taxable entity for federal or state income tax purposes; the tax effect of our activities accrues to the unitholders. Although publicly traded partnerships as a general rule will be taxed as corporations, we qualify for an exemption because at least 90% of our income consists of qualifying income, as defined in Section 7704(c) of the Internal Revenue Code.  Net income for financial statement purposes may differ significantly from taxable income reportable to unitholders as a result of differences between the tax basis and financial reporting basis of assets and liabilities and the taxable income allocation requirements under our partnership agreement. Individual unitholders have different investment bases depending upon the timing and price of acquisition of their partnership units. Furthermore, each unitholder’s tax accounting, which is partially dependent upon the unitholder’s tax position, differs from the accounting followed in our consolidated financial statements.  Accordingly, the aggregate difference in the basis of our net assets for financial and tax reporting purposes cannot be readily determined because information regarding each unitholder’s tax attributes in our partnership is not available to us. Our subsidiaries, ASI and Wildcat Insurance, are subject to federal and state income taxes. A valuation allowance is established if it is more likely than not that a deferred tax asset will not be realized.

 

Our tax counsel has provided an opinion that ARLP, the Intermediate Partnership and Alliance Coal will each be treated as a partnership. However, as is customary, no ruling has been or will be requested from the Internal Revenue Service (“IRS”) regarding our classification as a partnership for federal income tax purposes.

 

Revenue Recognition—Revenues from coal sales are recognized when title passes to the customer as the coal is shipped. Some coal supply agreements provide for price adjustments based on variations in quality characteristics of the coal shipped. In certain cases, a customer’s analysis of the coal quality is binding and the results of the analysis are received on a delayed basis. In these cases, we estimate the amount of the quality adjustment and adjust the estimate to actual when the information is provided by the customer. Historically, such adjustments have not been material. Non-coal sales revenues primarily consist of transloading fees, administrative service revenues from our affiliates, mine safety services and products, royalties and throughput fees earned from White Oak Resources LLC (“White Oak”) (Note 12), other coal contract fees and other handling and service fees.  Transportation revenues are recognized in connection with us incurring the corresponding costs of transporting coal to customers through third-party carriers for which we are directly reimbursed through customer billings.  We had no allowance for doubtful accounts for trade receivables at December 31, 2014 and 2013.

 

Pension Benefits—Our defined benefit pension obligation and the related benefit cost are accounted for in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 715, Compensation-Retirement Benefits.  Pension cost and obligations are actuarially determined and are affected by assumptions including expected return on plan assets, discount rates, mortality assumptions, employee turnover rates and retirement dates. We evaluate our assumptions periodically and make adjustments to these assumptions and the recorded liability as necessary (Note 14).

 

Common Unit-Based Compensation—We account for compensation expense attributable to restricted common units granted under the Long-Term Incentive Plan (“LTIP”), Supplemental Executive Retirement Plan (“SERP”) and the MGP Amended and Restated Deferred Compensation Plan for Directors (“Deferred Compensation Plan”) based on the requirements of FASB ASC 718, Compensation-Stock Compensation.  Accordingly, the fair value of award grants are determined on the grant date of the award and this value is recognized as compensation expense on a pro rata basis for LTIP and SERP awards, as appropriate, over the requisite service period.  Compensation expense is fully recognized on the grant date for quarterly distributions credited to SERP accounts and Deferred Compensation Plan awards.  The corresponding liability is classified as equity and included in limited partners’ capital in the consolidated financial statements (Note 15).

 

Net Income of ARLP Per Unit—Basic net income of ARLP per limited partner unit is determined by dividing net income of ARLP available to Limited Partners by the weighted-average number of outstanding common units.  Diluted net income of ARLP per unit is based on the combined weighted-average number of common units and common unit equivalents outstanding unless the effect is anti-dilutive (Note 13).

 

Investments—Investments and ownership interests are accounted for under the equity method of accounting if we have the ability to exercise significant influence, but not control, 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.  In the event our ownership entitles us to a disproportionate sharing of income or loss, our equity in earnings or losses of affiliates is allocated based on the hypothetical liquidation at book value (“HLBV”) method of accounting. Under the HLBV method, equity in earnings or losses of affiliates is allocated based on the difference between our claim on the net assets of the equity method investee at the end and beginning of the period with consideration of certain eliminating entries regarding differences of accounting for various related party transactions, after taking into account contributions and distributions, if any. Our share of the net assets of the equity method investee is calculated as the amount we would receive if the equity method investee were to liquidate all of its assets at net book value and distribute the resulting cash to creditors, other investors and us according to the respective priorities. Our share of earnings or losses under the HLBV method of accounting from equity method investments and basis difference amortization is reported in the consolidated statements of income as “Equity in loss of affiliates, net.” We review our investments and ownership interests accounted for under the equity method of accounting for impairment whenever events or changes in circumstances indicate a loss in the value of the investment may be other than temporary.  For 2014 and 2013, we determined there were no such material events or changes in circumstances that would indicate the carrying amounts of such investments were not recoverable.  Our equity method investments include our ownership interests in White Oak, AllDale Minerals, L.P. (“AllDale Minerals”) and Mid-America Carbonates, LLC (“MAC”) (Note 12).

 

Variable Interest Entities (“VIEs”)—VIEs are primarily entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders, as a group, lack one or more of the following characteristics: (a) direct or indirect ability to make decisions, (b) obligation to absorb expected losses or (c) right to receive expected residual returns. VIEs must be evaluated quantitatively and qualitatively to determine the primary beneficiary, which is the reporting entity that has (a) the power to direct activities of a VIE that most significantly impact the VIEs economic performance and (b) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. The primary beneficiary is required to consolidate the VIE for financial reporting purposes.

 

To determine a VIE’s primary beneficiary, we perform a qualitative assessment to determine which party, if any, has the power to direct activities of the VIE and the obligation to absorb losses and/or receive its benefits. This assessment involves identifying the activities that most significantly impact the VIE’s economic performance and determine whether it, or another party, has the power to direct those activities. When evaluating whether we are the primary beneficiary of a VIE, we perform a qualitative analysis that considers the design of the VIE, the nature of our involvement and the variable interests held by other parties.

 

New Accounting Standards Issued and Not Yet Adopted–In April 2014, the FASB issued ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU 2014-08”).  ASU 2014-08 changes the requirements for reporting discontinued operations in Accounting Standards Codification 205, Presentation of Financial Statements, by updating the criteria for determining which disposals can be presented as discontinued operations and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of discontinued operations.  ASU 2014-08 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014.  We do not anticipate the adoption of ASU 2014-08 on January 1, 2015 will have a material impact on our consolidated financial statements.

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”).  ASU 2014-09 is a new revenue recognition standard that provides a five-step analysis of transactions to determine when and how revenue is recognized.  The core principle of the new standard is an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016 and shall be applied retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption.  Early adoption is not permitted.  We are currently evaluating the effect of adopting ASU 2014-09.

 

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

 

 

3.ACQUISITIONS

 

CONSOL Energy Inc.

 

In June 2013, our subsidiary, Alliance Resource Properties acquired the rights to approximately 11.6 million tons of proven and probable medium-sulfur coal reserves, and an additional 5.9 million resource tons, in Grant and Tucker Counties, West Virginia from Laurel Run Mining Company, a subsidiary of CONSOL Energy Inc. (“CONSOL”).  The purchase price of $25.2 million was allocated to owned and leased coal rights and was financed using existing cash on hand.  As a result of the coal reserve purchase, we reclassified certain tons of medium-sulfur, non-reserve coal deposits as reserves, which together with the reserves purchased above, extended the expected life of Mettiki (WV)’s Mountain View mine.

 

In November 2014, Alliance Resource Properties acquired the rights to approximately 124.2 million tons of proven and probable high-sulfur coal reserves, most of which are leased reserves, and various surface properties in western Kentucky from CNX RCPC, LLC (“CNX RCPC”) and Island Creek Coal Company (“Island Creek”), both subsidiaries of CONSOL.  The purchase price of $11.6 million was financed using existing cash on hand and allocated to the owned and leased coal rights and surface properties acquired.  We also assumed reclamation liabilities totaling $6.0 million.

 

In conjunction with this acquisition, WKY CoalPlay, LLC (“WKY CoalPlay”), an entity owned by SGP Land, LLC (“SGP Land”) and two limited liability companies owned by irrevocable trusts established by our President and Chief Executive Officer (“Craft Companies”), acquired approximately 86.6 million tons of proven and probable high-sulfur owned coal reserves in western Kentucky and southern Indiana through its purchase of two wholly owned subsidiaries of CNX RCPC and Island Creek for $57.2 million.  In December 2014, WKY CoalPlay’s subsidiaries leased 72.3 million tons of the acquired reserves to us and, as partial consideration for entering the leases, conveyed the remaining 14.3 million tons of its acquired reserves to us.  The conveyed reserves have minimal value as a result of uncertainty regarding inclusion in a mine plan.  See Note 19 for further information on our related party transactions and lease terms with WKY CoalPlay.  The reserves described in this paragraph extended the expected lives of our River View and Dotiki mines and provide potential greenfield mining opportunities.

 

Peabody Energy Corporation

 

In December 2014, Alliance Resource Properties acquired the rights to approximately 86.2 million tons of proven and probable high-sulfur leased coal reserves in western Kentucky from Midwest Coal Reserves of Kentucky, LLC (“Midwest”) and Cyprus Creek Land Company, both subsidiaries of Peabody Energy Corporation (“Peabody”), in exchange for an overriding royalty to be paid to Peabody based on a percentage of the sales price of coal mined from the reserves acquired.  In addition, WKY CoalPlay acquired the rights to approximately 54.1 million tons of owned coal reserves in western Kentucky, through its purchase of a wholly owned subsidiary of Midwest for $29.6 million cash paid at closing.  In conjunction with this acquisition, WKY CoalPlay’s subsidiary leased 22.6 million tons of the acquired reserves to us and, as partial consideration for entering the lease, conveyed the remaining 31.5 million tons to us.  The conveyed reserves have minimal value as a result of uncertainty regarding inclusion in a mine plan.  See Note 19 for further information on our related party transactions and lease terms with WKY CoalPlay.  This transaction allowed us to extend the expected life of our River View mine and provides potential greenfield mining opportunities.

 

Patriot Coal Corporation

 

On December 31, 2014 (the “Initial Closing Date”), we entered into asset purchase agreements with Patriot Coal Corporation (“Patriot”) regarding certain assets relating to two of Patriot’s western Kentucky mining operations, including certain coal sales agreements, unassigned coal reserves and underground mining equipment and infrastructure.  Both of the mining operations – the former Dodge Hill and Highland mining operations – were closed by Patriot in late 2014 prior to entering into these agreements.  Also on December 31, 2014, Patriot affiliates entered into agreements to sell other assets from Highland to a third party.  Additional details of the transactions are discussed below.

 

On the Initial Closing Date, our subsidiary, Alliance Coal acquired the rights to certain coal supply agreements from an affiliate of Patriot for approximately $21.0 million.  Of the $21.0 million purchase price, $9.3 million was paid into escrow subject to obtaining certain consents and is included in “Other” cash flows from investing activities on our consolidated statements of cash flows and in “Prepaid expenses and other assets” on our consolidated balance sheets.  In February 2015, $7.5 million of the escrowed amount was released to Patriot for a consent received and $1.8 million was returned to Alliance Coal as a result of a consent not received, reducing our purchase price to $19.2 million.   The acquired agreements provide for delivery of approximately 5.1 million tons of coal from 2015 through 2017.

 

On February 3, 2015 (the “Subsequent Closing Date”), Alliance Coal and Alliance Resource Properties acquired from Patriot an estimated 84.1 million tons of proven and probable high-sulfur coal reserves in western Kentucky (substantially all of which was leased by Patriot), and substantially all of Dodge Hill’s assets related to its former coal mining operation in western Kentucky, which principally included underground mining equipment and an estimated 43.2 million tons of non-reserve coal deposits (substantially all of which was leased by Dodge Hill). In addition, we assumed Dodge Hill’s reclamation liabilities totaling $2.5 million.  Also on the Subsequent Closing Date, the Intermediate Partnership’s newly formed subsidiaries, UC Mining, LLC and UC Processing, LLC, acquired certain underground mining equipment and spare parts inventory from Patriot’s former Highland mining operation.

 

The mining and reserve assets acquired from Patriot described above are located in Union and Henderson Counties, Kentucky.  The mining equipment, spare parts and underground infrastructure that we acquired from Patriot will be dispersed to our existing operations in the Illinois Basin region in accordance with their highest and best use.  Our purchase price of $19.2 million and $20.5 million paid on the Initial Closing Date and the Subsequent Closing Date, respectively, described above was financed using existing cash on hand.  As we have no intentions of operating the former Dodge Hill mining complex as a business and only acquired certain assets of Highland, we believe unaudited pro forma information of revenue and earnings is not meaningful as it relates to the acquisition of Patriot assets described above and furthermore not materially different than revenue and earnings as presented in our consolidated statements of income.  The primary ongoing benefit derived from the transaction relates to the coal supply agreements acquired, which would have permitted the sale of 3.2 million tons at average pricing of $46.67 per ton sold during 2014 based on the contract price and sales volumes, if we had owned the contracts during 2014.

 

In conjunction with our acquisitions on the Subsequent Closing Date, WKY CoalPlay acquired approximately 39.1 million tons of proven and probable high-sulfur owned coal reserves located in Henderson and Union Counties, Kentucky from Central States Coal Reserves of Kentucky, LLC (“Central States”), a wholly owned subsidiary of Patriot, for $25.0 million and in turn leased those reserves to us (Note 19).  Also on the Subsequent Closing Date, Patriot sold certain mining equipment at Highland that we did not acquire to a third party. We anticipate that later in 2015, Patriot will complete the sale of reserves and surface and underground facilities at the former Highland mining operation to this same third party.

 

The following table summarizes the consideration paid by us to Patriot on the Initial and Subsequent Closing Dates and the preliminary fair value allocation of assets acquired and liabilities assumed as valued at the respective acquisition dates (in thousands):

 

 

Intangible assets related to coal supply agreements will be amortized over the weighted-average term of the contracts.  We are currently in the process of evaluating the fair values of the assets acquired and liabilities assumed from Patriot.  As a result, the purchase price allocation above is preliminary pending completion of our final evaluation of all assets acquired and liabilities assumed.

 

With the reserve acquisitions made in 2014 and 2015 discussed above, we were able to reclassify approximately 85.0 million tons of controlled non-reserve coal deposits to reserves, resulting in a total increase of coal reserves of approximately 537.2 million tons.  These acquisitions provide for potential greenfield mining opportunities and extend the expected lives of our River View and Dotiki mines.  Depreciation, depletion and amortization of certain assets at these mines will be adjusted as appropriate to reflect the extended lives.

 

Green River Collieries, LLC

 

On April 2, 2012, we acquired substantially all of Green River Collieries, LLC’s (“Green River”) assets related to its coal mining business and operations located in Webster and Hopkins Counties, Kentucky.  The transaction includes the Onton No. 9 mining complex (“Onton mine”), which includes the mine, a dock, tugboat, and a lease for the preparation plant, and an estimated 40.0 million tons of coal reserves in the West Kentucky No. 9 coal seam.   The Green River acquisition is consistent with our general business strategy and complements our current coal mining operations.

 

The following table summarizes the consideration paid to Green River and the final fair value allocation of assets acquired and liabilities assumed at the acquisition date (in thousands):

 

 

During the quarter ended September 30, 2012, we finalized the purchase price allocation related to the assets acquired and liabilities assumed from Green River.  The adjustments to the preliminary fair values resulted from additional information obtained about facts in existence on April 2, 2012.  Prior financial statements have not been retrospectively adjusted due to immateriality.

 

Intangible assets and liabilities related to coal supply agreements are being amortized over the average term of the contracts.  Mine permits will be amortized over the estimated useful life of the Onton mine and the noncompete agreement will be amortized over the term of the agreement.

 

As the Green River acquisition occurred on April 2, 2012, we believe unaudited pro forma information of revenue and earnings is not materially different than revenue and earnings as presented in our consolidated statements of income.

 

4.ASSET IMPAIRMENT CHARGE

 

Pontiki’s mining complex in Martin County, Kentucky was idled from August 29, 2012 to November 25, 2012 following an Mine Safety and Health Administration (“MSHA”) closure order.  This idling together with ongoing market uncertainty and the likelihood of future cost increases arising from stringent regulatory oversight placed the long-term viability of Pontiki at significant risk. As a result of these events, we recorded an asset impairment charge of $19.0 million during the quarter ended September 30, 2012 to reduce the carrying value of the asset group representing the Pontiki mining complex (“Pontiki Assets”) to an estimated fair value of $16.1 million which was determined using the market and cost valuation techniques and represents a Level 3 fair value measurement.  Although the Pontiki mining complex resumed production operations, we subsequently ceased operations at the Pontiki mining complex in late November 2013.  Many of Pontiki’s employees and some of its equipment were migrated to our MC Mining and other operations.  No additional impairment was required related to the closure of the mine in 2013.  We sold most of the remaining assets at the Pontiki mining complex in May 2014.

 

5.INVENTORIES

 

Inventories consist of the following at December 31, (in thousands):

 

 

6.PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment consist of the following at December 31, (in thousands):

 

 

Equipment leased by us under lease agreements which are determined to be capital leases are stated at an amount equal to the present value of the minimum lease payments during the lease term, less accumulated amortization.  Equipment under capital leases totaling $20.9 million included in mining equipment and processing facilities is amortized on the straight-line method over the shorter of its useful life or the related lease term.  The provision for amortization of leased properties is included in depreciation, depletion and amortization expense.  Accumulated amortization related to our capital leases was $5.6 million and $5.8 million as of December 31, 2014 and 2013, respectively, and amortization expense was $1.6 million, $2.0 million and $1.9 million for the years ended December 31, 2014, 2013 and 2012, respectively.  For information regarding the impairment of assets at the Pontiki mine, please see Note 4.

7.LONG-TERM DEBT

 

Long-term debt consists of the following at December 31, (in thousands):

 

 

Credit Facility.  On May 23, 2012, our Intermediate Partnership entered into a credit agreement (the “Credit Agreement”) with various financial institutions for a revolving credit facility (the “Revolving Credit Facility”) of $700.0 million and a term loan (the “Term Loan”) in the aggregate principal amount of $250.0 million (collectively, the Revolving Credit Facility and Term Loan are referred to as the “Credit Facility”).  Borrowings under the Credit Agreement bear interest at a Base Rate or Eurodollar Rate, at our election, plus an applicable margin that fluctuates depending upon the ratio of Consolidated Debt to Consolidated Cash Flow (each as defined in the Credit Agreement).  We have elected a Eurodollar Rate, which, with applicable margin, was 1.57% on borrowings outstanding as of December 31, 2014.  The Credit Facility matures May 23, 2017, at which time all amounts then outstanding are required to be repaid.  Interest is payable quarterly, with principal of the Term Loan due as follows: for each quarter commencing June 30, 2014 and ending March 31, 2016, quarterly principal payments in an amount per quarter equal to 2.50% of the aggregate amount of the Term Loan advances outstanding; for each quarter beginning June 30, 2016 through December 31, 2016, 20% of the aggregate amount of the Term Loan advances outstanding; and the remaining balance of the Term Loan advances at maturity.  In June 2014, we began making quarterly principal payments on the Term Loan, leaving a balance of $231.3 million at December 31, 2014.  We have the option to prepay the Term Loan at any time in whole or in part subject to terms and conditions described in the Credit Agreement.  Upon a “change of control” (as defined in the Credit Agreement), the unpaid principal amount of the Credit Facility, all interest thereon and all other amounts payable under the Credit Agreement would become due and payable.

 

At December 31, 2014, we had borrowings of $140.0 million and $5.4 million of letters of credit outstanding with $554.6 million available for borrowing under the Revolving Credit Facility.  We utilize the Revolving Credit Facility, as appropriate, for working capital requirements, capital expenditures, debt payments and distribution payments.  We incur an annual commitment fee of 0.20% on the undrawn portion of the Revolving Credit Facility.

 

We incurred debt issuance costs of approximately $4.3 million in 2012 associated with the Credit Agreement, which have been deferred and are being amortized as a component of interest expense over the duration of the Credit Agreement.  We also expensed $1.1 million in 2012 of previously deferred debt issuance cost associated with our previous $300 million term loan.

 

Series A Senior Notes. On June 26, 2008, our Intermediate Partnership entered into a Note Purchase Agreement (the “2008 Note Purchase Agreement”) with a group of institutional investors in a private placement offering.  We issued $205.0 million of Series A senior notes, which bear interest at 6.28% and mature on June 26, 2015 with interest payable semi-annually.

 

Series B Senior Notes. On June 26, 2008, we issued under the 2008 Note Purchase Agreement $145.0 million of Series B senior notes (together with the Series A senior notes, the “2008 Senior Notes”), which bear interest at 6.72% and mature on June 26, 2018 with interest payable semi-annually.

 

The 2008 Senior Notes and the Credit Facility described above (collectively, “ARLP Debt Arrangements”) are guaranteed by all of the material direct and indirect subsidiaries of our Intermediate Partnership.  The ARLP Debt Arrangements contain various covenants affecting our Intermediate Partnership and its subsidiaries restricting, among other things, the amount of distributions by our Intermediate Partnership, incurrence of additional indebtedness and liens, sale of assets, investments, mergers and consolidations and transactions with affiliates, in each case subject to various exceptions.  The ARLP Debt Arrangements also require the Intermediate Partnership to remain in control of a certain amount of mineable coal reserves relative to its annual production.  In addition, the ARLP Debt Arrangements require our Intermediate Partnership to maintain (a) debt to cash flow ratio of not more than 3.0 to 1.0 and (b) cash flow to interest expense ratio of not less than 3.0 to 1.0, in each case, during the four most recently ended fiscal quarters.  The debt to cash flow ratio and cash flow to interest expense ratio were 1.01 to 1.0 and 24.0 to 1.0, respectively, for the trailing twelve months ended December 31, 2014.  We were in compliance with the covenants of the ARLP Debt Arrangements as of December 31, 2014.

 

Accounts Receivable Securitization.  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, 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.  The Securitization Facility has an initial term of 364 days, however we have the contractual ability and the intent to extend the term for an additional 364 days.  At December 31, 2014, we had $100.0 million outstanding under the Securitization Facility.  Debt issuance costs were immaterial for the transaction.

 

Other.  In addition to the letters of credit available under the Credit Facility discussed above, we also have agreements with two banks to provide additional letters of credit in an aggregate amount of $31.1 million to maintain surety bonds to secure certain asset retirement obligations and our obligations for workers’ compensation benefits.  At December 31, 2014, we had $30.7 million in letters of credit outstanding under agreements with these two banks.

 

Aggregate maturities of long-term debt are payable as follows (in thousands):

 

 

 

8.FAIR VALUE MEASUREMENTS

 

We apply the provisions of FASB ASC 820, Fair Value Measurement, which, among other things, defines fair value, requires disclosures about assets and liabilities carried at fair value and establishes a hierarchal disclosure framework based upon the quality of inputs used to measure fair value.

 

Valuation techniques are based upon observable and unobservable inputs.  Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our own market assumptions.

 

These two types of inputs create the following fair value hierarchy:

 

 

 

 

The carrying amounts for cash equivalents, accounts receivable, accounts payable, due from affiliates and due to affiliates approximate fair value because of the short maturity of those instruments.  At December 31, 2014 and 2013, the estimated fair value of our long-term debt, including current maturities, was approximately $833.4 million and $884.8 million, respectively, based on interest rates that we believe are currently available to us for issuance of debt with similar terms and remaining maturities (see Note 7).  The fair value of debt, which is based upon interest rates for similar instruments in active markets, is classified as a Level 2 measurement under the fair value hierarchy.

 

9.DISTRIBUTIONS OF AVAILABLE CASH

 

We distribute 100% of our available cash within 45 days after the end of each quarter to unitholders of record and to our general partners.  Available cash is generally defined in the partnership agreement as all cash and cash equivalents on hand at the end of each quarter less reserves established by our managing general partner in its reasonable discretion for future cash requirements.  These reserves are retained to provide for the conduct of our business, the payment of debt principal and interest and to provide funds for future distributions.

 

As quarterly distributions of available cash exceed the target distribution levels established in our partnership agreement, our managing general partner receives distributions based on specified increasing percentages of the available cash that exceeds the target distribution levels.  The target distribution levels are based on the amounts of available cash from our operating surplus distributed for a given quarter that exceed the minimum quarterly distribution (“MQD”) and common unit arrearages, if any.  Our partnership agreement defines the MQD as $0.125 per unit ($0.50 per unit on an annual basis).

 

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. For the years ended December 31, 2014, 2013 and 2012, we allocated to our managing general partner incentive distributions of $129.8 million, $115.6 million and $102.1 million, respectively. The following table summarizes the quarterly per unit distribution paid during the respective quarter:

 

 

On January 28, 2015, we declared a quarterly distribution of $0.65 per unit, totaling approximately $83.6 million (which includes our managing general partner’s incentive distributions), on all our common units outstanding, which was paid on February 13, 2015, to all unitholders of record on February 6, 2015.

 

10.INCOME TAXES

 

Our subsidiaries, ASI and Wildcat Insurance, are subject to federal and state income taxes.  Wildcat Insurance’s income is due to insurance premiums provided by our other subsidiaries.  ASI’s income is principally due to its subsidiary, Matrix Design.  There are minor temporary differences between our taxable entities financial reporting basis and the tax basis of their assets and liabilities.  Components of income tax expense (benefit) are as follows (in thousands):

 

 

We have deferred tax assets due to net operating losses and research and development credits associated with ASI’s operations in the amount of $6.5 million, partially offset by liabilities of $1.3 million.  State and federal valuation allowances have been established to reduce these deferred tax assets to an amount that will, more likely than not, be realized.  During 2014, the federal and state valuation allowances increased to $4.0 million and $1.2 million, respectively, primarily due to the ongoing evaluation process of the losses and credits anticipated to be realized in future years.

 

Reconciliations from the provision for income taxes at the U.S. federal statutory tax rate to the effective tax rate for the provision for income taxes are as follows (in thousands):

 

 

 

11.NONCONTROLLING INTEREST

 

On November 10, 2014 (the “Cavalier Formation Date”), our wholly owned subsidiary, Alliance Minerals and Bluegrass Minerals Management, LLC (“Bluegrass Minerals”) entered into a limited liability company agreement (the “Cavalier Agreement”) to form Cavalier Minerals.  Cavalier Minerals was formed to indirectly acquire oil and gas mineral interests through its noncontrolling ownership interest in AllDale Minerals.  Alliance Minerals and Bluegrass Minerals committed funding of $48.0 million and $2.0 million, respectively, to Cavalier Minerals.  Alliance Minerals’ contributions through December 31, 2014 to Cavalier Minerals totaled $11.5 million, leaving a remaining commitment to Cavalier Minerals of $36.5 million at December 31, 2014, which we expect to fund over the next two to four years.  We expect to fund this additional commitment utilizing existing cash balances, future cash flows from operations, borrowings under credit and securitization facilities and cash provided from the issuance of debt or equity.  Bluegrass Minerals, which is owned and controlled by an officer of ARH and is Cavalier Minerals’ managing member, contributed $0.5 million as of December 31, 2014 and has a remaining commitment of $1.5 million.  Cavalier Minerals has committed to provide funding of $49.0 million to AllDale Minerals.  Cavalier Minerals has and will continue to provide funding to AllDale Minerals using contributions from Alliance Minerals and Bluegrass Minerals (Note 12).

 

In accordance with the Cavalier Agreement, Bluegrass Minerals is entitled to receive an incentive distribution from Cavalier Minerals equal to 25.0% of all distributions (including in liquidation) after return of members’ capital reduced by certain distributions received by Bluegrass Minerals or its owner from AllDale Minerals Management, LLC (“AllDale Minerals Management”) (Note 12).  Alliance Minerals’ ownership interest in Cavalier Minerals at December 31, 2014 was 96.0%.   The remainder of the equity ownership is held by Bluegrass Minerals.  As of December 31, 2014, Cavalier Minerals had not made any distributions to its owners.  We have consolidated Cavalier Minerals’ financial results in accordance with FASB ASC 810, Consolidation.  Based on the guidance in FASB ASC 810, we concluded that Cavalier Minerals is a VIE and we are the primary beneficiary because our consent is required for significant activities of Cavalier Minerals and due to Bluegrass Minerals’ relationship to us as described above.  Bluegrass Minerals equity ownership of Cavalier Minerals is accounted for as noncontrolling ownership interest in our consolidated balance sheets.  In addition, earnings attributable to Bluegrass Minerals is recognized as noncontrolling ownership interest in our consolidated statements of income.

 

12.EQUITY INVESTMENTS

 

White Oak

 

On September 22, 2011 (the “Transaction Date”), we entered into a series of transactions with White Oak and related entities to support development of a longwall mining operation.  The initial longwall system commenced operation in late October 2014.  The transactions with White Oak feature several components, including an equity investment in White Oak (represented by “Series A Units” containing certain distribution and liquidation preferences), the acquisition and lease-back of certain coal reserves and surface rights and a construction loan.  Our initial investment funding to White Oak at the Transaction Date, consummated utilizing existing cash on hand, was $69.5 million and we have funded White Oak $320.5 million between the Transaction Date and December 31, 2014.  Inclusive of this funding, we expect to fund to White Oak a total of approximately $395.5 million to $415.5 million from the Transaction Date through December 31, 2015.  We expect to fund additional commitments utilizing existing cash balances, future cash flows from operations, borrowings under credit and securitization facilities and cash provided from the issuance of debt or equity.  On the Transaction Date, we also entered into a coal handling and preparation agreement, pursuant to which we constructed and are operating a preparation plant and other surface facilities.  The following information discusses each component of these transactions in further detail.

 

Hamilton County, Illinois Reserve Acquisition

 

On the Transaction Date, WOR Properties acquired from White Oak the rights to approximately 204.9 million tons of proven and probable high-sulfur coal reserves, of which 105.2 million tons have been developed for mining by White Oak, and certain surface properties and rights in Hamilton County, Illinois (the “Reserve Acquisition”), which is adjacent to White County, Illinois, where our Pattiki mine is located.  The asset purchase price of $33.8 million cash paid at closing was allocated to owned and leased coal rights.   Between the Transaction Date and December 31, 2012, WOR Properties provided $51.6 million to White Oak for development of the acquired coal reserves, fulfilling its initial commitment for further development funding.  During the twelve months ended December 31, 2013, WOR Properties acquired from White Oak, for $25.3 million cash paid at various closings, an additional 90.1 million tons of reserves.  During the twelve months ended December 31, 2014, WOR Properties acquired from White Oak, for $4.1 million cash paid at various closings, an additional 14.6 million tons of reserves.  Of the additional tons acquired in 2014 and 2013, 53.4 million tons have been developed for mining by White Oak.  At December 31, 2014, WOR Properties had provided $114.8 million to acquire a total of 309.6 million tons of coal reserves and fund the development of the acquired reserves.  WOR Properties has a remaining commitment of $25.2 million for additional coal reserve acquisitions.  In conjunction with the Reserve Acquisition and the additional reserve acquisitions discussed above, WOR Properties entered into leases with White Oak, which provide White Oak the rights to develop and mine the acquired reserves.  The leases require, in consideration of the lease-back of the coal reserves and the funding of development of those coal reserves, White Oak to pay WOR Properties earned royalties and, during the period beginning January 1, 2015 and ending December 31, 2034, fully recoupable minimum royalty totaling $2.1 million per month. The lease terms are through December 31, 2034, subject to certain renewal options for White Oak.   In December 2014, we received the first minimum royalty payment of $2.1 million from White Oak, against which earned royalties for the period prior to January 1, 2015 will be credited.  Unearned minimum royalty payments from White Oak are reflected in the “Other current liabilities” and “Other liabilities” line items in our consolidated balance sheets.

 

Series A Units

 

Concurrent with the Reserve Acquisition, WOR Processing made an initial equity investment of $35.7 million in White Oak to purchase Series A Units representing ownership in White Oak.  White Oak and WOR Processing agreed to an additional investment in Series A Units by WOR Processing of at least $114.3 million (for a minimum total of $150.0 million), and WOR Processing committed to invest up to an additional $125.0 million in Series A Units (for a maximum total of $275.0 million) to the extent required for development or operation of the White Oak Mine No. 1 mine, and subject to certain rights and obligations of other White Oak owners to participate in such investment.  WOR Processing purchased $129.3 million of additional Series A Units between the Transaction Date and December 31, 2013, fulfilling WOR Processing’s minimum initial commitment of $150.0 million.  During the year ended December 31, 2014, WOR Processing purchased $99.8 million of additional Series A units, bringing our total investment in Series A units to $264.8 million at December 31, 2014.  Additional equity investments in Series A and B units of $39.8 million and $45.9 million were made by another White Oak owner in 2014 and 2013, respectively.  In 2015, through February 13, 2015, WOR Processing has purchased $6.0 million of additional Series A Units.

 

The Series A Units are entitled to receive 100% of all distributions made by White Oak until such time as the Series A Units have realized a defined minimum return, after which the Series A Units will receive distributions based on a participation percentage determined in accordance with the White Oak operating agreement.  In addition, the Series A Units contain certain liquidation preferences that require, upon an event of liquidation, the minimum return provision must be satisfied on a priority basis over other classes of White Oak equity.  WOR Processing’s ownership interest and distribution participation percentage in White Oak may increase with additional investments in the Series A Units up to a maximum of 40.0% for an investment of $275.0 million in the Series A Units.  WOR Processing’s ownership and member’s voting interest in White Oak at December 31, 2014 and 2013 was 39.0% and 21.6%, respectively, based upon currently outstanding voting units.  The remainder of the equity ownership in White Oak, represented by Series A and B Units, is held by other investors and members of White Oak management.

 

There are four primary activities we believe most significantly impact White Oak’s economic performance.  These primary activities are associated with financing, capital, operating and marketing of White Oak’s development and operation of the mine areas covered by the agreements.   We have various protective or participating rights related to these primary activities, such as minority representation on White Oak’s board of directors, restrictions on indebtedness and other obligations, the ability to assume control of White Oak’s board of directors in certain circumstances, such as an event of default by White Oak, and the right to approve certain coal sales agreements that represent a significant concentration of White Oak’s coal sales, among others.  Currently, we have two representatives on White Oak’s board of directors, which consists of five board members.  We continually review all rights provided to WOR Processing and us by various agreements with White Oak and continue to conclude that all such rights are protective or participating in nature and do not provide WOR Processing or us the ability to unilaterally direct any of the primary activities of White Oak that most significantly impact its economic performance.  However, the agreements provide us the ability to exert significant influence over these activities.  As such, we recognize WOR Processing’s interest in White Oak as an equity investment in affiliate in our consolidated balance sheets.  We account for WOR Processing’s ownership interest in White Oak under the equity method of accounting, with recognition of its ownership interest in the income or loss of White Oak as equity in income/(loss) in our consolidated statements of income. As of December 31, 2014, WOR Processing had invested $264.8 million in Series A Units of White Oak equity, which represents our current maximum exposure to loss as a result of our equity investment in White Oak exclusive of capitalized interest.  As of December 31, 2014, White Oak has made no distributions to us.

 

We record WOR Processing’s equity in income or losses of affiliates under the HLBV method of accounting due to the preferences to which WOR Processing is entitled to receive on distributions.  Under the HLBV method, we determine WOR Processing’s share of White Oak income or losses by determining the difference between its claim to White Oak’s book value at the end of the period as compared to the beginning of the period with consideration of certain eliminating entries regarding differences of accounting for various related party transactions between us and White Oak.  WOR Processing’s claim on White Oak’s book value is calculated as the amount it would receive if White Oak were to liquidate all of its assets at recorded amounts determined in accordance with GAAP and distribute the resulting cash to creditors, other investors and WOR Processing according to the respective priorities.  For the twelve months ended December 31, 2014 and 2013, we were allocated losses of $16.6 million and $25.3 million, respectively.  Allocated losses from White Oak in 2014 were reduced by, and are reflected net of $11.6 million due to the impact of purchases of Series A Units during the period by another White Oak owner.  Series A Unit purchases impact the future preferred distributions allocable to each owner and the ongoing allocation of income and losses for GAAP purposes under the HLBV method.

 

Services Agreement

 

Simultaneous with the closing of the Reserve Acquisition, WOR Processing entered into a Coal Handling and Preparation Agreement (“Services Agreement”) with White Oak pursuant to which WOR Processing committed to construct and operate a coal preparation plant and related facilities and a rail loop and loadout facility to service the White Oak Mine No. 1.  The Services Agreement requires White Oak to pay a throughput fee for these services of $5.00 per ton of feedstock coal processed through the preparation plant up to a minimum throughput quantity (and, beginning in January 2015, to pay any deficiency if less than the minimum tonnage is throughput) and $2.40 per ton for quantities in excess of the minimum throughput quantity.  The minimum throughput quantity is 666,667 tons of feedstock coal per month.  The term of the Services Agreement is through December 31, 2034.  During the year ended December 31, 2013, WOR Processing began processing and loading coal through the facilities.  WOR Processing earned throughput fees of $19.6 million and $2.1 million for the years ended December 31, 2014 and 2013, respectively, for processing and loading coal through the facilities.  Throughput fees earned from White Oak are included in “Other sales and operating revenues” on our consolidated statements of income.

 

In addition, the Intermediate Partnership agreed to loan $10.5 million to White Oak for the construction of various assets on the surface property, including a bathhouse, office and warehouse (“Construction Loan”).  The Construction Loan has a term of 20 years, with repayment scheduled to begin in 2015.  White Oak had borrowed the entire amount available under the Construction Loan as of December 31, 2014.

 

Equipment Financing Commitment

 

Also on the Transaction Date, the Intermediate Partnership committed to provide $100.0 million of fully collateralized equipment financing with a five-year term to White Oak for the purchase of coal mining equipment should other third-party funding sources not be available.  During the second quarter of 2012, White Oak obtained third-party financing for the purchase of coal mining equipment, and on June 18, 2012, repaid the Intermediate Partnership the outstanding amount of $2.2 million for previous advances and interest due.  White Oak also terminated early the equipment financing agreement with the Intermediate Partnership, and as part of the termination, paid the Intermediate Partnership a $2.0 million cancellation fee on June 18, 2012.

 

AllDale Minerals

 

On the Cavalier Formation Date, Cavalier Minerals (Note 11) contributed $7.4 million in return for a limited partner interest in AllDale Minerals, an entity created to purchase oil and gas mineral interests in various geographic locations within producing basins in the continental U.S.  Between the Cavalier Formation Date and December 31, 2014, Cavalier Minerals’ contributed $4.2 million to AllDale Minerals.  Cavalier Minerals has a remaining commitment to AllDale Minerals of $37.4 million at December 31, 2014, which it expects to fund over the next two to four years.  AllDale Minerals is managed and controlled by its general partner, AllDale Minerals Management.  AllDale Minerals Management is owned by four members, consisting of three parties unrelated to us or our affiliates and Bluegrass Minerals, which as noted above is owned by an officer of ARH.  Bluegrass Minerals does not individually possess the controlling interest of AllDale Minerals Management.  Due to Cavalier Minerals’ significant ownership interest in AllDale Minerals, we have recognized Cavalier Minerals’ limited partner interest in AllDale Minerals as an equity investment in affiliate in our consolidated balance sheets.  We account for Cavalier Minerals’ ownership interest in the income or loss of AllDale Minerals as equity income or loss in our consolidated statements of income.  We record equity income or loss based on AllDale Minerals’ distribution structure.  Cavalier Minerals’ limited partner interest in AllDale Minerals was 71.7% at December 31, 2014.  The remainder of the equity ownership is held by other limited partners and AllDale Minerals Management.  For the period from the Cavalier Formation Date through December 31, 2014, we have been allocated losses of $0.4 million from AllDale Minerals.

 

In accordance with AllDale Minerals’ partnership agreement, limited partners, such as Cavalier Minerals, will initially receive all distributions of proceeds from certain producing basins based upon the greater of the limited partner’s cumulative contributions plus 25.0% or an amount sufficient to cause the limited partner to receive an effective internal rate of return of 10.0%.  Afterwards, 20.0% of all distributions will be allocated to AllDale Minerals Management, as an incentive distribution to the general partner, with the remaining 80.0% allocated to limited partners based upon ownership percentages.  In addition, upon an event of liquidation, any proceeds will be distributed using the same methodology.  As of December 31, 2014, AllDale Minerals has not made any distributions to its owners.

 

MAC

 

In March 2006, White County Coal, and Alexander J. House entered into a limited liability company agreement to form MAC.  MAC was formed to engage in the development and operation of a rock dust mill and to manufacture and sell rock dust. White County Coal initially invested $1.0 million in exchange for a 50% equity interest in MAC. Our equity investment in MAC was $1.6 million at December 31, 2014.  Effective on January 1, 2015, we purchased the remaining 50.0% equity interest in MAC from Mr. House for $5.5 million cash paid at closing.

 

Summarized Financial Information

 

White Oak’s results for the years ended December 31, 2014, 2013 and 2012, are summarized as follows (in thousands):

 

 

White Oak’s financial position for the years ended December 31, 2014 and 2013 are summarized as follows (in thousands):

 

 

 

13.NET INCOME OF ARLP PER LIMITED PARTNER UNIT

 

We apply the provisions of FASB ASC 260, Earnings Per Share.  As required by FASB ASC 260, we apply the two-class method in calculating 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 (Note 9).  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 and therefore, undistributed earnings of the ARLP Partnership are not allocated to the IDR holder.  In addition, our outstanding unvested awards under our LTIP, SERP and Deferred Compensation Plan contain rights to nonforfeitable distributions and are therefore considered participating securities.  As such, we allocate undistributed and distributed earnings to the outstanding awards in our calculation of EPU.

 

The following is a reconciliation of net income of ARLP and net income used for calculating EPU and the weighted-average units used in computing EPU for the years ended December 31, 2014, 2013 and 2012, respectively (in thousands, except per unit data):

 

 

 

During 2014, 2013 and 2012, our managing general partner made a capital contribution of $1.5 million, $2.2 million and $2.0 million, respectively, to us for certain general and administrative expenses.  A special allocation of general and administrative expenses equal to the amount of our managing general partner’s contribution was made to them.  Net income of ARLP allocated to the limited partners was not burdened by this expense (Note 19).

 

14.EMPLOYEE BENEFIT PLANS

 

Defined Contribution Plans—Our eligible employees currently participate in a defined contribution profit sharing and savings plan (“PSSP”) that we sponsor. The PSSP covers substantially all regular full-time employees.  PSSP participants may elect to make voluntary contributions to this plan up to a specified amount of their compensation. We make matching contributions based on a percent of an employee’s eligible compensation and also make an additional nonmatching contribution.  Our contribution expense for the PSSP was approximately $21.8 million, $20.4 million and $18.9 million for the years ended December 31, 2014, 2013 and 2012, respectively.

 

Defined Benefit Plan—Eligible employees at certain of our mining operations participate in a defined benefit plan (the “Pension Plan”) that we sponsor. The Pension Plan is currently closed to new applicants; however, participants in the plan continue to accrue benefits.  The benefit formula for the Pension Plan is a fixed-dollar unit based on years of service.

 

The following sets forth changes in benefit obligations and plan assets for the years ended December 31, 2014 and 2013 and the funded status of the Pension Plan reconciled with the amounts reported in our consolidated financial statements at December 31, 2014 and 2013, respectively (dollars in thousands):

 

 

The actuarial loss component of the change in benefit obligation in 2014 was primarily attributable to a decrease in the discount rate and the actual rate of return on plan assets compared to December 31, 2013, adoption of newly issued mortality tables reflecting improved life expectancies and updated retirement and withdrawal rate estimates.  The actuarial gain component of the change in benefit obligation in 2013 was primarily attributable to an increase in the discount rate and an increase in the actual rate of return on plan assets compared to December 31, 2012, offset in part by an update to future benefit payment estimates.

 

The expected long-term rate of return assumption is based on broad equity and bond indices, the investment goals and objectives, the target investment allocation and on the long-term historical rates of return for each asset class.  The expected long-term rate of return used to determine our pension liability was 8.0% based on the above factors and an asset allocation assumption of 70.0% invested in domestic equity securities with an expected long-term rate of return of 9.9%, 10.0% invested in international equities with an expected long-term rate of return of 5.6% and 20.0% invested in fixed income securities with an expected long-term rate of return of 5.7%.  Expected long-term rate of return is based on a 20-year-average annual total return for each investment group.

 

The actual return on plan assets was 5.4% and 22.7% for the years ended December 31, 2014 and 2013, respectively.

 

 

 

Estimated future benefit payments as of December 31, 2014 are as follows (in thousands):

 

 

We expect to contribute $3.1 million to the Pension Plan in 2015.  The estimated net actuarial loss for the Pension Plan that will be amortized from AOCI into net periodic benefit cost during the 2015 fiscal year is $3.4 million.

 

As permitted under ASC 715, Compensation—Retirement Benefits, the amortization of any prior service cost is determined using a straight-line amortization of the cost over the average remaining service period of employees expected to receive benefits under the Pension Plan.

 

The compensation committee of our managing general partner (“Compensation Committee”) maintains a Funding and Investment Policy Statement (“Policy Statement”) for the Pension Plan. The Policy Statement provides that the assets of the Pension Plan be invested in a prudent manner based on the stated purpose of the Pension Plan and diversified among a broad range of investments including domestic and international equity securities, domestic fixed income securities and cash equivalents.  The Pension Plan allows for the utilization of options in a “collar strategy” to limit potential exposure to market fluctuations.  The investment goal of the Pension Plan is to ensure that the assets provide sufficient resources to meet or exceed the benefit obligations as determined under terms and conditions of the Pension Plan.  The Policy Statement provides that the Pension Plan shall be funded by employer contributions in amounts determined in accordance with generally accepted actuarial standards. The investment objectives as established by the Policy Statement are, first, to increase the value of the assets under the Pension Plan and, second, to control the level of risk or volatility of investment returns associated with Pension Plan investments.

 

We had unfunded benefit obligations of approximately $40.1 million and $18.2 million at December 31, 2014 and 2013, respectively.  In general, increases in benefit obligations will be offset by employer contributions and market returns.  However, general market conditions may result in market losses.  When the Pension Plan experiences market losses, significant variations in the funded status of the Pension Plan can, and often do, occur.  Actuarial methods utilized in determining required future employer contributions take into account the long-term effect of market losses and result in increased future employer contributions, thus offsetting such market losses.  Conversely, the long-term effect of market gains will result in decreased future employer contributions.  Total account performance is reviewed at least annually, using a dynamic benchmark approach to track investment performance.

 

The Compensation Committee has selected an investment manager to implement the selection and on-going evaluation of Pension Plan investments. The investments shall be selected from the following assets classes (which may include mutual funds, collective funds, or the direct investment in individual stocks, bonds or cash equivalent investments): (a) money market accounts, (b) U.S. Government bonds, (c) corporate bonds, (d) large, mid, and small capitalization stocks, and (e) international stocks. The Policy Statement provides the following guidelines and limitations, subject to exceptions authorized by the Compensation Committee: (i) the maximum investment in any one stock should not exceed 10.0% of the total stock portfolio, (ii) the maximum investment in any one industry should not exceed 30.0% of the total stock portfolio, and (iii) the average credit quality of the bond portfolio should be at least AA with a maximum amount of non-investment grade debt of 10.0%.

 

The Policy Statement’s asset allocation guidelines are as follows:

 

 

Domestic equity securities primarily include investments in individual common stocks or registered investment companies that hold positions in companies that are based in the U.S.  Foreign equity securities primarily include investments in individual common stocks or registered investment companies that hold positions in companies based outside the U.S.  Fixed income securities primarily include individual bonds or registered investment companies that hold positions in U.S. Treasuries, U.S. government obligations, corporate bonds, mortgage-backed securities, and preferred stocks.  Short-term market conditions may result in actual asset allocations that fall outside the minimum or maximum guidelines reflected in the Policy Statement.

 

 

We consider multiple factors in our investment strategy.  The following factors have been taken into consideration with respect to the Pension Plan’s long-term investment goals and objectives and in the establishment of the Pension Plan’s target investment allocation:

 

 

As required by FASB ASC 715, the following information discloses the fair values of our Pension Plan assets, by asset category, for the periods indicated (in thousands):

 

 

 

Pension Plan assets for which the fair value is based on quoted prices in active markets for identical assets are considered to be valued with Level 1 inputs in the fair value hierarchy.  Pension Plan assets for which the fair value is based on quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active are considered to be valued with Level 2 inputs in the fair value hierarchy.