-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Cts8xrQU3v6DUpct+IJSqePsTlKPTmOlhE3TgTxfimvp2iuaIPQEbkjVUmuQ+xAa c4ah80X0Q6HxAFwubb3IHQ== 0000950129-01-001676.txt : 20010328 0000950129-01-001676.hdr.sgml : 20010328 ACCESSION NUMBER: 0000950129-01-001676 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010327 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLIANCE RESOURCE PARTNERS LP CENTRAL INDEX KEY: 0001086600 STANDARD INDUSTRIAL CLASSIFICATION: BITUMINOUS COAL & LIGNITE SURFACE MINING [1221] IRS NUMBER: 731564280 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-26823 FILM NUMBER: 1580463 BUSINESS ADDRESS: STREET 1: 1717 SOUTH BOULDER AVENUE CITY: TULSA STATE: OK ZIP: 74119 BUSINESS PHONE: 9182957600 10-K 1 h85211e10-k.txt ALLIANCE RESOURCE PARTNERS LP - DECEMBER 31, 2000 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 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 (IRS EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 1717 SOUTH BOULDER AVENUE, SUITE 600, TULSA, OKLAHOMA 74119 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE) (918) 295-7600 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Units representing limited partner interests --------------- 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. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate value of the Common Units held by non-affiliates of the registrant (treating all executive officers and directors of the registrant, for this purpose, as if they may be affiliates of the registrant) was approximately $147,150,647 on March 26, 2001, based on $19.81 per unit, the closing price of the Common Units as reported on the Nasdaq National Market on such date. As of March 26, 2001, 8,982,780 Common Units and 6,422,531 Subordinated Units are outstanding. DOCUMENTS INCORPORATED BY REFERENCE: None ================================================================================ 2 TABLE OF CONTENTS
PAGE PART I ITEM 1. BUSINESS .................................................................................... 2 ITEM 2. PROPERTIES .................................................................................. 13 ITEM 3. LEGAL PROCEEDINGS............................................................................ 16 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS ..................................................................................... 17 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON UNITS AND RELATED UNITHOLDER MATTERS .................................................................. 17 ITEM 6. SELECTED FINANCIAL DATA ..................................................................... 18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ............................................... 19 ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ........................................................................... 25 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ................................................. 27 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE ...................................................... 49 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE MANAGING GENERAL PARTNER .................................................................... 49 ITEM 11. EXECUTIVE COMPENSATION ...................................................................... 52 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ....................................................................... 55 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .............................................. 57 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K ......................................................................... 59
1 3 FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K contains forward-looking statements. These statements are based on the beliefs of Alliance Resource Partners, L.P. (Partnership) as well as assumptions made by and information currently available to the Partnership. When used in this document, the words "anticipate," "believe," "expect," "estimate," "forecast," "project," and similar expressions identify forward-looking statements. These statements reflect the Partnership's current views with respect to future events and are subject to various risks, uncertainties and assumptions including, but not limited to (a) the Partnership's dependence on significant customer contracts and the terms of those contracts, (b) the Partnership's productivity levels and margins that it earns from the sale of coal, (c) the effects of any unanticipated increases in labor costs, adverse changes in work rules, or unexpected cash payments associated with post-mine reclamation, workers' compensation claims, and environmental litigation or cleanup, (d) the risk of major mine-related accidents or interruptions, and (e) the effects of any adverse change in the domestic coal industry, electric utility industry, or general economic conditions. If one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in this Annual Report on Form 10-K. Except as required by applicable securities laws, the Partnership does not intend to update these forward-looking statements. PART I ITEM 1. BUSINESS GENERAL We are a diversified producer and marketer of coal to major United States utilities and industrial users. We began mining operations in 1971 and, since then, have grown through acquisitions and internal development to become the eighth largest coal producer in the eastern United States. At December 31, 2000, we had approximately 466 million tons of reserves in Illinois, Indiana, Kentucky, Maryland and West Virginia. In 2000, we produced 13.7 million tons of coal and sold 15.0 million tons of coal. The coal we produced in 2000 was 20.4% low-sulfur coal, 19.0% medium-sulfur coal and 60.6% high-sulfur coal. In 2000, approximately 96% of our medium- and high-sulfur coal was sold to utility plants with installed pollution control devices, also known as "scrubbers," to remove sulfur dioxide. We currently operate seven mining complexes in Illinois, Indiana, Kentucky and Maryland. Six of our mining complexes are underground and one has both surface and underground mines. Our mining activities are organized into three operating regions: (a) the Illinois Basin operations, (b) the East Kentucky operations, and (c) the Maryland operations. We and our subsidiary, Alliance Resource Operating Partners, L.P. (Intermediate Partnership), were formed to acquire, own and operate substantially all of the coal production and marketing assets of Alliance Resource Holdings, Inc. (ARH), a Delaware corporation formerly known as Alliance Coal Corporation. We completed our initial public offering (IPO) on August 20, 1999, at which time ARH contributed substantially all of its operating assets and liabilities to the Intermediate Partnership. Our managing general partner, Alliance Resource Management GP, LLC (Managing GP) and our special general partner, Alliance Resource GP, LLC (Special GP) (collectively, the Special GP and the Managing GP are the General Partners) own an aggregate 2% general partner interests in the Partnership. Our limited partners, including the General Partners as holders of Common Units and Subordinated Units, own an aggregate 98% of the limited partner interests in the Partnership. 2 4 The coal production and marketing assets of ARH acquired by the Partnership are referred to as the "Predecessor." All 1999 operating data contained herein includes the results of the Partnership and the Predecessor. MINING OPERATIONS We produce a diverse range of steam coals with varying sulfur and heat contents, which enables us to satisfy the broad range of specifications demanded by our customers. The following chart illustrates our production by region for the last five years.
OPERATING REGION AND MINES 2000 1999 1998 1997 1996 ---------- ---------- ---------- ---------- ---------- (TONS IN MILLIONS) Illinois Basin Operations: Dotiki, Pattiki, Hopkins County, Gibson County 8.4 8.5 7.9 5.2 4.3 East Kentucky Operations: Pontiki, MC Mining 2.7 2.8 2.5 2.8 2.0 Maryland Operations: Mettiki 2.6 2.8 3.0 2.9 2.7 ---------- ---------- ---------- ---------- ---------- Total 13.7 14.1 13.4 10.9 9.0 ========== ========== ========== ========== ==========
Illinois Basin Operations Our Illinois Basin mining operations are located in western Kentucky, southern Illinois and southern Indiana. We have approximately 835 employees in the Illinois Basin and currently operate four mining complexes. Webster County Coal, LLC. Webster County Coal operates the Dotiki mine, which is an underground mining complex, located in Webster and Hopkins Counties, Kentucky. The mine was opened in 1966, and we purchased the mine in 1971. Our Dotiki operation utilizes continuous mining units employing room-and-pillar mining techniques. The preparation plant has a throughput capacity of 1,000 tons of raw coal an hour. Production from the mine is shipped via the CSX railroad, the Paducah & Louisville railroad and by truck. Our primary customers for coal produced at Dotiki are Seminole Electric Cooperative, Inc. (Seminole), Tennessee Valley Authority (TVA) and Western Kentucky Energy Corp. (WKE), which purchase our coal pursuant to long-term contracts for use in their scrubbed generating units. During 2000, Webster County Coal entered into a mineral lease and sublease with an affiliate of the Special GP. See "Item 13. Certain Relationships and Related Transactions." White County Coal, LLC. White County Coal operates the Pattiki mine, which is an underground mining complex, located in White County, Illinois. We began construction of the mine in 1980 and have operated it since its inception. Our Pattiki operation utilizes continuous mining units employing room-and-pillar mining techniques. We are in the process of extending our Pattiki mine into adjacent coal reserves. This extension involves capital expenditures of approximately $30 million during the 2000-2003 period and allows the Pattiki mine to continue its existing productive capacity for the next 15 years. The preparation plant has a throughput capacity of 1,000 tons of raw coal an hour. Production from the mine is shipped via the CSX railroad. Our primary customers for coal produced at Pattiki are Seminole and TVA, which purchase our coal pursuant to long-term contracts for use in their scrubbed generating units. Hopkins County Coal, LLC. Hopkins County Coal is a mining complex located in Hopkins County, Kentucky. The operation has three surface mines, two of which are currently idle, and one underground mine. We acquired Hopkins County Coal in January 1998. The surface operations utilize dragline mining, and the underground operation utilizes a continuous mining unit employing room-and-pillar mining techniques. The preparation plant has a throughput capacity of 1,000 tons of raw coal an hour. Production from the complex is shipped via the CSX and the Paducah & Louisville railroads and by truck. Our primary customers for coal 3 5 produced at Hopkins County Coal include Louisville Gas & Electric, TVA and WKE, which purchase our coal pursuant to long-term contracts for use in their scrubbed generating units. During 2000, Hopkins County Coal entered into an option to lease and sub-lease reserves with an affiliate of the Special GP. See "Item 13. Certain Relationships and Related Transactions." Gibson County Coal, LLC. Gibson County Coal is an underground mining complex located in Gibson County, Indiana. We began construction of the mine in 1999 and commenced production in November 2000. The Gibson County mining complex utilizes continuous mining units employing room-and-pillar mining techniques. The preparation plant is leased from the Special GP and has a throughput capacity of 700 tons of raw coal an hour. Production from Gibson County Coal is a low-sulfur coal, shipped via truck to our primary customer, PSI Energy Inc., a subsidiary of Cinergy Corporation. Gibson County Coal also has approximately 104.2 million tons of undeveloped recoverable reserves, which are not contiguous to the reserves currently being mined. East Kentucky Operations Our East Kentucky mining operations are located in the Central Appalachia coal fields. Our East Kentucky mines produce low-sulfur coal. We have approximately 360 employees and operate two mining complexes in East Kentucky. Pontiki Coal, LLC. Pontiki is an underground mining complex located in Martin County, Kentucky. We constructed the mine in 1977. Pontiki owns the mining complex and reserves and Excel Mining LLC, an affiliate of Pontiki, is responsible for conducting all mining operations. All of the coal produced at Pontiki meets or exceeds the compliance requirements of Phase II of the Clean Air Act Amendments. Our Pontiki operation utilizes continuous mining units employing room-and-pillar mining techniques. The preparation plant has a throughput capacity of 800 tons of raw coal an hour. Production from the mine is shipped via the Norfolk Southern railroad and by truck. Our primary customers for coal produced at Pontiki are James River Cogeneration Company, the successor to Cogentrix of Virginia, Inc., and AEI Coal Sales Company, Inc. (AEI). MC Mining, LLC. MC Mining is an underground mining complex located in Pike County, Kentucky, acquired in 1989. Since we began operations in late 1996, MC Mining was operated by an unaffiliated contract mining company. However, during the fourth quarter 2000, the contract mining agreement was terminated and MC Mining entered into an intercompany support services agreement with Excel Mining. Selected employees of the contractor and other qualified individuals were hired by Excel Mining, which is responsible for conducting all mining operations. The operation utilizes continuous mining units employing room-and-pillar mining techniques. The preparation plant has a throughput capacity of 800 tons of raw coal an hour. Production from the mine is shipped via the CSX railroad and by truck. MC Mining sells its low-sulfur production primarily in the spot market. Toptiki Coal, LLC. Toptiki was a surface and underground mining complex located in Martin County, Kentucky. After conducting surface mining operations through 1982 and underground operations through 1996, we discontinued mining at the complex and have since sold our member interest in Toptiki for an immaterial amount. Maryland Operations Our Maryland mining operation is located in the Northern Appalachia coal fields. We have approximately 235 employees and operate one mining complex in Maryland. Mettiki Coal, LLC. Mettiki is an underground longwall mining complex located in Garrett County, Maryland. We constructed Mettiki in 1977 and have operated it since its inception. The operation utilizes a longwall miner for the majority of the coal extraction as well as continuous mining units used to prepare the 4 6 mine for future longwall mining operation areas. The preparation plant has a throughput capacity of 1,350 tons of raw coal an hour. Production from the mine is shipped via truck and the CSX railroad. Our primary customer for coal produced at Mettiki is Virginia Electric and Power Company (VEPCO), which purchases the coal pursuant to a long-term contract for use in the generating units at its Mt. Storm, West Virginia power plant located less than 20 miles away. We also process coal at Mettiki for Anker Energy Corporation and one of its affiliates. Mettiki Coal (WV), LLC. Mettiki (WV) has approximately 20.1 million tons of undeveloped recoverable reserves in Grant and Tucker Counties, West Virginia adjacent to Mettiki in Garrett County, Maryland. We currently conduct no mining operations at Mettiki (WV). OTHER OPERATIONS Mt. Vernon Transfer Terminal, LLC Mt. Vernon terminal is a rail-to-barge loading terminal on the Ohio River in Mt. Vernon, Indiana. The terminal has a capacity of 5.5 million tons per year with existing ground storage. The terminal was used from 1983 through 1998 for shipments from Pattiki and Dotiki under our coal supply agreement with Seminole. Seminole now transports these shipments directly by CSX railroad. We currently use the facility as needed for spot shipments to customers other than Seminole and continue to explore our opportunities and options regarding the terminal. Coal Brokerage We buy coal from outside producers throughout the eastern United States, which we then resell, both directly and indirectly, to utility and industrial customers. We purchased and sold 200,000 tons of outside coal in 2000. We have a policy of matching our outside coal purchases and sales to minimize market risks associated with buying and reselling coal. Additional Services We develop and market additional services in order to establish ourselves as the supplier of choice for our customers. Examples of the kind of services we have offered to date include ash and scrubber sludge removal, coal yard maintenance, and arranging alternate transportation services. We will continue to think proactively in providing additional services for customers and believe that this approach will give us a competitive advantage in obtaining coal supply contracts in the future. COAL MARKETING AND SALES As is customary in the coal industry, we have entered into long-term contracts with many of our customers. These arrangements are mutually beneficial. Our utility customers secure a fuel supply for their power plants for years into the future. Our long-term contracts contribute to both our customers and our stability and profitability by providing greater predictability of sales volumes and sales prices. In 2000, approximately 85% of our sales tonnage was sold under long-term contracts with maturities ranging from 2000 to 2012. Our total nominal commitment under significant long-term contracts was approximately 74.8 million tons at December 31, 2000. The total commitment of coal under contract is an approximate number because, in some instances, our contracts contain provisions that could cause the nominal total commitment to increase or decrease by as much as 20%. In addition, the nominal total commitment can otherwise change because of price reopener provisions contained in certain of these long-term contracts. We believe our long-term contract position compares favorably to those of our competitors. The terms of long-term contracts are the results of both bidding procedures and extensive negotiations with the customer. As a result, the terms of these contracts vary significantly in many respects, including, 5 7 among others, price adjustment features, price and contract reopener terms, permitted sources of supply, force majeure provisions, coal qualities, and quantities. Virtually all of our long-term contracts are subject to price adjustment provisions which permit an increase or decrease periodically in the contract price to reflect changes in specified price indices or items such as taxes, royalties or actual production costs. These provisions, however, may not assure that the contract price will reflect every change in production or other costs. Failure of the parties to agree on a price pursuant to an adjustment or a reopener provision can lead to early termination of a contract. Some of the long-term contracts also permit the contract to be reopened to renegotiate terms and conditions other than the pricing terms, and where a mutually acceptable agreement on terms and conditions cannot be concluded, either party may have the option to terminate the contract. The long-term contracts typically stipulate procedures for quality control, sampling and weighing. Most contain provisions requiring us to deliver coal within ranges for specific coal characteristic such as heat, sulfur, ash, moisture, grindability, volatility and other qualities. Failure to meet these specifications can result in economic penalties or termination of the contracts. While most of the contracts specify the approved seams and/or approved locations from which the coal is to be mined, some contracts allow the coal to be sourced from more than one mine or location. Although the volume to be delivered pursuant to a long-term contract is stipulated, the buyers often have the option to vary the volume within specified limits. RELIANCE ON MAJOR CUSTOMERS Our four largest customers are AEI, Seminole, TVA and VEPCO. Sales to these customers in the aggregate accounted for approximately 62% of our 2000 total revenues, and sales to each of these customers accounted for more than 10% of our 2000 total revenues. Three of these customers have purchased coal regularly from us for more than 15 years. A national bond rating agency has recently reported that the parent company of one of our significant customers is in default on a significant amount of its outstanding debt. All of the accounts receivable under the long-term contract with our customer are current. Our management does not anticipate that this event will have a material impact on our financial condition or results of operations. COMPETITION The United States coal industry is highly competitive with numerous producers in all coal producing regions. We compete with other large producers and hundreds of small producers in the United States. The largest coal company is estimated to have sold approximately 16% of the total 2000 tonnage sold in the United States market. We compete with other coal producers primarily on the basis of coal price at the mine, coal quality (including sulfur content), transportation cost from the mine to the customer, and the reliability of supply. Continued demand for our coal and the prices that we obtain are also affected by demand for electricity, environmental and government regulations, technological developments, and the availability and price of alternative fuel supplies, including nuclear, natural gas, oil, and hydroelectric power. TRANSPORTATION Our coal is transported to our customers by rail, truck and barge. Depending on the proximity of the customer to the mine and the transportation available for delivering coal to that customer, transportation costs can range from 10% to 60% of the delivered cost of a customer's coal. As a consequence, the availability and cost of transportation constitute important factors in the marketability of coal. We believe our mines are located in favorable geographic locations that minimize transportation costs for our customers. Customers pay the transportation costs from the contractual F.O.B. point to the customer's plant. At our Gibson and Mettiki mines, a contractor operates a truck delivery system that transports the coal from the mine to the primary customer's power plant. In 2000, the largest volume transporter of our coal production was the CSX railroad, which moved approximately 50% of our tonnage over its rail system. The practices of, and rates set by, the railroad serving a particular mine or customer might affect, either adversely or favorably, our marketing efforts with respect to coal produced from the relevant mine. 6 8 REGULATION AND LAWS The coal mining industry is subject to regulation by federal, state and local authorities on matters such as: - employee health and safety; - mine permits and other licensing requirements; - air quality standards; - water pollution; - storage of petroleum products and substances which are regarded as hazardous under applicable laws or which, if spilled, could reach waterways or wetlands; - plant and wildlife protection; - reclamation and restoration of mining properties after mining is completed; - the discharge of materials into the environment; - management of solid wastes generated by mining operations; - protection of wetlands; - management of electrical equipment containing polychlorinated biphenyls (PCBs); - surface subsidence from underground mining; - the effects that mining has on groundwater quality and availability; and - legislatively mandated benefits for current and retired coal miners. In addition, the utility industry is subject to extensive regulation regarding the environmental impact of its power generation activities, which could affect demand for our coal. The possibility exists that new legislation or regulations, or new interpretations of existing laws or regulations, may be adopted that may have a significant impact on our mining operations or our customers' ability to use coal, and may require us or our customers to change our or their operations significantly or to incur substantial costs. We are committed to conducting mining operations in compliance with all applicable federal, state and local laws and regulations. However, because of extensive and comprehensive regulatory requirements, violations during mining operations are not unusual in the industry and, notwithstanding our compliance efforts, we do not believe these violations can be eliminated completely. None of the violations to date or the monetary penalties assessed at our operations have been material. While it is not possible to quantify the costs of compliance with all applicable federal and state laws, those costs have been and are expected to continue to be significant. Capital expenditures for environmental matters have not been material in recent years. We have accrued for the present value estimated cost of reclamation and mine closing, including the cost of treating mine water discharge, when necessary. The accrual for reclamation and mine closing costs is based upon permit requirements and the costs and timing of reclamation and mine closing procedures. Although management believes it has made adequate provisions for all expected reclamation and other costs associated with mine closures, future operating results would be adversely affected if we later determine these accruals to be insufficient. Compliance with these laws has substantially increased the cost of coal mining for all domestic coal producers. Mining Permits and Approvals. Numerous governmental permits or approvals are required for mining operations. We may be required to prepare and present to federal, state or local authorities data pertaining to the effect or impact that any proposed production of coal may have upon the environment. All requirements imposed by any of these authorities may be costly and time-consuming, and may delay commencement or continuation of mining operations. Future legislation and administrative regulations may emphasize more heavily the protection of the environment and, as a consequence, our activities may be more closely regulated. Legislation and regulations, as well as future interpretations of existing laws, may require substantial increases in equipment and operating costs and delays, interruptions or a termination of operations, the extent of which cannot be predicted. 7 9 Before commencing mining on a particular property, we must obtain mining permits and approvals by state regulatory authorities of a reclamation plan for restoring, upon the completion of mining, the mined property to its approximate prior condition, productive use or other permitted condition. Typically, we commence actions to obtain permits between 18 and 24 months before we plan to mine a new area. In our experience, permits generally are approved within 12 months after a completed application is submitted. We have not experienced difficulties in obtaining mining permits in the areas where our reserves are currently located. However, we cannot assure you that we will not experience difficulty in obtaining mining permits in the future. Under some circumstances, substantial fines and penalties, including revocation of mining permits, may be imposed under the laws described above. Monetary sanctions and, in severe circumstances, criminal sanctions may be imposed for failure to comply with these laws. Regulations also provide that a mining permit can be refused or revoked if the permit applicant or permittee owns or controls, directly or indirectly through other entities, mining operations which have outstanding permit violations. Although we have been cited for violations in the ordinary course of our business, we have never had a permit suspended or revoked because of any violation, and the penalties assessed for these violations have not been material. Mine Health and Safety Laws. Stringent safety and health standards have been imposed by federal legislation since 1969 when the Coal Mine Health and Safety Act of 1969 (CMHSA) was adopted. CMHSA resulted in increased operating costs and reduced productivity. The federal Mine Safety and Health Act of 1977, which significantly expanded the enforcement of health and safety standards of CMHSA, imposes comprehensive safety and health standards on all mining operations. Regulations are comprehensive and affect numerous aspects of mining operations, including training of mine personnel, mining procedures, blasting, the equipment used in mining operations and other matters. The Mine Safety and Health Administration monitors compliance with these federal laws and regulations. In addition, as part of CMHSA and the Mine Safety and Health Act of 1977, the Black Lung Benefits Act requires payments of benefits by all businesses that conduct current mining operations to a coal miner with black lung disease and to some survivors of a miner who dies from this disease. Most of the states where we operate also have state programs for mine safety and health regulation and enforcement. In combination, federal and state safety and health regulation in the coal mining industry is perhaps the most comprehensive and rigorous system for protection of employee safety and health affecting any segment of any industry. Even the most minute aspects of mine operations, particularly underground mine operations, are subject to extensive regulation. This regulation has a significant effect on our operating costs. However, our competitors in all of the areas in which we operate are subject to the same laws and regulations. Black Lung Benefits Act (BLBA). The federal BLBA levies a tax on production of $1.10 per ton for underground-mined coal and $0.55 per ton for surface-mined coal, but not to exceed 4.4% of the applicable sales price, in order to compensate miners who are totally disabled due to black lung disease and some survivors of miners who died from this disease, and who were last employed as miners prior to 1970 or subsequently where no responsible coal mine operator has been identified for claims. In addition, BLBA provides that some claims for which coal operators had previously been responsible will be obligations of the government trust funded by the tax. The Revenue Act of 1987 extended the termination date of this tax from January 1, 1996, to the earlier of January 1, 2014, or the date on which the government trust becomes solvent. For miners last employed as miners after 1969 and who are determined to have contracted black lung, we self-insure against potential cost using actuarially determined estimates of the cost of present and future claims. We are also liable under state statutes for black lung claims. The U.S. Department of Labor has issued revised regulations that could alter the claims process for the federal black lung benefit recipients, which among other things: - simplify administrative procedures for the adjudication of claims; - propose preference for the miner's treating physician under certain circumstances; - allow previously denied claims to be refiled and litigated under a different standard; 8 10 - limit the amount of evidence all parties may submit for consideration; - create a rebuttable presumption that medical treatment for any pulmonary condition is caused or aggravated by the miner's work; and - expand the definition of pneumoconiosis and total disability. Because the revised regulations are expected to result in an increase in the incidence and recovery of black lung claims, both the coal and insurance industries are currently challenging through litigation certain provisions of the revised regulations. A federal judge has granted a limited stay of the new black lung regulations at the request of the Bush administration. Under the preliminary injunction, claims will continue to be processed under the new regulations, but no final decisions will be made on claims for black lung benefits filed after the new regulations became effective. The outcome of the litigation and the impact of the revised regulations if eventually implemented on the Partnership's liability for black lung claims cannot be determined at this time. In addition, Congress and state legislatures regularly consider various items of black lung legislation, which if enacted, could adversely affect our business financial condition and results of operations. Workers' Compensation. We are required to compensate employees for work-related injuries. Several states in which we operate consider changes in workers compensation laws from time to time. Coal Industry Retiree Health Benefits Act (CIRHBA). The federal CIRHBA was enacted to provide for the funding of health benefits for some United Mine Workers of America retirees. The act merged previously established union benefit plans into a single fund into which "signatory operators" and "related persons" are obligated to pay annual premiums for beneficiaries. The act also created a second benefit fund for miners who retired between July 21, 1992, and September 30, 1994, and whose former employers are no longer in business. Because of our union-free status, we are not required to make payments to retired miners under CIRHBA, with the exception of limited payments made on behalf of predecessors of MC Mining, LLC. However, in connection with the sale of the coal assets acquired by ARH in 1996, MAPCO Inc. agreed to retain all liabilities under CIRHBA. Surface Mining Control and Reclamation Act (SMCRA). The federal SMCRA establishes operational, reclamation and closure standards for all aspects of surface mining as well as many aspects of deep mining. The act requires that comprehensive environmental protection and reclamation standards be met during the course of and upon completion of mining activities. In conjunction with mining the property, we reclaim and restore the mined areas by grading, shaping and preparing the soil for seeding. Upon completion of the mining, reclamation generally is completed by seeding with grasses or planting trees for a variety of uses, as specified in the approved reclamation plan. We believe that we are in compliance in all material respects with applicable regulations relating to reclamation. SMCRA and similar state statutes, require, among other things, that mined property be restored in accordance with specified standards and approved reclamation plans. The act requires us to restore the surface to approximate the original contours as contemporaneously as practicable with the completion of surface mining operations. The mine operator must submit a bond or otherwise secure the performance of these reclamation obligations. The earliest a reclamation bond can be released is five years after reclamation has been achieved. Federal law and some states impose on mine operators the responsibility for replacing certain water supplies damaged by mining operations and repairing or compensating for damage occurring on the surface as a result of mine subsidence, a consequence of longwall mining and possibly other mining operations. In addition, the Abandoned Mine Lands Program, which is part of SMCRA, imposes a tax on all current mining operations, the proceeds of which are used to restore mines closed before 1977. The maximum tax is $0.35 per ton on surface-mined coal and $0.15 per ton on underground-mined coal. We have accrued for the estimated costs of reclamation and mine closing, including the cost of treating mine water discharge when necessary. 9 11 Under SMCRA, responsibility for unabated violations, unpaid civil penalties and unpaid reclamation fees of independent contract mine operators and other third parties can be imputed to other companies which are deemed, according to the regulations, to have "owned" or "controlled" the third party violator. Sanctions against the "owner" or "controller" are quite severe and can include being blocked from receiving new permits and revocation of any permits that have been issued since the time of the violations or, in the case of civil penalties and reclamation fees, since the time their amounts became due. We are not aware of any currently pending or asserted claims relating to the "ownership" or "control" theories discussed above. However, we cannot assure you that such claims will not develop in the future. Clean Air Act (CAA). The federal CAA and similar state laws, which regulate emissions into the air, affect coal mining and processing operations primarily through permitting and emissions control requirements. The CAA also indirectly affects coal mining operations by extensively regulating the air emissions of coal-fired electric power generating plants. For example, the CAA requires reduction of sulfur dioxide (SO2) emissions from electric power generation plants in two phases. Only some facilities were subject to the Phase I requirements. Beginning in year 2000, Phase II requires nearly all facilities to reduce emissions. The effected utilities are able to meet these requirements by: - switching to lower sulfur fuels; - installing pollution control devices such as scrubbers; - reducing electricity generating levels; or - purchasing or trading so-called pollution "credits." Specific emissions sources receive these "credits" that utilities and industrial concerns can trade or sell to allow other units to emit higher levels of SO2. In addition, the CAA requires a study of utility power plant emissions of some toxic substances and their eventual regulation, if warranted. The effect of the CAA cannot be completely ascertained at this time, although the SO2 emissions reduction requirement is projected generally to increase the demand for lower sulfur coal and potentially decrease demand for higher sulfur coal. The CAA also indirectly affects coal mining operations by requiring utilities that currently are major sources of nitrogen oxides (NOx) in moderate or higher ozone nonattainment areas to install reasonably available control technology for NOx, which are precursors of ozone. In October 1998, the U.S. Environmental Protection Agency (EPA) issued a rule requiring 22 eastern states and the District of Columbia to make substantial reductions in NOx emissions by the year 2003, which was substantially upheld by the U.S. Court of Appeals for the D.C. Circuit on March 3, 2000. On March 5, 2001, the U.S. Supreme Court declined to review that decision, in response to a petition by seven states and the power and coal industries. EPA expects that effected states will achieve reductions by requiring power plants to make substantial reductions in their NOx emissions. This in turn will require power plants to install reasonably available control technology and additional control measures. Installation of reasonably available control technology and additional measures required under EPA regulations will make it more costly to operate coal-fired plants and, depending on the requirements of individual state implementation plans and the development of revised new source performance standards, could make coal a less attractive fuel alternative in the planning and building of utility power plants in the future. Any reduction in coal's share of the capacity for power generation could have a material adverse effect on our business, financial condition and results of operations. The effect these regulations, or other requirements that may be imposed in the future, could have on the coal industry in general and on our business in particular cannot be predicted with certainty. We cannot assure you that the implementation of the CAA, the new National Ambient Air Quality Standards (NAAQS) discussed below, or any other current or future regulatory provision, will not materially adversely affect us. In addition, EPA has already issued and is considering further regulations relating to fugitive dust and emissions of other coal-related pollutants such as mercury, nickel, dioxin and fine particulates. For example, in July 1997 EPA adopted new, more stringent NAAQS for particulate matter, which may require some states to change existing implementation plans. These NAAQS are expected to be implemented by 2003. These NAAQS were effectively affirmed by the U.S. Supreme Court on February 27, 2001. That decision upheld 10 12 the constitutionality of EPA's NAAQS statutory authority, finding that EPA acted properly in not considering costs in setting the NAAQS, and remanded the case to the U.S. Court of Appeals for the D.C. Circuit to dispose of any remaining challenges to the rules. Because coal mining operations and utilities emit particulate matter, our mining operations and utility customers are likely to be directly effected when the revisions to the NAAQS are implemented by the states. EPA has filed suit against a number of our customers over implementation of new source performance standards and preconstruction review requirements for new sources and major modifications under the prevention of significant deterioration and nonattainment regulations. This issue surrounds the issue of what constitutes regular maintenance versus new construction. Some of our customers have agreed to or proposed settlements with EPA while others are preparing for litigation. These and other regulatory developments may restrict our ability to develop new mines, or could require us or our customers to modify existing operations. Framework Convention On Global Climate Change (Kyoto Protocol). The United States and more than 160 other nations are signatories to the Kyoto Protocol which is intended to limit or capture emissions of greenhouse gases, such as carbon dioxide. The Kyoto Protocol established a binding set of emissions targets for developed nations. The specific limits vary from country to country. Under the terms of the Kyoto Protocol, the United States would be required to reduce emissions to 93% of 1990 levels over a five-year budget period from 2008 through 2012. The Clinton Administration signed the Kyoto Protocol in November 1998. Although the U.S. Senate has not ratified the Kyoto Protocol and no comprehensive regulations focusing on greenhouse gas emissions have been enacted, efforts to control greenhouse gas emissions could result in reduced use of coal if electric power generators switch to lower carbon sources of fuel. These restrictions, if established through regulation or legislation, could have a material adverse effect on our business, financial condition and results of operations. Clean Water Act (CWA). The federal CWA affects coal mining operations by imposing restrictions on effluent discharge into waters. Regular monitoring, as well as compliance with reporting requirements and performance standards, are preconditions for the issuance and renewal of permits governing the discharge of pollutants into water. We are also subject to CWA Section 404, which imposes permitting and mitigation requirements associated with the dredging and filling of wetlands. The CWA and equivalent state legislation, where such equivalent state legislation exists, affect coal mining operations that impact wetlands. We believe we have obtained all necessary wetlands permits required under Section 404. However, mitigation requirements under those existing, and possible future, wetlands permits may vary considerably. In addition, we are currently interpreting the effect of a January 9, 2001, U.S. Supreme Court ruling concerning the definition of isolated wetlands. This issue should not cause any increase in post-mine reclamation accruals. In fact, this decision is expected to decrease the regulatory burden on mining operations that disturb intermittent streams and other isolated wetlands. For that reason, the setting of post-mine reclamation accruals for such mitigation projects is difficult to ascertain with certainty. We believe that we have obtained all permits required under the CWA as traditionally interpreted by the responsible agencies. Although more stringent permitting requirements may be imposed in the future, we are not able to accurately predict the impact, if any, of any such permitting requirements. However, each individual state is required to submit to EPA their biennial CWA Section 303(d) lists identifying all waterbodies not meeting state specified water quality standards. For each listed waterbody, the state is required to begin developing a Total Maximum Daily Load (TMDL) to: - determine the maximum pollutant loading the waterbody can assimilate without violating water quality standards, - identify all current pollutant sources and loadings to that waterbody, - calculate the pollutant loading reduction necessary to achieve water quality standards, and - establish a means of allocating that burden among and between the point and non-point sources contributing pollutants to the waterbody. 11 13 We are currently participating in stakeholders meetings and in negotiations with states and EPA to establish reasonable TMDLs that will accommodate expansion. These and other regulatory developments may restrict our ability to develop new mines, or could require us or our customers to modify existing operations, the extent of which we cannot accurately or reasonably predict. Safe Drinking Water Act (SDWA). The federal SDWA and its state equivalents affect coal mining operations by imposing requirements on the underground injection of fine coal slurries, fly ash, and flue gas scrubber sludge, and by requiring a permit to conduct such underground injection activities. The inability to obtain these permits could have a material impact on our ability to inject materials such as fine coal refuse, fly ash, or flue gas scrubber sludge into the inactive areas of some of our old underground mine workings. In addition to establishing the underground injection control program, the federal SDWA also imposes regulatory requirements on owners and operators of "public water systems." This regulatory program could impact our reclamation operations where subsidence, or other mining-related problems, require the provision of drinking water to effected adjacent homeowners. However, the federal SDWA defines a "public water system" for purposes of regulatory jurisdiction as a system for the provision to the public of water for human consumption through pipes or other constructed conveyances, if the system has at least fifteen service connections or regularly serves at least twenty-five individuals. It is unlikely that any of our reclamation activities would require the provision of such a "public water system." While we have at least one drinking water supply source for our employees and contractors that is subject to SDWA regulation, the SDWA is unlikely to have a material impact on our operations. Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). The federal CERCLA and similar state laws affect coal mining operations by, among other things, imposing cleanup requirements for threatened or actual releases of hazardous substances that may endanger public health or welfare or the environment. Under CERCLA, and similar state laws, joint and several liability may be imposed on waste generators, site owners and operators and others regardless of fault or the legality of the original disposal activity. Some products used by coal companies in operations, such as chemicals, generate waste containing hazardous substances, which are governed by the statute. Thus, coal mines that we currently own or have previously owned or operated, and sites to which we sent waste materials, may be subject to liability under CERCLA and similar state laws. We have been, on rare occasions, the subject of administrative proceedings, litigation and investigations relating to CERCLA matters, none of which has had a material adverse effect on our financial condition or results of operations. We cannot assure you that we will not become involved in future proceedings, litigation or investigations, or that liabilities arising out of any such proceedings will not be material. Toxic Substances Control Act (TSCA). The federal TSCA regulates, among other things, electrical equipment containing PCBs in excess of 50 parts-per-million. Specifically, TSCA's PCB rules require that all PCB-containing equipment be properly labeled, stored, and disposed of, and require the on-site maintenance of annual records regarding the presence and use of equipment containing PCBs in excess of 50 parts-per-million. Because the regulated PCB-containing electrical equipment in use in our operations is owned by the utilities that serve the operations where they are located, and because the use of PCB-containing fluids in such equipment is in the process of being phased out, we do not believe TSCA will have a material impact on our operations. Resource Conservation and Recovery Act (RCRA). The federal RCRA affects coal mining operations by imposing requirements for the generation, transportation, treatment, storage, disposal and cleanup of hazardous wastes. Many mining wastes are excluded from the regulatory definition of hazardous wastes, and coal mining operations covered by SMCRA permits are exempted from regulation under RCRA by statute. Coal Combustion By-Products. In 2000, EPA declined to impose hazardous wastes regulatory controls on the disposal of some coal combustion by-products, including the practice of using coal combustion by-products as minefill. However, EPA is currently evaluating the possibility of placing additional solid waste 12 14 burdens on the disposal of these types of materials, but it may be several years before these standards will be developed. While we cannot predict the ultimate outcome of the EPA's assessment, we believe that the beneficial uses of coal combustion by-products we employ do not constitute poor practices due to, among other things, the fact that our CWA discharge permits for treated acid mine drainage contain parameters for pollutants of concern, such as metals, and those permits require monitoring and reporting of effluent quality data. Small quantities of regulated hazardous wastes are generated at some of our facilities. However, we do not believe that the cost of complying with applicable regulations for those wastes will have a material impact. OTHER ENVIRONMENTAL, HEALTH AND SAFETY REGULATION In addition to the laws and regulations described above, we are subject to regulations regarding underground and above ground storage tanks where we may store petroleum or other substances. Some monitoring equipment that we use is subject to licensing under the federal Atomic Energy Act. Water supply wells located on our property are subject to federal, state and local regulation. The costs of compliance with these requirements should not have a material adverse effect on our business, financial condition or results of operations. EMPLOYEES We have approximately 1,530 employees, including some 100 corporate employees and some 1,430 employees involved in active mining operations. Our work-force is entirely union-free. Relations with our employees are generally good, and there have been no recent work stoppages or union organizing campaigns among our employees. ITEM 2. PROPERTIES COAL RESERVES As of December 31, 2000, we had approximately 466 million tons of coal reserves. All of the estimates of reserves which are presented in this Annual Report on Form 10-K are of proven and probable reserves. Proven and probable reserves are reserves that we can economically produce using current extraction technology from acreage we own or lease. The following table sets forth production data and reserve information, as of December 31, 2000, about each of our mining complexes. 13 15
Typical Clean Coal Quality Proven and Probable Reserve 2000 ---------------------------------- ---------------------------------------- Saleable Heat Production Content(2) (tons in (BTU Sulfur(2) Ash(2) Low Medium High Location Mine Type millions) per pound) (%) (%) Sulfur(1) Sulfur(1) Sulfur(1) Total - -------- --------- --------- ---------- --------- ------ --------- --------- --------- ----- (tons in millions) Webster and Hopkins Underground 3.9 12,500 2.9 8.1 107.4 107.4 County, KY White County, IL Underground 2.3 11,700 3.0 7.9 81.3 81.3 Hopkins County, KY Surface/ Underground 2.1 11,300 3.2 12.4 35.0 35.0 Gibson County, IN Underground 0.1 11,600 1.0 7.0 39.4 39.4 Gibson County, IN Underground 0.0 11,600 2.1(3) NA 10.9 44.1 49.2 104.2 ===== ===== ====== ====== ===== 8.4 50.3 44.1 272.9 367.3 ===== ===== ====== ====== ===== Martin County, KY Underground 1.9 12,800 0.7 6.7 19.7 19.7 Pike County, KY Underground 0.8 12,800 0.7 7.2 23.1 23.1 ===== ===== ====== ====== ===== 2.7 42.8 0.0 0.0 42.8 ===== ===== ====== ====== ===== Garrett County, MD Underground 2.6 13,000 1.6 10.0 36.0 36.0 Grant and Tucker Underground 0.0 13,000 1.6 10.0 20.1 20.1 County, WV ===== ===== ====== ====== ===== 2.6 0.0 56.1 0.0 56.1 ===== ===== ====== ====== ===== 93.1 100.2 272.9 466.2 ===== ===== ====== ====== ===== 13.7 20.0% 21.5% 58.5% 100.0 ===== ===== ====== ====== =====
(1) We classify low-sulfur coal as coal with a sulfur content of less than 1%, medium-sulfur coal as coal with a sulfur content between 1% and 2% and high-sulfur coal as coal with a sulfur content of greater than 2%. (2) Fully washed quality. Actual shipped quality varies according to the blending of washed and raw coal. (3) Sulfur (%) represents a weighted average. Our reserve estimates are prepared from geological data assembled and analyzed by our staff of geologists and engineers. This data is obtained through our extensive, ongoing exploration drilling and in-mine channel sampling programs. Reserve estimates will change from time to time in reflection of mining activities, analysis of new engineering and geological data, acquisition or divestment of reserve holdings, modification of mining plans or mining methods, and other factors. We estimate that approximately 62 million tons of our reserves, or approximately 67% of our low-sulfur reserves and 13% of our total reserves at December 31, 2000, meet compliance standards for Phase II of the Clean Air Act Amendments. Compliance coal consists of coal that emits less than 1.2 pounds of SO2 per million Btu. We lease almost all of our reserves and generally have the right to maintain the lease in force until the exhaustion of minable and merchantable coal located within the leased premises or a larger coal reserve area. These leases provide for royalties to be paid to the lessor at a fixed amount per ton or as a percentage of the sales price. Many leases require payment of minimum royalties, payable either at the time of the execution of the lease or in periodic installments, even if no mining activities have begun. These minimum royalties are normally credited against the production royalties owed to a lessor once coal production has commenced. In connection with our corporate reorganization and subsequent IPO, we obtained the consents of our lessors or determined that obtaining such consents was not required. Although we believe we have obtained all necessary consents, in the event that we have failed to obtain a necessary consent, our operations may be adversely impacted if we experience any disruption of our mining operations as a consequence. 14 16 For economic and other operational reasons, a portion of our reserves described above may be mined only after the construction of additional mining facilities. The extent to which we will eventually mine our reserves will depend on the price and demand for coal of the quality and type we control, the price and supply of alternative fuels, and future mining practices and regulations. RISK FACTORS If any of the following risks were actually to occur, our business, financial condition or results of operations could be materially adversely effected and the trading price of our Common Units could decline. Risks Inherent in Our Business - Competition within the coal industry may adversely affect our ability to sell coal, and excess production capacity in the industry could put downward pressure on coal prices in the future. - Current conditions in the coal industry may change and make it more difficult for us to extend existing or enter into new long-term contracts. This could affect the stability and profitability of our operations. - Some of our long-term contracts contain provisions allowing for the renegotiation of prices and, in some instances, the termination of the contract or the suspension of purchases by customers. - Some of our long-term contracts require us to supply all of our customers coal needs. If these customers' coal requirements decline, our revenues under these contracts will also drop. - A substantial portion of our coal has a high-sulfur content. This coal may become more difficult to sell because the CAA may impact the ability of electric utilities to burn high-sulfur coal through the regulation of emissions. - We depend on a few customers for a significant portion of our revenues, and the loss of one or more significant customers could have a material adverse effect on our business, financial condition or results of operations. - Any future litigation relating to disputes with our customers may result in substantial costs, liabilities and loss of revenues. - Any loss of the benefit from state tax credits may affect adversely our business financial condition or results of operations. - Coal mining is subject to inherent risks that are beyond our control, and we cannot assure you that these risks will be fully covered under our insurance policies. - We depend on third party service providers to assist us in producing a portion of our coal. If these providers' services were no longer available, our ability to produce and sell coal may be effected adversely. - Any significant increase in transportation costs or disruption of the transportation of our coal may impair our ability to sell coal. - We may not be able to grow successfully through future acquisitions, and we may not be able to effectively integrate the various businesses or properties we do acquire. - Our business may be adversely effected if we are unable to replace our coal reserves. - The estimates of our reserves may prove inaccurate, and you should not place undue reliance on these estimates. - Our indebtedness may limit our ability to borrow additional funds, make distributions to Unitholders or capitalize on business opportunities. - We are required to obtain and maintain bonds to secure our obligations to return mined property to its approximate original condition. The failure to do so may result in fines and the loss of mining permits. Risks Inherent in an Investment in the Partnership - Unitholders have limited voting rights and do not control our Managing GP. - We may issue additional Common Units without the approval of Common Unitholders, which would dilute existing Unitholders' interests. 15 17 - The issuance of additional Common Units, including upon conversion of Subordinated Units, will increase the risk that we will be unable to pay the full minimum quarterly distribution on all Common Units. - Cost reimbursements to our General Partners may be substantial and will reduce our cash available for distribution. - Our Managing GP has a limited call right that may require Unitholders to sell their Common Units at an undesirable time or price. - Unitholders may not have limited liability under some circumstances. - Cash distributions are not guaranteed and may fluctuate with our performance. In addition, our Managing GP's discretion in establishing reserves may negatively impact your receipt of cash distributions. Regulatory Risks - We are subject to federal, state and local regulations on numerous matters. These regulations increase our costs of doing business and may discourage customers from buying our coal. - We are subject to black lung benefits and workers' compensation obligations, which could increase if new legislation is enacted. - The CAA affects our customers and could significantly influence their purchasing decisions. - The passage of legislation responsive to the Kyoto Protocol could result in a reduced use of coal by electric power generators. This reduction in use could adversely affect our revenues and results of operations. - The CWA imposes limitations and monitoring and reporting obligations on our discharge of pollutants into water. - We are subject to reclamation, mine closure and real property restoration regulation obligations, which could increase if new legislation is enacted. - We and our customers could incur significant costs under federal and state Superfund and waste management statutes. Tax Risks to Common Unitholders - The Internal Revenue Service (IRS) could in the future choose to treat us as a corporation, which would substantially reduce the cash available for distribution to Unitholders. - We have not requested an IRS ruling with respect to our tax treatment. - You may be required to pay taxes on income from us even if you receive no cash distributions. - Tax gain or loss on disposition of Common Units could be different than expected. - Common Unitholders, other than individuals who are U.S. residents, may have adverse tax consequences from owning Common Units. - We have registered with the IRS as a tax shelter. This may increase the risk of an IRS audit of us or a Common Unitholder. - We treat a purchaser of Common Units as having the same tax benefits as the seller; the IRS may challenge this treatment, which could adversely affect the value of the Common Units. - Common Unitholders will likely be subject to state and local taxes as a result of an investment in units. ITEM 3. LEGAL PROCEEDINGS We are subject to various types of litigation in the ordinary course of our business. Disputes with our customers over the provisions of long-term coal supply contracts arise occasionally and generally relate to, among other things, coal quality, pricing, quantity, and the existence of force majeure conditions. Although we are not currently involved in any litigation involving our long-term coal supply contracts, we cannot assure you that disputes will not occur in the future or that we will be able to resolve those disputes in a satisfactory manner. We are not engaged in any litigation which we believe is material to our operations, including under the various environmental protection statutes to which we are subject. The information 16 18 under "General Litigation" under "Item 8. Financial Statements and Supplementary Data. - Note 15. Commitments and Contingencies" is hereby incorporated by reference. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON UNITS AND RELATED UNITHOLDER MATTERS The Common Units representing limited partner interests are listed on the Nasdaq National Market under the symbol "ARLP." The Common Units began trading on August 20, 1999, when the market price for the IPO of the Common Units was $19.00 per unit. On March 26, 2001 the closing market price for the Common Units was $19.81 per unit. There were approximately 6,100 record holders and beneficial owners at December 31, 2000 (held in street name) of the Partnership's Common Units. The following table sets forth, the range of high and low sales price per Common Unit and the amount of cash distribution declared with respect to the Units, for each quarterly period since commencement of operations on August 20, 1999.
HIGH LOW DISTRIBUTIONS PER UNIT ---- --- ----------------------- 3rd Quarter 1999 (from $ 19.06 $ 13.50 $0.23 (paid November 12, 1999 for the period from August 20, 1999) August 20, 1999, through September 30, 1999) 4th Quarter 1999 $ 14.75 $ 12.00 $0.50 (paid February 14, 2000) 1st Quarter 2000 $ 14.50 $ 12.13 $0.50 (paid May 15, 2000) 2nd Quarter 2000 $ 15.13 $ 12.63 $0.50 (paid August 14, 2000) 3rd Quarter 2000 $ 17.75 $ 14.25 $0.50 (paid November 14, 2000) 4th Quarter 2000 $ 18.25 $ 15.00 $0.50 (paid February 14, 2001)
The Partnership has also issued 6,422,531 Subordinated Units, all of which are held by the Special GP, for which there is no established public trading market. The Partnership will distribute to its partners (including holders of Subordinated Units), on a quarterly basis, all of its Available Cash. Available Cash generally means, with respect to any quarter of the Partnership, all cash on hand at the end of each quarter less cash reserves in an amount necessary or appropriate in the reasonable discretion of the Managing GP to (a) provide for the proper conduct of the Partnership's business, (b) comply with applicable law of any debt instrument or other agreement of the Partnership or any of its affiliates, or (c) provide funds for distributions to unitholders and the General Partners for any one or more of the next four quarters. Available Cash is defined in the Partnership Agreement listed as an exhibit to this Annual Report on Form 10-K. The Partnership Agreement defines minimum quarterly distributions (MQDs) as $0.50 for each full fiscal quarter. Distributions of Available Cash to the holder of the Subordinated Units are subject to the prior rights of the holders of the Common Units to receive MQDs for each quarter during the subordination period, and to receive any arrearages in the distribution of the MQDs on the Common Units for prior quarters during the subordination period. The subordination period will generally not end before September 30, 2004. Under certain circumstances, up to half of the Subordinated 17 19 Units may convert into Common Units before the end of the subordination period, which will generally not occur before September 30, 2003. ITEM 6. SELECTED FINANCIAL DATA On August 20, 1999, the Partnership completed its IPO whereby the Partnership became the successor to the business of the Predecessor. Our selected pro forma and historical financial data below was derived from the audited consolidated financial statements of the Partnership as of December 31, 2000 and 1999, for the year ended December 31, 2000 and the period from the Partnership's commencement of operations (on August 20, 1999) to December 31, 1999, the audited combined financial statements of the Predecessor, as of August 19, 1999, and for the period from January 1, 1999 to August 19, 1999, as of and for the years ended December 31, 1998, and 1997, and as of and for the five months ended December 31, 1996. The Predecessor purchased the coal operations of MAPCO Inc. effective August 1, 1996, in a business combination using the purchase method of accounting and the purchase price was allocated to the assets acquired and liabilities assumed based on their fair values. Accordingly, the audited financial data for periods prior to August 1, 1996, is not necessarily comparable to subsequent periods. The amounts in the table below, except for the per unit data and the per ton information, are in millions.
Partnership ----------------------------------------------------- From Commencement of Operations (on Pro Forma August 20, 1999) Year Ended Year Ended to December 31, December 31, December 31, 2000 1999(1) 1999 ------------- ------------- -------------- Statements of Income: Sales and operating revenues Coal sales $ 347.2 $ 345.9 $ 128.8 Transportation revenues(2) 13.5 19.1 4.9 Other sales and operating revenues 2.8 0.9 0.4 ------------- ------------- ------------- Total revenues 363.5 365.9 134.1 ------------- ------------- ------------- Expenses Operating expenses 257.4 242.0 89.9 Transportation expenses(2) 13.5 19.1 4.9 Outside purchases 16.9 24.2 6.4 General and administrative 15.2 15.1 6.2 Depreciation, depletion and amortization 39.1 39.7 15.1 Interest expense 16.6 19.4 5.9 Unusual items(3) (9.5) -- -- ------------- ------------- ------------- Total expenses 349.2 359.5 128.4 ------------- ------------- ------------- Income from operations 14.3 6.4 5.7 Other income (expense) 1.3 1.2 0.6 ------------- ------------- ------------- Income before income taxes 15.6 7.6 6.3 Income tax expense (benefit) -- -- -- ------------- ------------- ------------- Net income $ 15.6 $ 7.6 $ 6.3 ============= ============= ============= Basic net income per limited partner unit $ 0.99 $ 0.48 $ 0.40 ============= ============= ============= Diluted net income per limited partner unit $ 0.98 $ 0.48 $ 0.40 ============= ============= ============= Weighted average number of units outstanding-basic 15,405,311 15,405,311 15,405,311 ============= ============= ============= Weighted average number of units outstanding-diluted 15,551,062 15,405,311 15,405,311 ============= ============= ============= Balance Sheet Data: Working capital(4) $ 38.6 $ -- $ 61.2 Total assets 309.2 -- 314.8 Long-term debt 226.3 -- 230.0 Total liabilities 341.0 -- 330.7 Net Parent investment -- -- -- Partners' capital (deficit) (31.8) -- (15.9) Other Operating Data: Tons sold 15.0 15.0 5.6 Tons produced 13.7 14.1 5.3 Revenues per ton sold(5) $ 23.33 $ 23.12 $ 23.07 Cost per ton sold(6) $ 19.30 $ 18.75 $ 18.30 Other Financial Data: EBITDA(7) $ 71.3 $ 66.7 $ 27.3 Net cash provided by (used in) operating activities 71.4 -- (13.9) Net cash used in investing activities (41.0) -- (43.9) Net cash provided by (used in) financing activities (31.4) -- 65.8 Maintenance capital expenditures(8) 21.2 6.0 6.0 Predecessor --------------------------------------------------------------------------------- For the period from Five Seven January 1, 1999 Year Ended Months Months to December 31, Ended Ended August 19, ---------------------------- December 31, July 31, 1999 1998 1997 1996 1996 --------------- ----------- ----------- ----------- ----------- Statements of Income: Sales and operating revenues Coal sales $ 217.0 $ 357.4 $ 305.3 $ 133.9 $ 184.1 Transportation revenues(2) 14.2 41.4 42.7 20.4 29.0 Other sales and operating revenues 0.6 4.5 8.5 4.4 7.5 ----------- ----------- ----------- ----------- ----------- Total revenues 231.8 403.3 356.5 158.7 220.6 ----------- ----------- ----------- ----------- ----------- Expenses Operating expenses 152.1 237.6 197.4 79.2 110.7 Transportation expenses(2) 14.2 41.4 42.7 20.4 29.0 Outside purchases 17.7 51.2 49.8 34.7 45.7 General and administrative 8.9 15.3 15.4 5.9 7.3 Depreciation, depletion and amortization 24.6 39.8 33.7 11.9 7.7 Interest expense 0.1 0.2 -- -- -- Unusual items(3) -- 5.2 -- -- -- ----------- ----------- ----------- ----------- ----------- Total expenses 217.6 390.7 339.0 152.1 200.4 ----------- ----------- ----------- ----------- ----------- Income from operations 14.2 12.6 17.5 6.6 20.2 Other income (expense) 0.5 (0.1) 0.5 0.3 -- ----------- ----------- ----------- ----------- ----------- Income before income taxes 14.7 12.5 18.0 6.9 20.2 Income tax expense (benefit) 4.5 3.8 4.3 (0.9) 5.5 ----------- ----------- ----------- ----------- ----------- Net income $ 10.2 $ 8.7 $ 13.7 $ 7.8 $ 14.7 =========== =========== =========== =========== =========== Basic net income per limited partner unit Diluted net income per limited partner unit Weighted average number of units outstanding-basic Weighted average number of units outstanding-diluted Balance Sheet Data: Working capital(4) $ 11.2 $ 7.1 $ 10.3 $ 15.9 $ 24.6 Total assets 262.8 261.1 245.8 262.0 270.7 Long-term debt 1.8 1.7 1.9 -- -- Total liabilities 110.2 108.3 87.0 85.8 85.0 Net Parent investment 151.6 152.8 158.8 176.2 185.7 Partners' capital (deficit) -- -- -- -- -- Other Operating Data: Tons sold 9.4 15.1 12.4 5.1 6.9 Tons produced 8.8 13.4 10.9 3.9 5.3 Revenues per ton sold(5) $ 23.15 $ 23.97 $ 25.31 $ 27.12 $ 27.77 Cost per ton sold(6) $ 19.01 $ 20.14 $ 21.18 $ 23.49 $ 23.72 Other Financial Data: EBITDA(7) $ 39.4 $ 52.5 $ 51.7 $ 18.8 $ 27.9 Net cash provided by (used in) operating activities 32.9 50.5 53.2 23.0 16.7 Net cash used in investing activities (21.5) (35.6) (22.4) (13.0) (16.7) Net cash provided by (used in) financing activities (11.4) (14.9) (30.8) (10.0) -- Maintenance capital expenditures(8) 15.5 17.2 15.2 2.7 10.8
(1) The unaudited selected pro forma financial and operating data for the year ended December 31, 1999, is based on the historical financial statements of the Partnership from the Partnership's commencement of operations on 18 20 August 20, 1999, through December 31, 1999, and the Predecessor for the period from January 1, 1999, through August 19, 1999. The pro forma results of operations reflect certain pro forma adjustments to the historical results of operations as if the Partnership had been formed on January 1, 1999. The pro forma adjustments include (a) pro forma interest on debt assumed by the Partnership and (b) the elimination of income tax expense as income taxes will be borne by the partners and not the Partnership. The pro forma adjustments do not include approximately $1.0 million of general and administrative expenses that the Partnership believed would have been incurred as a result of its being a public entity. (2) During the fourth quarter 2000, the Partnership adopted the Financial Accounting Standards Board Emerging Issues Task Force Issue No. 00-10 "Accounting for Shipping and Handling Fees and Costs" (EITF No. 00-10). The Partnership records the cost of transporting coal to customers through third party carriers and the corresponding Partnership's direct reimbursement of these costs through customer billings. This activity is separately presented as transportation revenue and expense rather than offsetting these amounts in the consolidated and combined statements of income. There was no cumulative effect of the accounting change on net income and prior periods presented have been reclassified to comply with EITF No. 00-10. (3) Represents income from the final resolution of an arbitrated dispute with respect to the termination of a long-term contract, net of impairment charges relating to certain transloading facility assets, partially offset by expenses associated with other litigation matters in 2000 and the net loss incurred during the temporary closing of one of our mining complexes in the second half of 1998. (4) Excludes accounts receivable from affiliates for the Predecessor prior to July 31, 1996. (5) Revenues per ton sold is based on the total of coal sales and other sales and operating revenues divided by tons sold. (6) Cost per ton sold is based on the total of operating expenses, outside purchases and general and administrative expenses divided by tons sold. (7) EBITDA is defined as income from operations before interest expense, income taxes and depreciation, depletion and amortization. EBITDA should not be considered as an alternative to net income, income before income taxes, cash flows from operating activities or any other measure of financial performance presented in accordance with generally accepted accounting principles. EBITDA has not been adjusted for unusual items. EBITDA is not intended to represent cash flow and does not represent the measure of cash available for distribution, but provides additional information for evaluating our ability to make the MQDs. The Partnership's method of computing EBITDA also may not be the same method used to compute similar measures reported by other companies, or EBITDA may be computed differently by the Partnership in different contexts (i.e., public reporting versus computation under financing arrangements). (8) Maintenance capital expenditures for the Partnership, as defined under the terms of the Partnership Agreement, are defined as those capital expenditures required to maintain, over the long term, the operating capacity of our capital assets. Maintenance capital expenditures for the Predecessor reflect our historical designation of maintenance capital expenditures. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The following discussion of the financial condition and results of operations for the Partnership and its Predecessor should be read in conjunction with the historical financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K. For more detailed information regarding the basis of presentation for the following financial information, see "Item 8. Financial Statements and Supplementary Data. -- Note 1. Organization and Presentation." We are a diversified producer and marketer of coal to major U.S. utilities and industrial users. In 2000, our total production was 13.7 million tons and our total sales were 15.0 million tons. The coal we produced in 2000 was approximately 20.4% low-sulfur coal, 19.0% medium-sulfur coal and 60.6% high-sulfur coal. 19 21 At December 31, 2000, we had approximately 466 million tons of proven and probable coal reserves in Illinois, Indiana, Kentucky, Maryland and West Virginia. We believe we control adequate reserves to implement our currently contemplated mining plans. In addition, there are substantial unleased reserves on adjacent properties that we intend to acquire or lease as our mining operations approach these areas. In 2000, approximately 73% of our sales tonnage was consumed by electric utilities with the balance consumed by cogeneration plants and industrial users. Our largest customers in 2000 were AEI, Seminole, TVA, and VEPCO. We have had relationships with three of these customers for at least 15 years. In 2000, approximately 85% of our sales tonnage, including approximately 86% of our medium- and high-sulfur coal sales tonnage, was sold under long-term contracts. The balance of our sales were made on the spot market. Our long-term contracts contribute to our stability and profitability by providing greater predictability of sales volumes and sales prices. In 2000, approximately 96% of our medium- and high-sulfur coal was sold to utility plants with installed pollution control devices, also known as scrubbers, to remove sulfur dioxide. One of our business strategies is to continue to make productivity improvements to remain a low cost producer in each region in which we operate. Our principal expenses related to the production of coal are labor and benefits, equipment, materials and supplies, maintenance, royalties and excise taxes. Unlike most of our competitors in the eastern U.S., we employ a totally union-free workforce. Many of the benefits of the union-free workforce are not necessarily reflected in direct costs, but we believe are related to higher productivity. In addition, while we do not pay our customers' transportation costs, they may be substantial and often the determining factor in a coal consumer's contracting decision. Our mining operations are located near many of the major eastern utility generating plants and on major coal hauling railroads in the eastern U.S. We believe this gives us a transportation cost advantage compared to many of our competitors. RESULTS OF OPERATIONS In comparing 2000 to 1999 and 1999 to 1998, the Partnership and Predecessor periods for 1999 have been combined. Since the Partnership maintained the historical basis of the Predecessor's net assets, management believes that the combined Partnership and Predecessor results for 1999 are comparable with 1998. The interest expense associated with the debt incurred concurrent with the closing of the IPO is applicable only to the Partnership period. See "Item 8. Financial Statements and Supplementary Data. -- Note 1. Organization and Presentation." 2000 Compared with 1999 Coal sales. Coal sales for 2000 increased 0.4% to $347.2 million from $345.9 million for 1999. The increase of $1.3 million was primarily attributable to higher sales volumes in the Illinois Basin operations and at the restructured Pontiki operation, which were directly offset by planned reduced participation in low margin, coal export brokerage markets. The brokerage business is not expected to be material in the future. Tons sold remained consistent at 15.0 million for 2000 and 1999. Tons produced decreased 2.9% to 13.7 million for 2000 from 14.1 million for 1999. Transportation revenues. Transportation revenues for 2000 decreased 29.4% to $13.5 million from $19.1 million for 1999. The decrease of $5.6 million was primarily attributable to planned reduced participation in coal export brokerage markets, which generally have higher transportation costs. No margin is realized on transportation revenues. Other sales and operating revenues. Other sales and operating revenues increased to $2.8 million for 2000 from $0.9 million for 1999. The increase of $1.9 million resulted from the introduction of a third party coal synfuel production facility at the Hopkins County Coal mining complex. Hopkins County Coal provided the coal feedstock and received various fees for operating the third party's coal synfuel facility and providing other services. We assisted the third party with marketing the coal synfuel and received a fee for such 20 22 services. Synfuel shipments continue in 2001 on a month to month basis, currently contemplated through mid-2001, with customer interest through 2003. However, future shipments are dependent upon, among other things, receiving a new favorable private letter ruling from the IRS. In late October 2000, the IRS issued Rev. Proc. 2000-47, suspending issuance of private letter rulings for most coal synfuel plants while a review is conducted concerning whether current tax rules adequately address the evolving synfuel industry. The IRS requested public comment on Rev. Proc. 2000-47 by November 27, 2000. The IRS indicated it will provide substantial guidance in the form of a general revenue ruling or a tax regulation to address tax credits granted under Section 29 of the Internal Revenue Code. Until such guidance is received from the IRS, we cannot give any assurance that future benefits will be received from the coal synfuel production facility. Operating expenses. Operating expenses increased 6.3% to $257.4 million for 2000 from $242.0 million for 1999. The increase of $15.4 million was a result of: (a) start-up expenses related to the opening of the newly developed Gibson County Coal mining complex during the fourth quarter of 2000, (b) higher sales volumes in the Illinois Basin operations, (c) increased production volumes at the restructured Pontiki operation, and (d) prolonged adverse mining conditions at the Mettiki longwall mine. Transportation expenses. See "Transportation Revenues" above concerning the decrease in transportation expenses. Outside purchases. Outside purchases declined 30.2% to $16.9 million for 2000 from $24.2 million for 1999. The decrease of $7.3 million was the result of lower coal export brokerage volumes. See "Coal sales" above concerning the decrease in coal export brokerage volumes. General and administrative. General and administrative expenses were comparable for 2000 and 1999 at $15.2 million. Depreciation, depletion and amortization. Depreciation, depletion and amortization expense were comparable for 2000 and 1999 at $39.1 million and $39.7 million, respectively. Interest expense. Interest expense was $16.6 million for 2000 compared to $6.0 million for 1999. The increase reflected the full year impact of interest on the $180 million principal amount of 8.31% senior notes and $50 million of borrowings on the term loan facility in connection with the IPO and concurrent transactions occurring on August 20, 1999. See "Item 8. Financial Statements and Supplementary Data. -- Note 1. Organization and Presentation." Unusual items. The Partnership was involved in litigation with Seminole with respect to Seminole's termination of a long-term contract for the transloading of coal from rail to barge through the Mt. Vernon terminal in Indiana. The final resolution between the parties, reached in conjunction with an arbitrator's decision rendered during the third quarter, included both cash payments and amendments to an existing coal supply contract. The Partnership recorded income of $12.2 million, which is net of litigation expenses and impairment charges relating to certain Mt. Vernon transloading facility assets. Additionally, the Partnership recorded an expense of $2.7 million related to other litigation matters. The net effect of these unusual items was $9.5 million. See "Item 8. Financial Statements. -- Note 4. Unusual Items." Income before income taxes. Income before income taxes was $15.6 million for 2000 compared to $21.0 million for 1999. The decrease of $5.4 million was primarily attributable to: (a) start-up expenses related to the opening of the new Gibson County coal mining complex during the fourth quarter of 2000, (b) increased operating expenses as a result of prolonged adverse mining conditions encountered at the Mettiki longwall mining complex and (c) additional interest expense associated with the debt incurred concurrent with the closing of the IPO, partially offset by unusual items recorded during 2000. See "Unusual items" described above. 21 23 Income tax expense. The Partnership's earnings or loss for federal income taxes purposes will be included in the tax returns of the individual partners. Accordingly, no recognition is given to income taxes in the accompanying financial statements of the Partnership. The Predecessor was included in the consolidated federal income tax return of ARH. Federal and state income taxes were calculated as if the Predecessor had filed its return on a separate company basis utilizing an effective income tax rate of 31%. EBITDA (income from operations before net interest expense, income taxes, depreciation and depletion and amortization) increased 6.9% to $71.3 million for 2000 compared with $66.7 million for 1999. The $4.6 million increase was primarily attributable to the unusual items recorded during 2000, see "Unusual items" described above, and the increased production and sales volumes at the restructured Pontiki mine, which was partially offset by increased operating expenses as a result of adverse mining conditions at the Mettiki longwall mining complex. EBITDA should not be considered as an alternative to net income, income before income taxes, cash flows from operating activities or any other measure of financial performance presented in accordance with generally accepted accounting principles. EBITDA has not been adjusted for unusual items. EBITDA is not intended to represent cash flow and does not represent the measure of cash available for distribution, but provides additional information for evaluating the Partnership's ability to make MQDs. The Partnership's method of computing EBITDA also may not be the same method used to compute similar measures reported by other companies, or EBITDA may be computed differently by the Partnership in different contexts (i.e., public reporting versus computation under financing agreements). 1999 Compared with 1998 Coal sales. Coal sales for 1999 declined 3.2% to $345.9 million from $357.4 million for 1998. The decrease of $11.5 million was primarily attributable to lower coal export brokerage volumes partially offset by improved results from the restructured Pontiki mining complex and full-year benefits from the capital invested at Hopkins County Coal. The lower brokerage volumes were largely attributable to reduced participation in coal export brokerage markets. The brokerage business is not expected to be material in the future. Because coal brokerage operations generate lower margins than direct coal sales, changes in the levels of brokerage activity have a greater impact on revenues and outside purchases than on margins. Tons sold decreased less than 1.0% to 15.0 million tons for 1999 from 15.1 million tons for 1998. Tons produced increased 5.1% to 14.1 million tons for 1999 from 13.4 million tons for 1998. Transportation revenues. Transportation revenues for 1999 decreased 53.9% to $19.1 million from $41.4 million for 1998. The decrease of $22.3 million was primarily attributable to planned reduced participation in coal export brokerage markets, which generally have higher transportation costs. No margin is realized on transportation revenues. Other sales and operating revenues. Other sales and operating revenues declined 79.0% to $0.9 million for 1999 from $4.5 million from 1998. The decrease of $3.6 million was primarily due to lower volumes at the Mt. Vernon facility due to the dispute with Seminole. See "Item 8. Financial Statements and Supplementary Data. -- Note 4. Unusual Items." Transportation expenses. See "Transportation Revenues" above concerning the decrease in transportation expenses. Operating expenses. Operating expenses were comparable for 1999 and 1998 at $242.0 million and $237.6 million, an increase of 1.9%. Outside purchases. Outside purchases declined 52.8% to $24.2 million for 1999 from $51.2 million for 1998. The decrease of $27.0 million was the result of lower coal export brokerage volumes. See coal sales above concerning the decrease in coal export brokerage volumes. 22 24 General and administrative. General and administrative expenses were comparable for 1999 and 1998 at $15.2 million and $15.3 million, a decrease of less than 1.0%. Depreciation, depletion and amortization. Depreciation, depletion and amortization expense were comparable for 1999 and 1998 at $39.7 million and $39.8 million, a decrease of less than 1.0%. Interest expense. Interest expense was $6.0 million for 1999 compared to $0.2 million for 1998. The increase reflected the interest on the $180 million principal amount of 8.31% senior notes and $50 million of borrowings on the term loan facility in connection with the IPO and concurrent transactions occurring on August 20, 1999. See "Item 8. Financial Statements and Supplementary Data. -- Note 1. Organization and Presentation." Unusual items. In response to market conditions, the Pontiki mining complex ceased operations and terminated substantially all of its workforce in September 1998. During the idle status period, which ended in November 1998, Pontiki incurred a net loss of approximately $5.2 million consisting of estimated amounts for increased workers' compensation claims of $1.2 million and severance payments consistent with the Worker Adjustment and Retraining Notification Act of $1.2 million, as well as the costs associated with maintaining an idled mine of $2.8 million. Income before income taxes. Income before income taxes increased 67.3% to $21.0 million for 1999 compared to $12.5 million for 1998. The increase of $8.5 million was primarily attributable to improved productivity, which included the benefits of the restructured operation at Pontiki following the idle status period of the mine, which resulted in the $5.2 million unusual item recorded in 1998 as discussed above, and the capital investments at the Hopkins County operation, partially offset by the losses incurred at Mt. Vernon due to the dispute with Seminole. Income tax expense. The Partnership's earnings or loss for federal income taxes purposes are included in the tax returns of the individual partners. Accordingly, no recognition is given to income taxes in the accompanying financial statements of the Partnership. The Predecessor is included in the consolidated federal income tax return of ARH. Federal and state income taxes are calculated as if the Predecessor had filed its return on a separate company basis utilizing an effective income tax rate of 31%. EBITDA. (income from operations before net interest expense, income taxes, depreciation, and depletion and amortization) increased 26.9% to $66.7 million for 1999 compared with $52.5 million for 1998. The $14.2 million increase was attributable to the same factors that contributed to the increase in income before income taxes. LIQUIDITY AND CAPITAL RESOURCES Cash Flows Cash provided by operating activities was $71.4 million in 2000 compared to $19.0 million in 1999. The increase in cash provided by operating activities was principally attributable to the decrease in coal inventory of approximately $10.0 million and the Special GP retaining approximately $37.9 million of trade receivables in conjunction with the IPO and concurrent transactions that occurred on August 20, 1999. Net cash used in investing activities of $41.0 million in 2000 was principally attributable to capital expenditures. Net cash used in investing activities of $65.4 million for 1999 was principally attributable to capital expenditures and the purchase of U.S. Treasuries in conjuction with the IPO and concurrent transactions that occurred on August 20, 1999. 23 25 Net cash used in financing activities was $31.4 million for 2000 compared to net cash provided by financing activities of $54.4 million for 1999. Cash used in financing activities during 2000 was a direct result of four MQDs paid in 2000 of $0.50 per unit on Common and Subordinated Units outstanding. The net cash provided by financing activities in 1999 was principally attributable to net cash provided by the IPO and concurrent transactions that occurred on August 20, 1999. Capital Expenditures Capital expenditures increased to $46.2 million in 2000 compared to $39.2 million in 1999. The increase was primarily attributable to the development of the new Gibson County Coal mining complex, which commenced production in November 2000. During 2000, the Partnership liquidated approximately $7.1 million of U.S. Treasury Notes to fund various qualifying capital expenditures with the remaining expenditures funded through cash generated from operations. The Partnership approved an extension of its existing Pattiki mine into adjacent coal reserves. The extension involves capital expenditures of approximately $30.0 million during the 2000-2003 period and is expected to allow the Pattiki mine to continue its existing production level for the next 15 years. We currently expect that our average annual maintenance capital expenditures will be approximately $23.5 million. We currently expect to fund our anticipated capital expenditures with cash generated from operations and the utilization of the revolving credit facility described below. Notes Offering and Credit Facility Concurrently with the closing of the IPO, the Special GP issued and the Intermediate Partnership assumed the obligations with respect to $180 million principal amount of 8.31% senior notes due August 20, 2014 (Senior Notes). The Special GP also entered into, and the Intermediate Partnership assumed the obligations under a $100 million credit facility (Credit Facility). The Credit Facility consists of three tranches, including a $50 million term loan facility, a $25 million working capital facility and a $25 million revolving credit facility. The Partnership has borrowings outstanding of $50 million under the term loan facility, but no borrowings outstanding under either the working capital facility or the revolving credit facility at December 31, 2000, and 1999. The weighted average interest rates on the term loan facility at December 31, 2000, and 1999, was 7.77% and 7.07%, respectively. The Credit Facility expires August 2004. The Senior Notes and Credit Facility are guaranteed by Alliance Coal, LLC and all of its subsidiaries. In addition, the Credit Facility is further secured by a pledge of treasury securities, which, upon written notice, are released for purposes of financing qualified capital expenditures of the Intermediate Partnership or its subsidiaries. The Senior Notes and Credit Facility contain various restrictive and affirmative covenants, including the amount of distributions by the Intermediate Partnership and the incurrence of other debt. Accruals of Other Liabilities We had accruals for deferred credits and other liabilities, including current obligations, totaling $67.1 million and $61.9 million at December 31, 2000 and 1999. These accruals were chiefly comprised of workers' compensation benefits, black lung benefits, and costs associated with reclamation and mine closing. These obligations are self-insured and were funded at the time the expense was incurred. The accruals of these items were based on estimates of future expenditures based on current legislation and related regulations and other developments. Thus, from time to time, the Partnership's results of operations may be significantly effected by changes to these deferred credits and other liabilities. See "Item 8. Financial Statements and Supplementary Data. -- Note 12. Reclamation and Mine Closing Costs and Note 13. Pneumoconiosis ("Black Lung") Benefits." We are required to pay black lung benefits to eligible and former employees under the BLBA. We also are liable under various state statutes for similar claims. We provide self-insured accruals for these benefits. We had accrued liabilities of $22.2 million for these benefits at December 31, 2000, and 1999. 24 26 We accrue for reclamation and mine closing costs. We estimate the costs and timing of future reclamation and mine closing costs and record those estimates on a present value basis. We had accrued liabilities of $16.0 million and $14.8 million at December 31, 2000 and 1999 for these costs. We accrue for workers' compensation claims resulting from traumatic injuries based on actuarial valuations and periodically adjust these estimates based on the estimated costs of claims made. We had accrued liabilities of $20.6 million and $19.5 million at December 31, 2000 and 1999 for these costs. INFLATION Inflation in the U.S. has been relatively low in recent years and did not have a material impact on our results of operations for the years ended December 31, 2000, 1999 or 1998. RECENT ACCOUNTING PRONOUNCEMENTS Effective January 1, 2001, the Partnership adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that all derivatives be recognized as either assets or liabilities in the statement of financial position and be measured at fair value. The Partnership currently has no identified derivative instruments or hedging activities. Accordingly, this standard had no material effect on the Partnership's consolidated financial statements upon adoption. During the fourth quarter 2000, the Partnership adopted Financial Accounting Standards Board Emerging Issues Task Force Issue No. 00-10 "Accounting for Shipping and Handling Fees and Costs." Accordingly, the Partnership reflects the cost of transporting coal to customers through third party carriers as transportation expenses and the corresponding reimbursement of these costs through customer billings as transportation revenues in the consolidated and combined statements of income. These amounts were previously offset. There was no cumulative effect on net income and the prior periods' consolidated and combined statements of income have been reclassified to comply with this presentation. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Almost all of the Predecessor's transactions were, and almost all of the Partnership's transactions are, denominated in U.S. dollars, and as a result, the Partnership does not have material exposure to currency exchange-rate risks. The Partnership does not, engage in any interest rate, foreign currency exchange rate or commodity price-hedging transactions. The Intermediate Partnership assumed obligations under the Credit Facility. Borrowings under the Credit Facility are at variable rates and as a result the Partnership has interest rate exposure. The table below provides information about the Partnership's market sensitive financial instruments and constitutes a "forward-looking statement." The fair values of long-term debt are estimated using discounted cash flow analyses, based upon the Partnership's current incremental borrowing rates for similar types of borrowing arrangements as of December 31, 2000 and 1999. The carrying amounts and fair values of financial instruments are as follows (in thousands): 25 27
FAIR VALUE EXPECTED MATURITY DATES DECEMBER 31, AS OF DECEMBER 31, 2000 2001 2002 2003 2004 2005 THEREAFTER TOTAL 2000 ------- ------- --------- --------- -------- ---------- --------- ---------- Senior Notes-fixed rate $ -- $ -- $ -- $ -- $ 18,000 $ 162,000 $ 180,000 $ 180,000 Weighted Average interest rate 8.31% 8.31% Term Loan-floating rate $ 3,750 $15,000 $ 16,250 $ 15,000 $ -- $ -- $ 50,000 $ 50,000 Weighted Average interest rate 7.77% 7.77% 7.77% 7.77%
FAIR VALUE EXPECTED MATURITY DATES DECEMBER 31, AS OF DECEMBER 31, 1999 2000 2001 2002 2003 2004 THEREAFTER TOTAL 1999 ------- -------- --------- --------- -------- ---------- --------- ---------- Senior Notes-fixed rate $ -- $ -- $ -- $ -- $ -- $180,000 $180,000 $165,000 Weighted Average interest rate 8.31% Term Loan-floating rate $ -- $ 3,750 $ 15,000 $ 16,250 $ 15,000 $ -- $ 50,000 $ 50,000 Weighted Average interest rate 7.07% 7.07% 7.07% 7.07%
26 28 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEPENDENT AUDITORS' REPORT To the Board of Directors of the Managing General Partner and the Partners of Alliance Resource Partners, L.P.: We have audited the accompanying consolidated balance sheets of Alliance Resource Partners, L.P. and subsidiaries (the "Partnership") as of December 31, 2000 and 1999, the related consolidated and combined statements of income and cash flows for the year ended December 31, 2000 and the period from the Partnership's commencement of operations (on August 20, 1999) to December 31, 1999 and the Predecessor period from January 1, 1999 to August 19, 1999 and the year ended December 31, 1998 and the statement of Partners' capital (deficit) for the year ended December 31, 2000 and the period from the Partnership's commencement of operations (on August 20, 1999) to December 31, 1999. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated and combined financial statements present fairly, in all material respects, the financial position of the Partnership at December 31, 2000 and 1999 and the results of their operations and their cash flows for the year ended December 31, 2000 and the period from the Partnership's commencement of operations (on August 20, 1999) to December 31, 1999 and the Predecessor period from January 1, 1999 to August 19, 1999 and the year ended December 31, 1998 in conformity with accounting principles generally accepted in the United States of America. /s/ Deloitte & Touche LLP Tulsa, Oklahoma January 24, 2001 27 29 ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2000 AND 1999 (IN THOUSANDS, EXCEPT UNIT DATA) - --------------------------------------------------------------------------------
DECEMBER 31, ----------------------------- ASSETS 2000 1999 ------------ ------------ CURRENT ASSETS: Cash and cash equivalents $ 6,933 $ 8,000 Trade receivables 35,898 33,056 Due from affiliates 208 -- Marketable securities (at cost, which approximates fair value) 37,398 42,339 Inventories 10,842 21,130 Advance royalties 2,865 1,557 Prepaid expenses and other assets 1,168 923 ------------ ------------ Total current assets 95,312 107,005 PROPERTY, PLANT AND EQUIPMENT AT COST 320,445 278,221 LESS ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION (135,782) (102,709) ------------ ------------ 184,663 175,512 OTHER ASSETS: Advance royalties 10,009 8,306 Coal supply agreements, net 16,324 19,879 Other long-term assets 2,858 4,112 ------------ ------------ $ 309,166 $ 314,814 ============ ============ LIABILITIES AND PARTNERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 25,558 $ 19,377 Due to affiliates -- 334 Accrued taxes other than income taxes 4,863 4,574 Accrued payroll and related expenses 6,975 8,811 Accrued interest 5,439 5,491 Workers' compensation and pneumoconiosis benefits 4,415 4,317 Other current liabilities 5,710 2,937 Current maturities, long-term debt 3,750 -- ------------ ------------ Total current liabilities 56,710 45,841 LONG-TERM LIABILITIES: Long-term debt, excluding current maturities 226,250 230,000 Accrued pneumoconiosis benefits 21,651 21,655 Workers' compensation 16,748 15,696 Reclamation and mine closing 14,940 13,407 Due to affiliates 1,278 472 Other liabilities 3,376 3,671 ------------ ------------ Total liabilities 340,953 330,742 COMMITMENTS AND CONTINGENCIES PARTNERS' CAPITAL (DEFICIT): Common Unitholders 8,982,780 units outstanding 149,642 158,705 Subordinated Unitholder 6,422,531 units outstanding 116,794 123,273 General Partners (298,223) (297,906) ------------ ------------ Total Partners' capital (deficit) (31,787) (15,928) ------------ ------------ $ 309,166 $ 314,814 ============ ============
See notes to consolidated and combined financial statements. 28 30 ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES CONSOLIDATED AND COMBINED STATEMENTS OF INCOME FOR THE YEAR ENDED DECEMBER 31, 2000 AND THE PERIOD FROM THE PARTNERSHIP'S COMMENCEMENT OF OPERATIONS (ON AUGUST 20, 1999) TO DECEMBER 31, 1999 AND THE PREDECESSOR PERIOD FROM JANUARY 1, 1999 TO AUGUST 19, 1999 AND THE YEAR ENDED DECEMBER 31, 1998 (IN THOUSANDS, EXCEPT UNIT AND PER UNIT DATA) - --------------------------------------------------------------------------------
PARTNERSHIP PREDECESSOR --------------------------------- ----------------------------------- FROM COMMENCEMENT FOR THE OF OPERATIONS PERIOD FROM YEAR ENDED (ON AUGUST 20, 1999) JANUARY 1, 1999 YEAR ENDED DECEMBER 31, TO TO DECEMBER 31, 2000 DECEMBER 31, 1999 AUGUST 19, 1999 1998 ------------ ----------------- --------------- ------------ SALES AND OPERATING REVENUES: Coal sales $ 347,209 $ 128,860 $ 217,033 $ 357,440 Transportation revenues 13,511 4,907 14,223 41,408 Other sales and operating revenues 2,749 358 577 4,453 ------------ ------------ ------------ ------------ Total revenues 363,469 134,125 231,833 403,301 ------------ ------------ ------------ ------------ EXPENSES: Operating expenses 257,365 89,945 152,066 237,576 Transportation expenses 13,511 4,907 14,223 41,408 Outside purchases 16,874 6,429 17,738 51,151 General and administrative 15,176 6,245 8,912 15,301 Depreciation, depletion and amortization 39,141 15,081 24,622 39,838 Interest expense (net of interest income and interest capitalized of $3,015 and $999 for the year ended December 31, 2000 and 1999 partnership period) 16,563 5,887 100 169 Unusual items (9,466) -- -- 5,211 ------------ ------------ ------------ ------------ Total operating expenses 349,164 128,494 217,661 390,654 ------------ ------------ ------------ ------------ INCOME FROM OPERATIONS 14,305 5,631 14,172 12,647 OTHER INCOME (EXPENSE) 1,276 641 531 (113) ------------ ------------ ------------ ------------ INCOME BEFORE INCOME TAXES 15,581 6,272 14,703 12,534 INCOME TAX EXPENSE -- -- 4,498 3,866 ------------ ------------ ------------ ------------ NET INCOME $ 15,581 $ 6,272 $ 10,205 $ 8,668 ============ ============ ============ ============ GENERAL PARTNERS' INTEREST IN NET INCOME $ 312 $ 125 ============ ============ LIMITED PARTNERS' INTEREST IN NET INCOME $ 15,269 $ 6,147 ============ ============ BASIC NET INCOME PER LIMITED PARTNER UNIT $ 0.99 $ 0.40 ============ ============ DILUTED NET INCOME PER LIMITED PARTNER UNIT $ 0.98 $ 0.40 ============ ============ WEIGHTED AVERAGE NUMBER OF UNITS OUTSTANDING - BASIC 15,405,311 15,405,311 ============ ============ WEIGHTED AVERAGE NUMBER OF UNITS OUTSTANDING - DILUTED 15,551,062 15,405,311 ============ ============
See notes to consolidated and combined financial statements. 29 31 ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOW FOR THE YEAR ENDED DECEMBER 31, 2000 AND THE PERIOD FROM THE PARTNERSHIP'S COMMENCEMENT OF OPERATIONS (ON AUGUST 20, 1999) TO DECEMBER 31, 1999 AND THE PREDECESSOR PERIOD FROM JANUARY 1, 1999 TO AUGUST 19, 1999 AND THE YEAR ENDED DECEMBER 31, 1998 (IN THOUSANDS) - --------------------------------------------------------------------------------
PARTNERSHIP PREDECESSOR --------------------------------- ---------------------------------- FROM COMMENCEMENT FOR THE OF OPERATIONS PERIOD FROM YEAR ENDED (ON AUGUST 20, 1999) JANUARY 1, 1999 YEAR ENDED DECEMBER 31, TO TO DECEMBER 31, 2000 DECEMBER 31, 1999 AUGUST 19, 1999 1998 ----------- ----------------- ---------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income 15,581 $ 6,272 $ 10,205 $ 8,668 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization 39,141 15,081 24,622 39,838 Impairment of transloading facility 2,439 -- -- -- Deferred income taxes -- -- 639 (1,750) Reclamation and mine closings 1,074 348 457 705 Coal inventory adjustment to market 579 729 -- 1,743 Other 391 186 (114) 34 Changes in operating assets and liabilities, net of effects from 1998 purchase of coal business: Trade receivables (2,842) (33,048) (6,521) 229 Income tax receivable/payable -- -- 651 2,482 Inventories 9,709 (1,433) (371) (6,563) Advance royalties (3,011) 366 1,153 579 Accounts payable 6,181 (7,410) (129) 2,296 Due to affiliates 264 3,252 -- -- Accrued taxes other than income taxes 289 (630) 678 1,137 Accrued payroll and related benefits (1,836) 844 (828) 491 Accrued pneumoconiosis benefits (4) (1,122) 544 839 Workers' compensation 1,052 2,222 (460) 817 Other 2,366 452 2,370 (1,048) ----------- ------------ ------------ ------------ Total net adjustments 55,792 (20,163) 22,691 41,829 ----------- ------------ ------------ ------------ Net cash provided by (used in) operating activities 71,373 (13,891) 32,896 50,497 ----------- ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, plant and equipment (46,151) (17,173) (21,984) (27,669) Proceeds from sale of property, plant and equipment 210 125 447 185 Purchase of marketable securities (72,523) (51,287) -- -- Proceeds from the maturity of marketable securities 77,464 24,434 -- -- Payment for purchase of business -- -- -- (7,310) Direct acquisition costs -- -- -- (821) ----------- ------------ ------------ ------------ Net cash used in investing activities (41,000) (43,901) (21,537) (35,615) ----------- ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from initial public offering (Note 1) -- 137,872 -- -- Cash contribution by General Partner -- 5,917 -- -- Distributions upon formation (Note 1) -- (64,750) -- -- Payment of formation costs -- (4,140) -- -- Deferred financing cost -- (3,517) -- -- Borrowings under revolving credit facility 29,500 -- -- -- Payments under revolving credit facility (29,500) -- -- -- Payments on long-term debt -- (1,975) -- (350) Distributions to Partners (31,440) (3,615) -- -- Dividend to Parent -- -- -- (8,642) Return of capital to Parent -- -- (11,359) (5,890) ----------- ------------ ------------ ------------ Net cash provided by (used in) financing activities (31,440) 65,792 (11,359) (14,882) ----------- ------------ ------------ ------------ NET CHANGE IN CASH AND CASH EQUIVALENTS (1,067) 8,000 -- -- CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 8,000 -- -- -- ----------- ------------ ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD 6,933 $ 8,000 $ -- $ -- =========== ============ ============ ============
See notes to consolidated and combined financial statements. 30 32 ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL (DEFICIT) FOR THE YEAR ENDED DECEMBER 31, 2000 AND THE PERIOD FROM THE PARTNERSHIP'S COMMENCEMENT OF OPERATIONS (ON AUGUST 20, 1999) TO DECEMBER 31, 1999 (IN THOUSANDS, EXCEPT UNIT DATA) - --------------------------------------------------------------------------------
NUMBER OF LIMITED TOTAL PARTNER UNITS MINIMUM PARTNERS' ------------------------- GENERAL PENSION CAPITAL COMMON SUBORDINATED COMMON SUBORDINATED PARTNERS LIABILITY (DEFICIT) --------- ------------ --------- ------------ --------- --------- --------- Balance at commencement of operations (on August 20, 1999) -- -- $ -- $ 1 $ -- $ -- $ 1 Issuance of units to public 7,750,000 -- 133,732 -- -- -- 133,732 Contribution of net assets of Predecessor 1,232,780 6,422,531 23,455 122,186 (24,612) (459) 120,570 Managing General Partner contribution -- -- -- -- 5,917 -- 5,917 Amount retained by Special General Partner from debt borrowings assumed by the Partnership -- -- -- -- (214,514) -- (214,514) Distribution at time of formation -- -- -- -- (64,750) -- (64,750) Distribution to Partners -- -- (2,066) (1,477) (72) -- (3,615) Comprehensive income: Net income from commencement of operations (on August 20, 1999) to December 31, 1999 -- -- 3,584 2,563 125 -- 6,272 Minimum pension liability -- -- -- -- -- 459 459 --------- --------- --------- --------- --------- --------- --------- Total comprehensive income -- -- 3,584 2,563 125 459 6,731 --------- --------- --------- --------- --------- --------- --------- Balance at December 31, 1999 8,982,780 6,422,531 158,705 123,273 (297,906) -- (15,928) Net income -- -- 8,903 6,366 312 -- 15,581 Distribution to Partners -- -- (17,966) (12,845) (629) -- (31,440) --------- --------- --------- --------- --------- --------- --------- Balance at December 31, 2000 8,982,780 6,422,531 $ 149,642 $ 116,794 $(298,223) $ -- $ (31,787) ========= ========= ========= ========= ========= ========= =========
See notes to consolidated and combined financial statements. 31 33 ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2000 AND THE PERIOD FROM THE PARTNERSHIP'S COMMENCEMENT OF OPERATIONS (ON AUGUST 20, 1999) TO DECEMBER 31, 1999 AND THE PREDECESSOR PERIOD FROM JANUARY 1, 1999 TO AUGUST 19, 1999 AND THE YEAR ENDED DECEMBER 31, 1998 - -------------------------------------------------------------------------------- 1. ORGANIZATION AND PRESENTATION Alliance Resource Partners, L.P., a Delaware limited partnership (the "Partnership") was formed on May 17, 1999, to acquire, own and operate certain coal production and marketing assets of Alliance Resource Holdings, Inc., a Delaware corporation ("ARH") (formerly known as Alliance Coal Corporation), consisting of substantially all of ARH's operating subsidiaries, but excluding ARH. Prior to August 20, 1999, (a) MAPCO Coal Inc., a Delaware corporation and direct wholly-owned subsidiary of ARH merged with and into Alliance Coal, LLC, a Delaware limited liability company ("Alliance Coal"), which prior to August 20, 1999 was also a wholly-owned subsidiary of ARH, (b) several other indirect corporate subsidiaries of ARH were merged with and into corresponding limited liability companies, each of which is a wholly-owned subsidiary of Alliance Coal, and (c) two indirect limited liability company subsidiaries of ARH became subsidiaries of Alliance Coal as a result of the merger described in clause (a) above. Collectively, the coal production and marketing assets and operating subsidiaries of ARH acquired by the Partnership, but excluding ARH, are referred to as the Alliance Resource Group (the "Predecessor"). The Delaware limited partnerships and limited liability companies that comprise the Partnership are as follows: Alliance Resource Partners, L.P., Alliance Resource Operating Partners, L.P. (the "Intermediate Partnership"), Alliance Coal, LLC (the holding company for operations), Alliance Land, LLC, Alliance Properties, LLC, Backbone Mountain, LLC, Excel Mining, LLC, Gibson County Coal, LLC, Hopkins County Coal, LLC, MC Mining, LLC, Mettiki Coal, LLC, Mettiki Coal (WV), LLC, Mt. Vernon Transfer Terminal, LLC, Pontiki Coal, LLC, Webster County Coal, LLC, and White County Coal, LLC. The accompanying consolidated financial statements include the accounts and operations of the limited partnerships and limited liability companies disclosed above and present the financial position as of December 31, 2000 and 1999 and the results of their operations, cash flows and changes in partners' capital (deficit) for the year ended December 31, 2000 and the period from commencement of operations on August 20, 1999 to December 31, 1999. The accompanying combined financial statements include the accounts and operations of the Predecessor for the periods indicated. All material intercompany transactions and accounts of the Partnership and Predecessor have been eliminated. Initial Public Offering and Concurrent Transactions On August 20, 1999, the Partnership completed its initial public offering (the "IPO") of 7,750,000 Common Units ("Common Units") representing limited partner interests in the Partnership at a price of $19.00 per unit. Concurrently with the closing of the IPO, the Partnership entered into a contribution and assumption agreement (the "Contribution Agreement") dated August 20, 1999 among the Partnership and the other parties named therein, whereby, among other things, ARH contributed its 100% member interest in Alliance Coal, which is the sole member of thirteen subsidiary operating limited liability companies, to the Intermediate Partnership, and the Intermediate Partnership holds a 99.999% non-managing member interest in Alliance Coal. The Partnership and the Intermediate Partnership are managed by Alliance Resource Management GP, LLC, a Delaware limited liability company (the "Managing GP"), which as 32 34 a result of the consummation of the transactions under the Contribution Agreement, holds (a) a 0.99% and 1.0001% managing general partner interest in the Partnership and the Intermediate Partnership, respectively, and (b) a 0.001% managing member interest in Alliance Coal. Also, as a result of the consummation of the transactions completed under the Contribution Agreement, Alliance Resource GP, LLC, a Delaware limited liability company and wholly-owned subsidiary of ARH (the "Special GP"), holds (a) 1,232,780 Common Units, (b) 6,422,531 Subordinated Units convertible into Common Units in the future upon the occurrence of certain events and (c) a 0.01% special general partner interest in each of the Partnership and the Intermediate Partnership. Concurrently with the closing of the IPO, the Special GP issued and the Intermediate Partnership assumed the obligations under a $180 million principal amount of 8.31% senior notes due August 20, 2014. The Special GP also entered into and the Intermediate Partnership assumed the obligations under a $100 million credit facility. Consistent with guidance provided by the Emerging Issues Task Force in Issue No. 87-21 "Change of Accounting Basis in Master Limited Partnership Transactions," the Partnership maintained the historical cost of the $121 million of net assets received under the Contribution Agreement. Pro Forma Results of Operations (Unaudited) For the years ended December 31, 1999 and 1998, the pro forma total revenues would have been approximately $346,828,000 and $361,893,000, respectively. For the years ended December 31, 1999 and 1998, the pro forma net income (loss) would have been approximately $7,567,000 and $(6,740,000) and net income (loss) per limited partner unit would have been $0.48 and $(0.43), respectively. The pro forma results of operations for the years ended December 31, 1999 and 1998, are derived from the historical financial statements of the Partnership from the commencement of operations on August 20, 1999 through December 31, 1999 and the Predecessor for the period from January 1, 1999 through August 19, 1999, and January 1, 1998 through December 31, 1998. The pro forma results of operations reflect certain pro forma adjustments to the historical results of operations as if the Partnership had been formed on January 1, 1998. The pro forma adjustments include (i) pro forma interest on debt assumed by the Partnership and (ii) the elimination of income tax expense as income taxes will be borne by the partners and not the Partnership. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ESTIMATES - The preparation of consolidated and combined financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures in the consolidated and combined financial statements. Actual results could differ from those estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts for accounts receivable, marketable securities and accounts payable approximate fair value because of the short maturity of those instruments. At December 31, 2000 and 1999, the estimated fair value of long-term debt was approximately $230 million and $215 million, respectively. The fair value of long-term debt is based on interest rates that are currently available to the Partnership for issuance of debt with similar terms and remaining maturities. CASH MANAGEMENT - The Partnership reclassified outstanding checks of $4,698,000 and $3,844,000 at December 31, 2000 and 1999, respectively, to accounts payable in the consolidated balance sheets. MARKETABLE SECURITIES - The Partnership has investments in six month U.S. Treasury Notes that are classified as available-for-sale debt securities. These investments are subject to certain provisions of the credit facility (Note 7), which could restrict the use of these investments for financing a required level of 33 35 capital expenditures within the second anniversary of the credit facility's effective date. At December 31, 2000, the Partnership has satisfied the capital expenditure requirements and consequently, the Partnership's use of the investments is not restricted. At December 31, 2000 and 1999, the cost of these investments approximates fair value and no effect of unrealized gains (losses) is reflected in Partners' capital (deficit). INVENTORIES - Coal inventories are stated at the lower of cost or market on a first-in, first-out basis. Supply inventories are stated at the lower of cost or market on an average cost basis. PROPERTY, PLANT AND EQUIPMENT - Additions and replacements constituting improvements are capitalized. Maintenance, repairs, and minor replacements are expensed as incurred. Depreciation and amortization are computed principally on the straight-line method based upon the estimated useful lives of the assets or the estimated life of each mine (9 to 15 years at the revaluation date of August 1, 1996), whichever is less and for 5 years on certain assets related to the 1998 business acquisition. Depreciable lives for mining equipment and processing facilities range from 1 to 15 years. Depreciable lives for land and land improvements and depletable lives for mineral rights range from 5 to 15 years. Depreciable lives for buildings, office equipment and improvements range from 1 to 13 years. Gains or losses arising from retirements are included in current operations. Depletion of mineral rights is provided on the basis of tonnage mined in relation to estimated recoverable tonnage. LONG-LIVED ASSETS - The Partnership reviews 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. The amount of an impairment is measured by the difference between the carrying value and the fair value of the asset, which is based on cash flows from that asset, discounted at a rate commensurate with the risk involved. During 2000, the Partnership recorded an impairment loss of approximately $2,439,000 relating to certain transloading facility assets, which is included as an unusual item in the accompanying consolidated and combined statements of operations. ADVANCE ROYALTIES - Rights to coal mineral leases are often acquired through advance royalty payments. Management assesses the recoverability of royalty prepayments based on estimated future production and capitalizes these amounts accordingly. Royalty prepayments expected to be recouped within one year are classified as a current asset. As mining occurs on those leases, the royalty prepayments are included in the cost of mined coal. Royalty prepayments estimated to be nonrecoverable are expensed. COAL SUPPLY AGREEMENTS - The Predecessor purchased the coal operations of MAPCO Inc. effective August 1, 1996, in a business combination using the purchase method of accounting. A portion of the acquisition costs was allocated to coal supply agreements. This allocated cost is being amortized on the basis of coal shipped in relation to total coal to be supplied during the respective contract term. The amortization periods end on various dates from September 2002 to December 2005. Accumulated amortization for coal supply agreements was $22,139,000 and $18,584,000 at December 31, 2000 and 1999, respectively. RECLAMATION AND MINE CLOSING COSTS - Estimates of the cost of future mine reclamation and closing procedures of currently active mines are recorded on a present value basis. Those costs relate to sealing portals at underground mines and to reclaiming the final pit and support acreage at surface mines. Other costs common to both types of mining are related to removing or covering refuse piles and settling ponds and dismantling preparation plants and other facilities and roadway infrastructure. Ongoing reclamation costs principally involve restoration of disturbed land and are expensed as incurred during the mining process. WORKERS' COMPENSATION AND PNEUMOCONIOSIS ("BLACK LUNG") BENEFITS - The Partnership is self-insured for workers' compensation benefits, including black lung benefits. The Partnership accrues 34 36 a workers' compensation liability for the estimated present value of current and, in the case of black lung benefits, future workers' compensation benefits based on actuarial valuations. INCOME TAXES - No provision for income taxes related to the operations of the Partnership is included in the accompanying consolidated financial statements because, as a Partnership, it is not subject to federal or state income tax and the tax effect of its activities accrues to the unitholders. Net income for financial statement purposes may differ significantly from taxable income reportable to unitholders as a result of differences between the tax bases and financial reporting bases of assets and liabilities and the taxable income allocation requirements under the Partnership agreement. The Predecessor is included in the combined U.S. income tax returns of ARH. The Predecessor has provided for income taxes on its separate taxable income and other tax attributes. Deferred income taxes are computed based on recognition of future tax expense or benefits, measured by enacted tax rates, that are attributable to taxable or deductible temporary differences between financial statement and income tax reporting bases of assets and liabilities. REVENUE RECOGNITION - Revenues are recognized when coal is shipped from the mine. Revenues not arising from coal sales, which primarily consist of transloading fees, are included in operating revenues and are recognized as services are performed. NET INCOME PER UNIT - Basic net income per limited partner unit is determined by dividing net income, after deducting the General Partners' 2% interest, by the weighted average number of outstanding Common Units and Subordinated Units (a total of 15,405,311 units as of December 31, 2000 and 1999). Diluted net income per unit is based on the combined weighted average number of Common Units, Subordinated Units and common unit equivalents outstanding which primarily include restricted units granted under the Long-Term Incentive Plan (Note 11). SEGMENT REPORTING - The Partnership has no reportable segments due to its operations consisting solely of producing and marketing coal. The Partnership has disclosed major customer sales information (Note 16) and geographic areas of operation (Note 17). NEW ACCOUNTING STANDARDS - Effective January 1, 2001, the Partnership adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that all derivatives be recognized as either assets or liabilities in the statement of financial position and be measured at fair value. The Partnership currently has no identified derivative instruments or hedging activities. Accordingly, this standard had no material effect on the Partnership's consolidated financial statements upon adoption. During the fourth quarter 2000, the Partnership adopted Financial Accounting Standards Board Emerging Issues Task Force Issue No. 00-10 "Accounting for Shipping and Handling Fees and Costs." Accordingly, the Partnership reflects the cost of transporting coal to customers through third party carriers as transportation expenses and the corresponding reimbursement of these costs through customer billings as transportation revenues in the consolidated and combined statements of income. These amounts were previously offset. There was no cumulative effect on net income and the prior periods' consolidated and combined statements of income have been reclassified to comply with this presentation. RECLASSIFICATIONS - Certain reclassifications have been made to the 1999 and 1998 combined and consolidated financial statements to conform to the classifications used in 2000. 35 37 3. BUSINESS ACQUISITION Effective January 23, 1998, the Predecessor acquired substantially all of the assets and assumed certain liabilities, excluding working capital, of an unrelated coal company's west Kentucky coal operations, now Hopkins County Coal, LLC, for cash of approximately $7,310,000 and direct acquisition costs of $821,000. The acquisition was accounted for using the purchase method of accounting. Accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values of $25,320,000 and $17,189,000, respectively. The results of operations are included in the Partnership's consolidated and combined financial statements from the acquisition date and are not considered significant. 4. UNUSUAL ITEMS The Unusual items for the years ended December 31, 2000 and 1998 are as follows (in thousands):
YEAR ENDED DECEMBER 31, ------------------------------- 2000 1998 ------------ ------------ Gain on settlement of transloading facility dispute $ (12,141) $ -- Litigation matters 2,675 -- Temporary mine closings -- 5,211 ------------ ------------ $ (9,466) $ 5,211 ============ ============
The Partnership was involved in litigation with Seminole Electric Cooperative, Inc. ("Seminole") with respect to Seminole's termination of a long-term contract for the transloading of coal from rail to barge through the Partnership's terminal in Indiana. The final resolution between the parties, reached in conjunction with an arbitrator's decision rendered during the third quarter of 2000, included both cash payments and amendments to an existing coal supply contract. The Partnership recorded income of $12,141,000, which is net of litigation expenses and impairment charges relating to certain transloading facility assets. The Partnership recorded an expense of $2,675,000 related to litigation matters settled and contingencies associated with other litigation matters. In response to market conditions, one of the Predecessor's operating mines ceased operations and terminated all of its workforce in September 1998. Management planned to maintain the mine in an indefinite idle status pending improvement in market conditions. Shortly after the mine closure, management executed a long-term coal supply contract for the mine and the mine resumed production in late 1998. During the idle status period, the mine incurred a net loss of approximately $5,211,000 consisting of estimated amounts for increased workers' compensation claims of $1,200,000 and severance payments consistent with the federal Worker Adjustment and Retraining Notification, or "WARN" Act, of $1,200,000 as well as the costs associated with maintaining the idled mine of $2,811,000. 36 38 5. INVENTORIES Inventories consist of the following at December 31, (in thousands):
2000 1999 ---------- ---------- Coal $ 5,140 $ 15,180 Supplies 5,702 5,950 ---------- ---------- $ 10,842 $ 21,130 ========== ==========
6. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following at December 31, (in thousands):
2000 1999 --------- --------- Mining equipment and processing facilities $ 267,287 $ 236,252 Land and mineral rights 17,686 17,282 Buildings, office equipment and improvements 24,224 17,780 Construction in progress 11,248 6,907 --------- --------- 320,445 278,221 Less accumulated depreciation, depletion and amortization (135,782) (102,709) --------- --------- $ 184,663 $ 175,512 ========= =========
7. LONG-TERM DEBT Long-term debt consists of the following at December 31, (in thousands):
2000 1999 --------- --------- Senior notes $ 180,000 $ 180,000 Term loan 50,000 50,000 --------- --------- 230,000 230,000 Less current maturities (3,750) -- --------- --------- $ 226,250 $ 230,000 ========= =========
The Special GP issued and the Intermediate Partnership assumed obligations with respect to a $180 million principal amount of senior notes pursuant to a Note Purchase Agreement with a group of institutional investors in a private placement offering. The senior notes are payable in ten annual installments of $18 million beginning in August 2005 and bear interest at 8.31%, payable semiannually. The Special GP also entered into and the Intermediate Partnership assumed obligations, under a $100 million credit facility consisting of three tranches, including a $50 million term loan facility, a $25 million working capital facility and a $25 million revolving credit facility. In connection with the closing of the IPO, the Special GP borrowed $50 million under the term loan facility and the Special GP and Intermediate Partnership purchased $50 million of U.S. Treasury Notes, which secure the term loan. The U.S. Treasury Notes may be liquidated for the sole purpose of funding capital expenditures. Through December 31, 2000, the Partnership had liquidated approximately $15.5 million of U.S. Treasury Notes to fund various qualifying capital expenditures. 37 39 The working capital facility can be used to provide working capital and, if necessary, to fund distributions to unitholders. The revolving credit facility can be used for general business purposes, including capital expenditures and acquisitions. The rate of interest charged is adjusted quarterly based on a pricing grid, which is a function of the ratio of the Partnership's debt to cash flow. The credit facility provides the Partnership the option of borrowing at either (1) the London Interbank Offered Rate ("LIBOR") or (2) the "Base Rate" which is equal to the greater of (a) the Chase Prime Rate, or (b) the Federal Funds Rate plus 1/2 of 1%, plus, in either option, an applicable margin. The weighted average interest rates on the term loan facility at December 31, 2000 and 1999 were 7.77% and 7.07%, respectively. In accordance with the pricing grid, a commitment fee ranging from 0.375% to 0.500% per annum is paid quarterly on the unused portion of the working capital and revolving credit facilities. There were no amounts outstanding under the Partnership's working capital facility or revolving credit facility as of December 31, 2000 and 1999. The credit facility expires in August 2004. The senior notes and credit facility are guaranteed by Alliance Coal, LLC and all of its subsidiaries. In addition, the credit facility is further secured by a pledge of treasury securities, which upon written notice, are released for purposes of financing qualifying capital expenditures of the Intermediate Partnership or its subsidiaries. The senior notes and credit facility contain various restrictive and affirmative covenants, including the amount of distributions by the Intermediate Partnership and the incurrence of other debt. The Partnership was in compliance with the covenants of both the credit facility and senior notes at December 31, 2000. The Partnership incurred debt issuance costs aggregating approximately $3,517,000, which have been deferred and are being amortized as a component of interest expense over the term of the notes. Aggregate maturities of long-term debt are as follows (in thousands):
YEAR ENDING DECEMBER 31, 2001 $ 3,750 2002 15,000 2003 16,250 2004 15,000 2005 18,000 Thereafter 162,000 -------- $230,000 ========
8. DISTRIBUTIONS OF AVAILABLE CASH The Partnership will distribute 100% of its available cash within 45 days after the end of each quarter to unitholders of record and to the General Partners. Available cash is generally defined as all cash and cash equivalents of the Partnership on hand at the end of each quarter less reserves established by the Managing GP in its reasonable discretion for future cash requirements. These reserves are retained to provide for the conduct of the Partnership's business, the payment of debt principal and interest and to provide funds for future distributions. Distributions of available cash to the holder of Subordinated Units are subject to the prior rights of holders of Common Units to receive the minimum quarterly distribution ("MQD") for each quarter during the subordination period and to receive any arrearages in the distribution of the MQD on the Common Units for the prior quarters during the subordination period. The MQD is $0.50 per unit ($2.00 per unit on an annual basis). Upon expiration of the subordination period, which will generally not occur before September 30, 2004, all Subordinated Units will be converted on a one-for-one basis into Common Units and will then participate, on a pro rata basis with all other Common Units in future 38 40 distributions of available cash. However, under certain circumstances, up to 50% of the Subordinated Units may convert into Common Units on or after September 30, 2003. Common Units will not accrue arrearages with respect to distributions for any quarter after the subordination period and Subordinated Units will not accrue any arrearages with respect to distributions for any quarter. If quarterly distributions of available cash exceed the MQD or the target distributions levels, the General Partners will receive distributions based on specified increasing percentages of the available cash that exceeds the MQD or target distribution levels. The target distribution levels are based on the amounts of available cash from the Partnership's operating surplus distributed for a given quarter that exceed distributions for the MQD and common unit arrearages, if any. For the 42-day period from the Partnership's commencement of operations (on August 20, 1999) through September 30, 1999, the Partnership paid a pro-rata MQD distribution of $0.23 per unit on its outstanding Common and Subordinated Units. For each of the quarters ended December 31, 1999 through September 30, 2000, quarterly distributions of $0.50 per unit were paid to the common and subordinated unitholders. On January 24, 2001, the Partnership declared a MQD, for the period from October 1, 2000 to December 31, 2000, of $0.50 per unit, totaling approximately $7,703,000 on its outstanding Common and Subordinated Units, payable on February 14, 2001 to all unitholders of record on January 31, 2001. 9. INCOME TAXES The Predecessor recognized a deferred tax asset for the future tax benefits attributable to deductible temporary differences and other credit carryforwards, including alternative minimum tax credit carryforwards. Realization of these future tax benefits was dependent on the Predecessor's ability to generate future taxable income, which was not assured. Management of the Predecessor believed that future taxable income would be sufficient to recognize only a portion of the tax benefits and had established a valuation allowance. Concurrent with the closing of the IPO on August 20, 1999, and in connection with the Contribution Agreement, ARH retained the current and deferred income taxes of the Predecessor. Income before income taxes is derived from domestic operations. Significant components of income taxes are as follows (in thousands):
FOR THE PERIOD FROM JANUARY 1, 1999 YEAR ENDED TO DECEMBER 31, AUGUST 19, 1999 1998 --------------- ------------ Current: Federal $ 3,376 $ 4,815 State 483 801 ------------ ------------ 3,859 5,616 Deferred: Federal 595 (1,531) State 44 (219) ------------ ------------ 639 (1,750) ------------ ------------ Income tax expense $ 4,498 $ 3,866 ============ ============
39 41 A reconciliation of the statutory U.S. federal income tax rate and the Predecessor's effective income tax rate is as follows:
FOR THE PERIOD FROM JANUARY 1, 1999 YEAR ENDED TO DECEMBER 31, AUGUST 19, 1999 1998 --------------- ------------ Statutory rate 35% 35% Increase (decrease) resulting from: Excess of tax over book depletion (21) (29) Alternative minimum tax credit carryforwards 3 6 State income taxes, net of federal benefit 3 4 Valuation allowance 10 14 Other 1 1 --------- --------- Effective income tax rate 31% 31% ========= =========
10. NET INCOME PER LIMITED PARTNER UNIT A reconciliation of net income and weighted average units used in computing basic and diluted earnings per unit is as follows (in thousands, except per unit data):
FROM COMMENCEMENT YEAR OF OPERATIONS ENDED (ON AUGUST 20, 1999) DECEMBER 31, TO 2000 DECEMBER 31, 1999 ------------ ----------------- Net income per limited partner unit $ 15,269 $ 6,147 Weighted average limited partner units - basic 15,405 15,405 Basic net income per limited partner unit $ 0.99 $ 0.40 ============ ============ Weighted average limited partner units - basic 15,405 15,405 Units contingently issuable: Restricted units for Long-Term Incentive Plan 142 -- Directors' compensation units deferred 4 -- ------------ ------------ Weighted average limited partner units, assuming dilutive effect of restricted units 15,551 15,405 ------------ ------------ Diluted net income per limited partner unit $ 0.98 $ 0.40 ============ ============
40 42 11. EMPLOYEE BENEFIT PLANS LONG-TERM INCENTIVE PLAN - Effective January 1, 2000, the Managing GP adopted the Long-Term Incentive Plan (the "LTIP") for certain employees and directors of the Managing GP and its affiliates who perform services for the Partnership. Annual grant levels and vesting provisions for designated participants are recommended by the President and Chief Executive Officer of the Managing GP, subject to the review and approval of the Compensation Committee. Grants are made either of restricted units, which are "phantom" units that entitle the grantee to receive a Common Unit or an equivalent amount of cash upon the vesting of a phantom unit, or options to purchase Common Units. Common Units to be delivered upon the vesting of restricted units will be acquired by the Managing GP in the open market at a price equal to the then prevailing price, or directly from ARH or any other third party. The Partnership agreement provides that the Managing GP be reimbursed for all costs incurred in acquiring these Common Units or in paying cash in lieu of Common Units upon vesting of the restricted units. The aggregate number of units reserved for issuance under the LTIP is 600,000. Effective January 1, 2000, the Compensation Committee approved initial grants of 142,100 restricted units, which vest at the end of the subordination period, which will generally not end before September 30, 2004. During 2000, the Managing GP billed the Partnership approximately $538,000 attributable to the LTIP. The Partnership has recorded this amount as compensation expense. Effective January 1, 2001, the Compensation Committee approved additional grants of 131,490 restricted units, which also vest at the end of the subordination period. DEFINED CONTRIBUTION PLANS - The Partnership's employees currently participate in a defined contribution profit sharing and savings plan sponsored by the Partnership, which is the same plan sponsored by the Predecessor. This plan covers substantially all full-time employees. Plan participants may elect to make voluntary contributions to this plan up to a specified amount of their compensation. The Partnership makes contributions based on matching 75% of employee contributions up to 3% of their annual compensation as well as an additional nonmatching contribution of 3/4 of 1% of their compensation. Additionally, the Partnership contributes a defined percentage of eligible earnings for certain employees not covered by the defined benefit plan described below. The Partnership's expense for its plan was approximately $1,590,000 for the year ended December 31, 2000 and $715,000 for the period from August 20, 1999 to December 31, 1999. The Predecessor's expense for the plan was $1,226,000 for the period from January 1, 1999 to August 19, 1999, and $1,944,000 for the year ended December 31, 1998. DEFINED BENEFIT PLANS - Certain employees at the mining operations participate in a defined benefit plan sponsored by the Partnership, which is the same plan sponsored by the Predecessor. The benefit formula is a fixed dollar unit based on years of service. 41 43 The following sets forth changes in benefit obligations and plan assets for the years ended December 31, 2000 and 1999 and the funded status of the plans reconciled with amounts reported in the Partnership's consolidated and the Predecessor's combined financial statements at December 31, 2000 and 1999, respectively. The Partnership and Predecessor periods for 1999 have been combined. Since the Partnership maintained the historical basis of the Predecessor's net assets, management believes that the combined Partnership and Predecessor amounts for 1999 are comparable with 2000 (dollars in thousands):
2000 1999 ------------ ------------ CHANGE IN BENEFIT OBLIGATIONS: Benefit obligations at beginning of year $ 7,774 $ 6,742 Service cost 1,971 2,107 Interest cost 596 452 Actuarial (gain) loss (136) (1,435) Benefits paid (70) (92) ------------ ------------ Benefit obligation at end of year 10,135 7,774 ------------ ------------ CHANGE IN PLAN ASSETS: Fair value of plan assets at beginning of year 8,265 2,911 Employer contribution 1,100 4,736 Actual return on plan assets 205 710 Benefits paid (70) (92) ------------ ------------ Fair value of plan assets at end of year 9,500 8,265 ------------ ------------ Funded status (635) 491 Unrecognized prior service cost 284 332 Unrecognized actuarial (gain) loss (828) (1,273) ------------ ------------ Net amount recognized $ (1,179) $ (450) ============ ============ WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31: Discount rate 7.50% 7.75% Expected return on plan assets 9.00% 9.00% COMPONENTS OF NET PERIODIC BENEFIT COST: Service cost $ 1,971 $ 2,107 Interest cost 596 452 Expected return on plan assets (737) (413) Prior service cost 48 48 Net gain (49) -- ------------ ------------ Net periodic benefit cost $ 1,829 $ 2,194 ============ ============ Effect on minimum pension liability $ -- $ (459) ============ ============
12. RECLAMATION AND MINE CLOSING COSTS The majority of the Partnership's operations are governed by various state statutes and the federal Surface Mining Control and Reclamation Act of 1977, which establish reclamation and mine closing standards. These regulations, among other requirements, require restoration of property in accordance with specified standards and an approved reclamation plan. The Partnership has estimated the costs and 42 44 timing of future reclamation and mine closing costs and recorded those estimates on a present value basis using a 6% discount rate. Discounting resulted in reducing the accrual for reclamation and mine closing costs by $10,420,000 and $5,489,000 at December 31, 2000 and 1999, respectively. Estimated payments of reclamation and mine closing costs as of December 31, 2000 are as follows (in thousands):
2001 $ 1,078 2002 1,191 2003 1,594 2004 2,147 2005 2,511 Thereafter 17,917 ---------- Aggregate undiscounted reclamation and mine closing 26,438 Effect of discounting 10,420 ---------- Total reclamation and mine closing costs 16,018 Less current portion 1,078 ---------- Reclamation and mine closing costs $ 14,940 ==========
The following table presents the activity affecting the reclamation and mine closing liability (in thousands):
PARTNERSHIP PREDECESSOR -------------------------------------- ----------------------------------- FROM COMMENCEMENT FOR THE YEAR OF OPERATIONS PERIOD FROM YEAR ENDED (ON AUGUST 20, 1999) JANUARY 1,1999 ENDED DECEMBER 31, TO TO DECEMBER 31, 2000 DECEMBER 31, 1999 AUGUST 19, 1999 1998 ------------- ------------------- --------------- ------------- Beginning balance $ 14,796 $ 13,856 $ 13,800 $ 5,439 Accrual 1,074 348 457 705 Payments (764) (394) (401) (1,544) Allocation of liability associated with acquisition and mine development 912 986 -- 9,200 ------------- ------------- ------------- ------------- Ending balance $ 16,018 $ 14,796 $ 13,856 $ 13,800 ============= ============= ============= =============
13. PNEUMOCONIOSIS ("BLACK LUNG") BENEFITS Certain mine operating entities of the Partnership are liable under state statutes and the federal Coal Mine Health and Safety Act of 1969, as amended, to pay black lung benefits to eligible employees and former employees and their dependents. These subsidiaries provide self-insurance accruals, determined by independent actuaries, at the present value of the actuarially computed present and future liabilities for such benefits. The actuarial studies utilize a 6% discount rate and various assumptions as to the frequency of future claims, inflation, employee turnover and life expectancies. The cost or reduction of cost due to change in the estimate of black lung benefits charged (credited) to operations for the year ended December 31, 2000, the period from the Partnership's commencement of operations on August 20, 1999 to December 31, 1999 and for the Predecessor period from January 1, 1999 43 45 to August 19, 1999, and the year ended December 31, 1998 was $123,000, $(1,028,000), $726,000, and $1,139,000, respectively. The U.S. Department of Labor has issued revised regulations that could alter the claims process for the federal black lung benefit recipients. The revised regulations are expected to result in an increase in the incidence and recovery of black lung claims. Both the coal and insurance industries are currently challenging through litigation certain provisions of the revised regulations. The impact of the revised regulations on the Partnership's liability for future black lung claims cannot be determined at this time. 14. RELATED PARTY TRANSACTIONS The Partnership Agreement provides that the Managing GP and its affiliates be reimbursed for all direct and indirect expenses it incurs or payments it makes on behalf of the Partnership, including management's salaries and related benefits, accounting, budget and planning, treasury, public relations, land administration, environmental and permitting management, payroll and benefits management, disability and workers' compensation management, legal and information technology services. The Managing GP may determine in its sole discretion the expenses that are allocable to the Partnership. Total costs reimbursed to the Managing GP and its affiliates by the Partnership were approximately $3,899,000 and $1,283,000 for the year ended December 31, 2000 and the period from the Partnership's commencement of operations on August 20, 1999 to December 31, 1999, respectively. ARH allocated certain direct and indirect general and administrative expenses to the Predecessor. These allocations were primarily based on the relative size of the direct mining operating costs incurred by each of the mine locations of the Predecessor. The allocations of general and administrative expenses to the Predecessor were approximately $2,982,000 and $2,595,000 for the period from January 1, 1999 to August 19, 1999 and for the year ended December 31, 1998, respectively. Management is of the opinion that the allocations used are reasonable and appropriate. During November 1999, the Managing GP was authorized by its Board of Directors to purchase up to 1.0 million Common Units of the Partnership. As of December 31, 2000 and 1999 the Managing GP had purchased 164,000 Common Units in the open market at prevailing market prices. In September 2000, the Special GP acquired coal reserves and the right to acquire additional coal reserves that are (a) contiguous to the Webster County Coal, LLC ("WCC") mining complex ("Providence No. 3 Reserves") and (b) contiguous to the Hopkins County Coal, LLC ("HCC") mining complex ("Elk Creek Reserves"). Such coal reserves and the rights to acquire additional coal reserves were transferred to SGP Land, LLC ("SGP Land"), a newly formed wholly-owned subsidiary of the Special GP. Concurrent with such coal reserve acquisitions, the Special GP, through affiliates, was negotiating for the purchase of (a) the capital stock of Roberts Bros. Coal Co., Inc., Warrior Coal Mining Company, and Warrior Coal Corporation, and (b) the related coal reserves ("Warrior Reserves") owned by Cardinal Trust, LLC (collectively the "Warrior Group"). The Warrior Group's operating assets are located adjacent to the Providence No. 3 Reserves and were purchased by a newly formed affiliate of the Special GP, Warrior Coal, LLC ("Warrior Coal"). SGP Land acquired the Warrior Reserves, which are located between the Providence No. 3 Reserves and HCC. The acquisition of the Warrior Group closed in January 2001. SGP Land entered into a mineral lease and sublease with WCC for a portion of each of the Providence No. 3 Reserves and the Warrior Reserves, and granted an option to HCC to lease and/or sublease the Elk Creek Reserves. Under the terms of the WCC lease and sublease, WCC has an annual minimum 44 46 royalty obligation of $2.7 million, payable in advance, from 2000 to 2013 or until $37.8 million of cumulative annual minimum and/or earned royalty payments have been paid. WCC paid the first annual minimum royalty of $2.7 million in 2000. Under the terms of the HCC option to lease and sublease, HCC paid an option fee of $645,000 in 2000. The anticipated annual minimum royalty obligation is $684,000 payable in advance, from 2001 to 2009. The Partnership and ARH Warrior Holdings, Inc. ("ARH Warrior Holdings"), the parent company of Warrior Coal, have entered into an Amended and Restated Put and Call Option Agreement ("Put/Call Agreement") with the Partnership. Under the terms of the Put/Call Agreement, ARH Warrior Holdings can require the Partnership to purchase Warrior Coal from ARH Warrior Holdings during the period from January 2, 2003 to January 11, 2003, with a put option price of the sum of $10 million and interest on the $10 million at 12 percent, compounded annually. The Partnership can also require ARH Warrior Holdings to sell Warrior Coal to the Partnership during the period from April 12, 2003 to December 31, 2006, with a call option price of the sum of (a) $10 million, (b) interest on the $10 million at 12 percent, compounded annually and (c) 25 percent of the interest determined in (b). Separately, on December 29, 2000, the Partnership entered into a noncancelable operating lease arrangement with the Special GP for a "build-to-suit" coal preparation plant and ancillary facilities at the Gibson County Coal, LLC mining complex that was constructed and is currently owned by the Special GP. This lease arrangement qualified for sale-leaseback accounting treatment, and consequently, the Partnership has removed the corresponding asset and liability associated with the coal preparation plant from its consolidated balance sheet. Based on the terms of the lease, the Partnership will make monthly payments of approximately $216,000 for 121 months. Lease expense incurred for the year ended December 31, 2000 was approximately $14,000. 15. COMMITMENTS AND CONTINGENCIES COMMITMENTS - The Partnership leases buildings and equipment under operating lease agreements which provide for the payment of both minimum and contingent rentals. The Partnership also has a noncancelable lease with the Special GP (Note 14). Future minimum lease payments under operating leases are as follows (in thousands):
AFFILIATE OTHERS TOTAL --------- --------- --------- Year ending December 31, 2001 $ 2,595 $ 452 $ 3,047 2002 2,595 408 3,003 2003 2,595 274 2,869 2004 2,595 284 2,879 2005 2,595 284 2,879 Thereafter 13,190 780 13,970 --------- --------- --------- $ 26,165 $ 2,482 $ 28,647 ========= ========= =========
Lease expense under all operating leases was $1,409,000, $801,000, $496,000, and $1,169,000 for the year ended December 31, 2000, the period from the Partnership's commencement of operations on August 20, 1999 to December 31, 1999 and the Predecessor period from January 1, 1999 to August 19, 1999, and the year ended December 31, 1998, respectively. CONTRACTUAL COMMITMENTS - In connection with the expansion of an existing mine into adjacent coal reserves, the Partnership has entered into contractual commitments for mine development of approximately $22.5 million at December 31, 2000. GENERAL LITIGATION - The Partnership is involved in various lawsuits, claims and regulatory proceedings, including those conducted by the Mine Safety and Health Administration, incidental to its business. The Partnership provides for costs related to litigation and regulatory proceedings, including civil fines 45 47 issued as part of the outcome of such proceedings, when a loss is probable and the amount is reasonably determinable. The Partnership also recorded an expense of $2,675,000 related to litigation matters settled and contingencies associated with other litigation matters, which is reflected in "Unusual items" in the accompanying consolidated and combined statements of income. In the opinion of management, the outcome of such matters to the extent not previously provided for or covered under insurance, will not have a material adverse effect on the Partnership's business, financial position or results of operations, although management cannot give any assurance to that effect. 16. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS The Partnership has significant long-term coal supply agreements, some of which contain price adjustment provisions designed to reflect changes in market conditions, labor and other production costs and, when the coal is sold other than FOB the mine, changes in railroad and/or barge freight rates. Total revenues to major customers, including transportation revenues (Note 2), which exceed ten percent of total revenues are as follows (in thousands):
PARTNERSHIP PREDECESSOR -------------------------------------- --------------------------------- FROM COMMENCEMENT FOR THE YEAR OF OPERATIONS PERIOD FROM YEAR ENDED (ON AUGUST 20, 1999) JANUARY 1, 1999 ENDED DECEMBER 31, TO TO DECEMBER 31, 2000 DECEMBER 31, 1999 AUGUST 19, 1999 1998 ------------- ------------------- ---------------- ------------- Customer A $ 67,234 $ 23,104 $ 38,875 $ 62,642 Customer B 61,007 26,993 40,752 57,233 Customer C 58,498 16,090 31,328 74,076 Customer D 38,713 11,926 19,582 --
Trade accounts receivable from these customers totaled approximately $18.1 million at December 31, 2000. The Partnership's bad debt experience has historically been insignificant. Based on current evaluations, Partnership management believes that no allowance is required to absorb potential uncollectible balances. However, changes in the financial conditions of its customers could result in a material change to this estimate in future periods. The coal supply agreements with customers A, B, C and D expire in 2006, 2001, 2010 and 2006, respectively. 46 48 17. GEOGRAPHIC INFORMATION Included in the consolidated and combined financial statements are the following revenues and long-lived assets relating to geographic locations (in thousands):
PARTNERSHIP PREDECESSOR ------------------------------------ ---------------------------------- FROM COMMENCEMENT FOR THE YEAR OF OPERATIONS PERIOD FROM YEAR ENDED (ON AUGUST 20, 1999) JANUARY 1, 1999 ENDED DECEMBER 31, TO TO DECEMBER 31, 2000 DECEMBER 31, 1999 AUGUST 19, 1999 1998 ------------ ------------------- --------------- ------------ Revenues: United States $ 363,469 $ 134,125 $ 221,339 $ 348,055 Other foreign countries -- -- 10,494 55,246 ------------ ------------ ------------ ------------ $ 363,469 $ 134,125 $ 231,833 $ 403,301 ============ ============ ============ ============ Long-lived assets: United States $ 210,996 $ 203,697 $ 200,057 $ 204,078 Other foreign countries -- -- -- -- ------------ ------------ ------------ ------------ $ 210,996 $ 203,697 $ 200,057 $ 204,078 ============ ============ ============ ============
18. SUPPLEMENTAL CASH FLOW INFORMATION The Partnership's and Predecessor's supplemental disclosure of cash flow information and other non-cash investing and financing activities were as follows (in thousands):
PARTNERSHIP PREDECESSOR ------------------------------------ ------------------------------ FROM COMMENCEMENT FOR THE YEAR OF OPERATIONS PERIOD FROM YEAR ENDED (ON AUGUST 20, 1999) JANUARY 1, 1999 ENDED DECEMBER 31, TO TO DECEMBER 31, 2000 DECEMBER 31, 1999 AUGUST 19, 1999 1998 ----------- ------------------- --------------- ------------ Cash paid for: Interest $ 19,043 $ 1,173 $ -- $ -- Income taxes paid through Parent (Note 9) -- -- 3,504 3,135 Noncash investing and financing activities: Debt transferred from Special GP -- 230,000 -- -- Marketable securities transferred from Special GP -- 15,486 -- --
19. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) On August 20, 1999, the Partnership completed its IPO in which the Partnership became the successor to the business of the Predecessor. Accordingly, no recognition has been given to income taxes in the financial statements of the Partnership as income taxes will be borne by the partners and not the Partnership. Additionally, interest expense associated with the debt incurred concurrent with the closing of the IPO is applicable only to the Partnership period. Accordingly, the quarterly operating results prior to August 20, 1999 are not necessarily comparable to subsequent periods. 47 49 A summary of the quarterly operating results for the Partnership and Predecessor is as follows (in thousands, except unit and per unit data):
PARTNERSHIP QUARTER ENDED ------------------------------------------------------------------------ MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 2000 2000 2000(1) 2000 ------------ ------------ ------------ ------------ Revenues $ 89,420 $ 86,652 $ 96,459 $ 90,938 Operating income 6,191 5,912 15,669 3,096 Net income (loss) 2,366 2,098 11,560 (443) Basic net income (loss) per limited Partner unit $ 0.15 $ 0.13 $ 0.74 $ (0.03) Diluted net income (loss) per limited Partner unit $ 0.15 $ 0.13 $ 0.73 $ (0.03) Weighted average number of units outstanding - basic 15,405,311 15,405,311 15,405,311 15,405,311 Weighted average number of units outstanding - diluted 15,550,489 15,550,845 15,552,017 15,553,372
PREDECESSOR PARTNERSHIP ------------------------------------------------- ---------------------------------------- FROM COMMENCEMENT QUARTER ENDED JULY 1, 1999 OF OPERATIONS ----------------------------- TO (ON AUGUST 20, 1999) MARCH 31, JUNE 30, AUGUST 19, TO QUARTER ENDED 1999 1999 1999 SEPTEMBER 30, 1999 DECEMBER 31, 1999 ------------- ------------- ------------- ------------------ ----------------- Revenues $ 87,876 $ 93,395 $ 50,562 $ 45,758 $ 88,367 Operating income 4,273 6,995 3,004 5,019 6,499 Net income 2,969 4,934 2,302 3,509 2,763 Basic and diluted net income per unit -- -- -- $ 0.22 $ 0.18 Weighted average number of units outstanding - basic and diluted -- -- -- 15,405,311 15,405,311
(1) The Partnership recorded income of $12.2 million, which is net of litigation expenses and costs relating to the impairment of certain transloading facility assets. Additionally, the Partnership recorded an expense of $2.7 million related to litigation matters settled and contingencies associated with other litigation matters. The net effect of these unusual items for the quarter was $9.5 million (Note 4). Operating income in the above table represents income from operations before interest expense. ****** 48 50 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE MANAGING GENERAL PARTNER As is commonly the case with publicly-traded limited partnerships, we are managed and operated by our Managing GP. The following table shows information for the directors and executive officers of the Managing GP. Executive officers and directors are elected for one-year terms.
NAME AGE POSITION WITH OUR MANAGING GENERAL PARTNER - --------------------- ---- ------------------------------------------- Joseph W. Craft III 50 President, Chief Executive Officer and Director Robert G. Sachse 52 Executive Vice President and Director Thomas L. Pearson 47 Senior Vice President - Law and Administration, General Counsel and Secretary Michael L. Greenwood 45 Senior Vice President - Chief Financial Officer and Treasurer Charles R. Wesley 46 Senior Vice President - Operations Gary J. Rathburn 50 Senior Vice President - Marketing John J. MacWilliams 45 Director Preston R. Miller, Jr. 52 Director John P. Neafsey 61 Director John H. Robinson 50 Director Paul R. Tregurtha 65 Director
Joseph W. Craft III has worked for us since 1980. Prior to the formation of ARH, Mr. Craft was a Senior Vice President of MAPCO Inc., serving as General Counsel and Chief Financial Officer, and since 1986 as President of MAPCO Coal Inc. Mr. Craft has held his current positions since August 1996. Prior to working with us, Mr. Craft was an attorney at Falcon Coal Corporation and Diamond Shamrock Coal Corporation. Mr. Craft has held numerous industry leadership positions, including past Chairman of the National Coal Council, a Board and Executive Committee member of the National Mining Association, and a Director of the Center for Energy and Economic Development. Mr. Craft holds a Bachelor of Science degree in Accounting and a Juris Doctor degree from the University of Kentucky. Mr. Craft also is a graduate of the Senior Executive Program of the Alfred P. Sloan School of Management at Massachusetts Institute of Technology. Robert G. Sachse joined us as Executive Vice President and Vice Chairman in August 2000. Prior to working with us, Mr. Sachse was Executive Vice President and Chief Operating Officer of MAPCO Inc. from 1996 to 1998 until MAPCO Inc. merged with The Williams Companies, Inc. Mr. Sachse held various positions with MAPCO Coal Inc. from 1982 to 1991, and was promoted to President of MAPCO Natural Gas 49 51 Liquids in 1992. Mr. Sachse holds a Bachelor of Science degree from Trinity University and a Juris Doctor degree from the University of Tulsa. Thomas L. Pearson has worked for us since 1989. Prior to the formation of ARH, Mr. Pearson was Assistant General Counsel of MAPCO Inc. and served as General Counsel and Secretary of MAPCO Coal Inc. from 1989-1996. Mr. Pearson has held his current positions since September 1996. Prior to working with us, Mr. Pearson was General Counsel and Secretary of McLouth Steel Products Corporation, one of the largest integrated steel producers in the United States; and Corporate Counsel of Midland-Ross Corporation, a multi-national company with numerous international joint venture companies and projects. Previously, he was an attorney with the Arter & Hadden law firm in Cleveland, Ohio. Mr. Pearson is or has been active in a number of educational, charitable and business organizations, including the following: Vice Chairman, Legal Affairs Committee, National Mining Association; Member, Dean's Committee, The University of Iowa College of Law; and Contributions Committee, Greater Cleveland United Way. Mr. Pearson holds a Bachelor of Arts degree in History and Communications from DePauw University and a Juris Doctor degree from The University of Iowa. Michael L. Greenwood has worked for us since 1986. Prior to the formation of ARH, Mr. Greenwood served in various financial management capacities, including General Manager - Finance of MAPCO Coal Inc., General Manager of Planning and Financial Analysis, and Manager - Mergers and Acquisitions of MAPCO Inc. Mr. Greenwood has held his current positions since September 1996. Prior to working for us, Mr. Greenwood held financial planning and business development management positions in the energy industry with Davis Investments, The Williams Companies, Inc. and Penn Central Corporation. Mr. Greenwood holds a Bachelor of Science degree in Business Administration from Oklahoma State University and a Master of Business Administration degree from the University of Tulsa. Mr. Greenwood has also completed executive programs at Northwestern University, Southern Methodist University and The Center for Creative Leadership. Charles R. Wesley has worked for us since 1974. Mr. Wesley joined Webster County Coal Corporation in 1974 as an engineering co-op student and worked through the ranks to become General Superintendent. In 1992 he became Vice President of Operations for Mettiki Coal Corporation. He has held his current position since September 1996. Mr. Wesley has served the industry as past President of the West Kentucky Mining Institute and National Mine Rescue Association Post 11. He also served on the board of the Kentucky Mining Institute. Mr. Wesley holds a Bachelor of Science degree in Mining Engineering from the University of Kentucky. Gary J. Rathburn has worked for us since 1980 when he joined MAPCO Coal Inc. as Manager of Brokerage Coals. Since 1980, Mr. Rathburn has managed all phases of the marketing group involving transportation and distribution, international sales and the brokering of coal. He has held his current position since September 1996. Prior to working for us, Mr. Rathburn was employed by Eastern Associated Coal Corporation in its International Sales and Brokerage groups. Mr. Rathburn has been active in industry groups such as the Maryland Coal Association, The North Carolina Coal Institute and the National Mining Association. Mr. Rathburn was a Director of The National Coal Association and Chairman of the Coal Exporters Association for several years. Mr. Rathburn holds a Bachelor of Arts degree in Political Science from the University of Pittsburgh and has participated in industry-related programs at the World Trade Institute, Princeton University and the Colorado School of Mines. John J. MacWilliams has served as a Director since June 1996. Mr. MacWilliams has been a General Partner of The Beacon Group, LP (The Beacon Group) since May 1993. Prior to the formation of The Beacon Group, Mr. MacWilliams was an Executive Director of Goldman Sachs International in London, where he was responsible for heading the firm's International Structured Financing Group. Prior to moving to London, Mr. MacWilliams was a Vice President in the Investment Banking Division of Goldman, Sachs & Co. in New York. Prior to joining Goldman Sachs, Mr. MacWilliams was an attorney at Davis Polk & Wardwell in New York, where he worked on international bank financings, partnership financings, and mergers and 50 52 acquisitions. Mr. MacWilliams is also a director of Campagnie Generale Geophysique. Mr. MacWilliams holds a Bachelor of Arts degree from Stanford University, Master of Science degree from Massachusetts Institute of Technology, and a Juris Doctor degree from Harvard Law School. Preston R. Miller, Jr. has served as a Director since June 1996. Mr. Miller has been a General Partner of The Beacon Group since June 1993. Prior to the formation of The Beacon Group, Mr. Miller was employed for fourteen years by Goldman, Sachs & Co. in New York City, where he was a Vice President in the Structured Finance Group and had global responsibility for the coverage of the independent power industry, asset-backed power generation, and oil and gas financings. Mr. Miller also has a background in credit analysis, and was head of the revenue bond rating group at Standard & Poor's Corp. prior to joining Goldman Sachs. Mr. Miller holds a Bachelor of Arts degree from Yale University and a Master of Public Administration degree from Harvard University. John P. Neafsey has served as Chairman since June 1996. Mr. Neafsey has served as President of JN Associates, an investment consulting firm, since January 1994. Mr. Neafsey served as President and CEO of Greenwich Capital Markets from 1990 to 1993 and Director since its founding in 1983. In addition, Mr. Neafsey held numerous other positions during his twenty-three years at The Sun Company, including: Executive Vice President responsible for Canadian operations, Sun Coal Company and Helios Capital Corporation; Chief Financial Officer; and other executive management positions with numerous subsidiary companies. Mr. Neafsey is or has been active in a number of educational, charitable and business organizations, including the following: Director, The West Pharmaceutical Services Company, Longhorn Partners Pipeline Inc. and the Provident Mutual Life Insurance Company; Trustee, Cornell University; and Overseer of Cornell-Weill Medical Center. Mr. Neafsey holds Bachelor and Master of Science degrees in Engineering and a Master of Business Administration degree from Cornell University. John H. Robinson has served as a Director since December 1999. In April 2000, Mr. Robinson joined Amey, plc, a British support services business, as Executive Director of its newly-formed Technology Services Division. Mr. Robinson previously served as Vice Chairman of Black & Veatch, a global engineer-constructor firm, from January 1997 through March 2000. He was also the Chairman of Black & Veatch UK Ltd. and was responsible for guiding strategic development of the firm, having begun his career there in 1973. He is a Director of Coeur Precious Metals, Protection One and Commerce Bancshares. Mr. Robinson holds Bachelor and Master of Science degrees in Engineering from the University of Kansas and has completed the Owner/President Management Program at the Harvard School of Business. Paul R. Tregurtha has served as a Director since December 1999. Mr. Tregurtha serves as Chairman and Chief Executive Officer of Mormac Marine Group, Inc. and Moran Transportation Company, and Chairman of MAC Acquisitions, Inc. He is a director and principal officer of several companies involved in water transportation and natural resources, including The Interlake Steamship Company and Lakes Shipping Company. Mr. Tregurtha is also a director of FleetBoston Financial and FPL Group, Inc., the parent of Florida Power & Light Company. Mr. Tregurtha holds a Bachelor of Science degree in Mechanical Engineering from Cornell University, where he serves as Trustee Emeritus, and a Master of Business Administration degree from the Harvard School of Business. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE. Section 16(a) of the Securities and Exchange Act of 1934, as amended, requires directors, executive officers and persons who beneficially own more than ten percent of a registered class of the Partnership's equity securities to file with the SEC initial reports of ownership and reports or changes in ownership of such equity securities. Such persons are also required to furnish the Partnership with copies of all Section 16(a) forms that they file. Based solely upon a review of the copies of the forms furnished to it, or written representations from certain reporting persons, the Partnership believes that during 2000 none of its officers and directors was delinquent with respect to any of the filing requirements under Rule 16(a) other than (a) Mr. Craft did not file a Form 4 for the months of August and September 1999, regarding purchases made by a 51 53 private foundation for which he serves as a trustee and disclaims beneficial ownership, and (b) Mr. Neafsey did not timely file a Form 4 for the month of August 2000, but has since filed this Form 4. REIMBURSEMENT OF EXPENSES OF THE MANAGING GP AND ITS AFFILIATES The Managing GP does not receive any management fee or other compensation in connection with its management of us. However, our Managing GP and its affiliates, including ARH, perform services for us and are reimbursed by us for all expenses incurred on our behalf, including the costs of employee, officer and director compensation and benefits properly allocable to us, as well as all other expenses necessary or appropriate to the conduct of our business, and properly allocable to us. Our Partnership Agreement provides that the Managing GP will determine the expenses that are allocable to us in any reasonable manner determined by the Managing GP in its sole discretion. ITEM 11. EXECUTIVE COMPENSATION EXECUTIVE COMPENSATION The following table sets forth certain compensation information for all executive officers of our Managing GP who received salary and bonus compensation in excess of $100,000 in 2000. The Partnership was formed in May 1999 but did not commence business until August 1999. Therefore 1999 compensation information is for the Partnership period from commencement of operations (on August 20, 1999) to December 31, 1999. SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM ---------------------------------------- COMPENSATION OTHER ANNUAL RESTRICTED ALL OTHER BONUS COMPENSATION STOCK AWARDS COMPENSATION NAME AND PRINCIPAL POSITION YEAR SALARY (1) (2) (3) (4) - ------------------------------------- -------- -------- ---------- ------------ ------------ ------------ Joseph W. Craft III, 2000 $292,950 $ 94,200 $ -- $678,150 $ 63,695 President, Chief Executive Officer 1999 106,313 70,040 700 -- 21,495 and Director Thomas L. Pearson, 2000 177,000 45,000 1,550 122,067 43,856 Senior Vice President-Law and 1999 64,234 28,306 -- -- 12,385 Administration, General Counsel and Secretary Michael L. Greenwood, 2000 151,400 45,000 -- 122,067 26,009 Senior Vice President-Chief 1999 54,944 28,306 -- -- 7,972 Financial Officer and Treasurer Charles R. Wesley, 2000 187,000 47,600 1,500 135,630 32,802 Senior Vice President-Operations 1999 67,863 35,565 -- -- 12,383 Gary J. Rathburn, 2000 152,000 45,000 1,500 122,067 28,008 Senior Vice President-Marketing 1999 55,161 28,306 -- -- 9,407
(1) Amount awarded under the Short-Term Incentive Plan. See "Short-Term Incentive Plan" below. (2) Amount reimbursed for income tax preparation. (3) Awards under the Long-Term Incentive Plan. The amount represents the value of restricted units at the date of issuance. The total number of restricted units and their market value as of December 31, 2000, were: Mr. Craft, 50,000 units valued at $900,000; Mr. Pearson, 9,000 units valued at $162,000; Mr. Greenwood, 9,000 units valued at $162,000; Mr. Wesley, 10,000 units valued at $180,000; Mr. Rathburn, 9,000 units valued at $162,000. 52 54 Units granted under the Long-Term Incentive Plan do not vest until the end of the subordination period, which will generally not end before September 30, 2004. See "Long-Term Incentive Plan" below. (4) Amount represents (a) the Managing General Partner's matching contributions to its 401(k) Plan and (b) the Managing General Partner's contribution to a Supplemental Executive Retirement Plan. COMPENSATION OF DIRECTORS Under the Managing GP's Directors Compensation Program (Directors Plan) each non-employee Director is paid an annual retainer of $20,000. The annual retainer is payable in Common Units of the Partnership to be paid on a quarterly basis in advance determined by dividing the pro rata annual retainer payable on such date by the closing sales price per Common Unit averaged over the immediately preceding ten trading days. Each non-employee director may elect to defer all or a portion of his or her compensation under the Deferred Compensation Plan for Directors. In addition each non-employee director participates in the Long-Term Incentive Plan. The directors restricted units vest in accordance with the same procedure as is described below. Messrs. MacWilliams and Miller have declined compensation under the Directors and Long-Term Incentive Plans. Mr. Sachse has a consulting agreement with the Managing GP, for a term of three years, effective August 14, 2000. The consulting agreement provides that Mr. Sachse will serve as Executive Vice President of the Managing GP and devote his services on a part-time basis. In addition to compensation received under the Directors Plan and Long-Term Incentive Plan described above, Mr. Sachse is entitled to receive an annual fee of $150,000 payable in arrears monthly. Mr. Sachse also is entitled to receive quarterly payments in arrears of the cash difference between $7,500 less the market value of 250 Common Units of the Partnership calculated by the closing sales price per Common Unit averaged over the immediately preceding ten trading days. A copy of the consulting agreement with Mr. Sachse is filed as an exhibit hereto. EMPLOYMENT AGREEMENTS The executive officers of the Managing GP and some additional members of senior management will enter into employment agreements among the executive officer or member of senior management, on the one hand, and the Managing GP and ARH, on the other. We reimburse the Managing GP for the compensation and benefits costs under these agreements. This summary of the terms of the employment agreements does not purport to be complete, but outlines their material provisions. A form of the agreements with each of Messrs. Craft, Pearson, Greenwood, Wesley and Rathburn are filed as exhibits. Each of the employment agreements has an initial term that expires on December 31, 2001, but will automatically be extended for successive one-year terms unless either party gives 12 months prior notice to the other party. The employment agreements provide for a base salary, subject to review annually, of $292,950, $177,000, $151,400, $187,000 and $152,000 for Messrs. Craft, Pearson, Greenwood, Wesley and Rathburn, respectively. The employment agreements provide for continued salary payments, bonus and benefits for a period of three years, in the case of Mr. Craft, and 18 months, in the case of Messrs. Pearson, Greenwood, Wesley and Rathburn, following termination of employment, except in the case of a change of control of the Managing GP. In the case of a "change of control" as defined in the agreements, in lieu of the continuation of salary and benefits, that executive will be entitled to a lump sum payment in an amount equal to three times base salary plus bonus, in the case of Mr. Craft, and two times base salary plus bonus in the case of Messrs. Pearson, Greenwood, Wesley and Rathburn. Unless the executive waives his or her right to the continuation of base salary and bonus, the agreements provide for a noncompetition period of 18 months. The noncompetition period does not apply after a change in control. Amounts paid by the Managing GP pursuant to the employment agreements will be reimbursed by the Partnership. 53 55 The executives who are subject to employment agreements also participate in the Short- and Long-Term Incentive Plans of the Managing GP described below along with other members of management. They also are entitled to participate in the other employee benefit plans and programs that the Managing GP provides for its employees. LONG-TERM INCENTIVE PLAN Effective January 1, 2000, the Managing GP adopted the Long-Term Incentive Plan (LTIP) for certain employees and directors of the Managing GP and its affiliates who perform services for us. The summary of the LTIP contained herein does not purport to be complete, but outlines its material provisions. The LTIP is administered by the Compensation Committee of the Managing GP's Board of Directors. Annual grant levels for designated participants are recommended by the President and CEO of the Managing GP, subject to the review and approval of the Compensation Committee. We will reimburse the Managing GP for all costs incurred pursuant to the programs described below. Grants are made either of restricted units, which are "phantom" units that entitle the grantee to receive a Common Unit or an equivalent amount of cash upon the vesting of a phantom unit, or options to purchase Common Units. Common Units to be delivered upon the vesting of restricted units or to be issued upon exercise of a unit option will be acquired by the Managing GP in the open market at a price equal to the then prevailing price, or directly from ARH or any other third party, including units newly issued by us, or use units already owned by the Managing GP, or any combination of the foregoing. The Managing GP is entitled to reimbursement by us for the cost incurred in acquiring these Common Units or in paying cash in lieu of Common Units upon vesting of the restricted units. If we issue new Common Units upon payment of the restricted units or unit options instead of purchasing them, the total number of Common Units outstanding will increase. The aggregate number of units reserved for issuance under the LTIP is 600,000. Effective January 1, 2000, the Compensation Committee approved initial grants of 142,100 restricted units, which vest at the end of the subordination period, which will generally not end before September 30, 2004. Effective as of January 1, 2001, the Compensation Committee approved additional grants of 131,490 restricted units, which also vest at the end of the subordination period. Restricted Units. Restricted units will vest over a period of time as determined by the Compensation Committee. However, if a grantee's employment is terminated for any reason prior to the vesting of any restricted units, those restricted units will be automatically forfeited, unless the Compensation Committee, in its sole discretion, provides otherwise. In addition, vested restricted units will not be payable before the end of the subordination period, which will generally not end before September 30, 2004. The issuance of the Common Units pursuant to the restricted unit plan is intended to serve as a means of incentive compensation for performance and not primarily as an opportunity to participate in the equity appreciation in respect of the Common Units. Therefore, no consideration will be payable by the plan participants upon receipt of the Common Units, and we receive no remuneration for these units. Following the subordination period, the Compensation Committee, in it discretion, may grant distribution equivalent rights with respect to restricted units. Unit Options. We have not made any grants of unit options. The Compensation Committee may, in the future, determine to make unit option grants to employees and directors containing the specific terms that they determine. When granted, unit options will have an exercise price set by the Compensation Committee which may be above, below or equal to the fair market value of a Common Unit on the date of grant. Unit options, if any, granted during the subordination period will become exercisable upon, and in the same proportions as, the conversion of the Subordinated Units to Common Units, or at a later date as determined by the Compensation Committee in its sole discretion. The Managing GP's Board of Directors, in its discretion, may terminate the LTIP at any time with respect to any Common Units for which a grant has not previously been made. The Managing GP's Board of 54 56 Directors will also have the right to alter or amend the LTIP or any part of it from time to time, subject to unitholder approval as required by the exchange upon which the Common Units may be listed at that time; provided, however, that no change in any outstanding grant may be made that would materially impair the rights of the participant without the consent of the affected participant. In addition, the Managing GP may, in its discretion, establish such additional compensation and incentive arrangements as it deems appropriate to motivate and reward its employees. The Managing GP is reimbursed for all compensation expenses incurred on our behalf. SHORT-TERM INCENTIVE PLAN Effective January 1, 1999, the Managing GP adopted a Short-Term Incentive Plan (STIP) for management and other salaried employees. The STIP is designed to enhance the financial performance by rewarding management and salaried employees of the Managing GP and Partnership with cash awards for the Partnership achieving an annual financial performance objective. The annual performance objective for each year is recommended by the President and CEO of the Managing GP and approved by the Compensation Committee of its Board of Directors prior to January 1 of that year. The STIP is administered by the Compensation Committee. Individual participants and payments each year are determined by and in the discretion of the Compensation Committee, and the Managing GP is able to amend the plan at any time. The Managing GP is entitled to reimbursement by us for the costs incurred under the STIP. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information as of March 1, 2001, regarding the beneficial ownership of Common and Subordinated Units held by (a) each person known by the Managing GP to be the beneficial owner of 5% or more of the Common and Subordinated Units, (b) each director and executive officer of the Managing GP and (c) all directors and executive officers of the Managing GP as a group. The Managing GP is owned by funds affiliated with The Beacon Group and members of management. The Special GP is a wholly-owned subsidiary of ARH. The address of ARH, the Managing GP and the Special GP, is 1717 South Boulder Avenue, Tulsa, Oklahoma 74119.
PERCENTAGE OF PERCENTAGE OF PERCENTAGE COMMON COMMON SUBORDINATED SUBORDINATED OF TOTAL UNITS UNITS UNITS UNITS UNITS BENEFICIALLY BENEFICIALLY BENEFICIALLY BENEFICIALLY BENEFICIALLY NAME OF BENEFICIAL OWNER OWNED(8) OWNED OWNED OWNED OWNED - ------------------------ ----------- ------------- ------------ ------------ ------------ Alliance Resource GP, LLC(2) 1,232,780 13.72% 6,422,531 100% 49.7% Alliance Resource Management GP, LLC(3) 164,000 1.83% -- -- 1.1% Joseph W. Craft III(1)(7) 73,500 (*) -- -- (*) Robert G. Sachse(1) 646 -- -- -- -- Thomas L. Pearson(1) 9,971 (*) -- -- (*) Michael L. Greenwood(1) 29,950 (*) -- -- (*) Charles R. Wesley(1) 20,000 (*) -- -- (*) Gary J. Rathburn(1) 8,000 (*) -- -- (*) John J. MacWilliams(4) 1,396,780 15.55% 6,422,531 100% 50.8% Preston R. Miller, Jr.(4) 1,396,780 15.55% 6,422,531 100% 50.8% John P. Neafsey(1) 12,257 (*) -- -- (*) John H. Robinson(5) 2,257 (*) -- -- (*) Paul R. Tregurtha(6) 2,257 (*) -- -- (*) All directors and executive officers as a group (11 persons) 1,555,618 17.32% 6,422,531 100% 51.8%
* Less than one percent. (1) The address of Messrs. Craft, Sachse, Pearson, Greenwood, Wesley, Rathburn and Neafsey is 1717 South Boulder Avenue, Tulsa, Oklahoma 74119. 55 57 (2) ARH may be deemed to beneficially own the Common Units and the Subordinated Units held by the Special GP, as a result of ARH's ownership of all of the membership interests in the Special GP. MPC Partners, LP (MPC Partners) may also be deemed to beneficially own the Common Units and the Subordinated Units held by the Special GP as a result of MPC Partners' ownership of 86.2% of ARH's outstanding common stock. (3) The Managing GP is an affiliate of the Special GP, and as a consequence, the Special GP may be deemed to beneficially own the Common Units held by the Managing GP. (4) Messrs. MacWilliams and Miller may also be deemed to share beneficial ownership of the Common Units and the Subordinated Units held by the Special GP and the Managing GP by virtue of their status as partners of The Beacon Group, an affiliate of MPC Partners. Messrs. MacWilliams and Miller disclaim beneficial ownership of the Common and Subordinated Units held by the Special GP and the Managing GP. The address of Messrs. MacWilliams and Miller is Beacon Group Energy Funds, an affiliate of JP Morgan Partners, 1221 Avenue of the Americas, 4th floor, New York, New York 10020. (5) The address of Mr. Robinson is 24 Hanover Square, London, England W1S1JD. (6) The address of Mr. Tregurtha is 3 Landmark Square, Stamford, Connecticut 06901. (7) Mr. Craft owns 60,000 Common Units and may also be deemed to share beneficial ownership of 13,500 Common Units held by a private foundation for which he serves as a trustee. Mr. Craft disclaims beneficial ownership of the Common Units held by the private foundation. (8) The amounts set forth do not include any restricted units granted under the LTIP. 56 58 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Special GP owns 1,232,780 Common Units and 6,422,531 Subordinated Units representing an aggregate 48.7% limited partner interest in the Partnership. In addition, the General Partners own, on a combined basis, an aggregate 2% general partner interest in the Partnership, the Intermediate Partnership and the subsidiaries. The Managing GP's ability, as managing general partner, to manage and operate the Partnership and its ownership of 164,000 Common Units together with the Special GP's ownership of 1,232,780 Common Units and 6,422,531 Subordinated Units, effectively gives the General Partners the ability to veto some actions of the Partnership and to control the management of the Partnership. UNIT PURCHASE PROGRAM BY THE MANAGING GP The Managing GP authorized a Common Unit purchase program in November 1999 for the purchase of up to the greater of one million Common Units or $15 million of Common Units. As of December 31, 2000, the Managing GP has purchased 164,000 Common Units. The Common Units purchased by the Managing GP retain their rights to receive quarterly distributions of Available Cash. TRANSACTIONS BETWEEN THE PARTNERSHIP, SPECIAL GP AND ARH In September 2000, the Special GP acquired coal reserves and the right to acquire additional coal reserves (a) contiguous to our Dotiki mine (Providence No. 3 Reserves) and (b) contiguous to Hopkins County Coal (Elk Creek Reserves). Such coal reserves and the rights to acquire additional coal reserves were transferred to SGP Land, LLC (SGP Land), a newly formed wholly-owned subsidiary of the Special GP. Concurrent with such coal reserve acquisitions, the Special GP, through affiliates, was negotiating for the purchase of (a) the capital stock of Roberts Bros. Coal Co., Inc., Warrior Coal Mining Company, and Warrior Coal Corporation, and (b) the related coal reserves (Warrior Reserves) owned by Cardinal Trust, LLC (collectively, the Warrior Group). The Warrior Group's operating assets are located adjacent to the Providence No. 3 Reserves and were purchased by a newly formed affiliate of the Special GP, Warrior Coal, LLC (Warrior Coal). SGP Land acquired the Warrior Reserves, which are immediately between the Providence No. 3 Reserves and Hopkins County Coal. The acquisition of the Warrior Group closed in January 2001. SGP Land entered into a mineral lease and sublease with Webster County Coal for a portion of each of the Providence No. 3 Reserves and the Warrior Reserves, and granted an option to Hopkins County Coal to lease and/or sublease the Elk Creek Reserves. Under the terms of the Webster County Coal lease and sublease, Webster County Coal has an annual minimum royalty obligation of $2.7 million, payable in advance, from 2000 to 2013, or until $37.8 million of cumulative annual minimum and/or earned royalty payments have been paid. Webster County Coal paid the first annual minimum royalty of $2.7 million in 2000. Under the terms of the Hopkins County Coal option to lease and sub-lease, Hopkins County Coal paid an option fee of $645,000 in 2000. The anticipated annual minimum royalty obligation is $684,000 payable in advance, from 2001 to 2009. Consistent with the terms of the Omnibus Agreement discussed below, the above transactions were initially offered to the Partnership. However, the Board of Directors of the Managing GP, with the concurrence of its Conflicts Committee, elected not to pursue these transactions. However, the Partnership and ARH Warrior Holdings, Inc. (ARH Warrior Holdings), the parent company of Warrior Coal, entered into an Amended and Restated Put and Call Option Agreement (Put/Call Agreement), filed as an exhibit hereto, which provides as follows: 57 59 (a) ARH Warrior Holdings can require the Partnership to purchase Warrior Coal from ARH Warrior Holdings during the period from January 2, 2003 to January 11, 2003, with a put option price of the sum of (i) $10 million, and (ii) interest on the $10 million at 12 percent, compounded annually; and (b) the Partnership can require ARH Warrior Holdings to sell Warrior Coal to the Partnership during the period from April 12, 2003 to December 31, 2006, with a call option price of the sum of (i) $10 million, (ii) interest on the $10 million at 12 percent, compounded annually, and (iii) 25 percent of the interest determined in (ii). Separately, we entered into a noncancelable operating lease arrangement with the Special GP for a coal preparation plant and ancillary facilities at Gibson County Coal. This transaction was reviewed and approved by the Conflicts Committee. Under the terms of the lease, the Partnership began making monthly payments commencing January 1, 2001, of approximately $216,000 for 121 months. We may enter into similar arrangements in the future to support the acquisition of additional reserve properties or to develop facilities at our existing mining complexes. OMNIBUS AGREEMENT Concurrent with the closing of the IPO, we entered into an Omnibus Agreement with ARH and the General Partners, which governs potential competition among us and the other parties to this agreement. ARH agreed, and caused its controlled affiliates to agree, for so long as management and funds managed by The Beacon Group and its affiliates control the Managing GP, not to engage in the business of mining, marketing or transporting coal in the U.S. unless it first offers the Partnership the opportunity to engage in a potential activity or acquire a potential business, and the Board of Directors of the Managing GP, with the concurrence of its Conflicts Committee, elects to cause us not to pursue such opportunity or acquisition. In addition, ARH has the ability to purchase businesses, the majority value of which is not mining, marketing or transporting coal, provided ARH offers the Partnership the opportunity to purchase the coal assets following their acquisition. The restriction does not apply to the assets retained and business conducted by ARH at the closing of the IPO. Except as provided above, ARH and its controlled affiliates are prohibited from engaging in activities in which they compete directly with the Partnership. In addition, The Beacon Group, and the funds it manages, are prohibited from owning or engaging in businesses which compete with the Partnership. In addition to its non-competition provisions, this agreement contains provisions which indemnify the Partnership against liabilities associated with certain assets and businesses of ARH which were disposed of or liquidated prior to consummating the IPO. OTHER RELATED TRANSACITONS J.P. Morgan Chase & Co. (Chase) is paying agent, co-administrative agent and a lender under our Credit Facility. In 2000, we made interest payments to Chase on outstanding borrowings and paid Chase customary fees for their other services. We expect that these relationships will continue in 2001. The Beacon Group is an affiliate of Chase. Messrs. MacWilliams and Miller are General Partners of the Beacon Group and Directors of the Managing GP. 58 60 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) Financial Statements. The response to this portion of Item 14 is submitted as a separate section herein under Part II, Item 8 - Financial Statements and Supplementary Data. (a)(2) Financial Statement Schedules. No schedules are required to be presented by Alliance Resource Partners. (a)(3) Index of Exhibits. 3.1 Amended and Restated Agreement of Limited Partnership of Alliance Resource Partners, L.P. (Incorporated by reference to Exhibit 3.1 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999). 3.2 Amended and Restated Agreement of Limited Partnership of Alliance Resource Operating Partners, L.P. (Incorporated by reference to Exhibit 3.2 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999). 3.3 Certificate of Limited Partnership of Alliance Resource Partners, L.P. (Incorporated by reference to Exhibit 3.6 of the Registrant's Registration Statement on Form S-1 filed with the Commission on May 20, 1999). 3.4 Certificate of Limited Partnership of Alliance Resource Operating Partners, L.P. (Incorporated by reference to Exhibit 3.8 of the Registrant's Statement on Form S-1/A filed with the Commission on July 20, 1999). 4.1 Form of Common Unit Certificate (Included as Exhibit A to the Amended and Restated Agreement of Limited Partnership of Alliance Resource Partners, L.P.) 10.1 Credit Agreement, dated as of August 16, 1999, among Alliance Resource GP, LLC, The Chase Manhattan Bank (as paying agent), Deutsche Bank AG, New York Branch (as documentation agent), Citicorp USA, Inc. and The Chase Manhattan Bank (as co-administrative agents) and the lenders named therein. (Incorporated by reference to Exhibit 10.1 of the Registrant's Annual Report 10-K for the year ended December 31, 1999). 10.2 Note Purchase Agreement, dated as of August 16, 1999, among Alliance Resource GP, LLC and the purchasers named therein. (Incorporated by reference to Exhibit 10.2 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999). 10.3 Contribution and Assumption Agreement, dated August 16, 1999, among Alliance Resource Holdings, Inc., Alliance Resource Management GP, LLC, Alliance Resource GP, LLC, Alliance Resource Partners, L.P., Alliance Resource Operating Partners, L.P. and the other parties named therein. (Incorporated by 59 61 reference to Exhibit 10.3 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999). 10.4 Omnibus Agreement, dated August 16, 1999, among Alliance Resource Holdings, Inc., Alliance Resource Management GP, LLC, Alliance Resource GP, LLC and Alliance Resource Partners, L.P. (Incorporated by reference to Exhibit 10.4 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999). 10.5 Alliance Resource Management GP, LLC 2000 Long-Term Incentive Plan (as amended). (Incorporated by reference to Exhibit 10.11 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999). 10.6 Alliance Resource Management GP, LLC Short-Term Incentive Plan. (Incorporated by reference to Exhibit 10.12 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999). 10.7 Restated and Amended Coal Supply Agreement, dated February 1, 1986, among Seminole Electric Cooperative, Inc., Webster County Coal Corporation and White County Coal Corporation. (Incorporated by reference to Exhibit 10.9 of the Registrant's Registration Statement on Form S-1/A filed with the Commission on July 20, 1999). 10.8 Amendment No. 1 to the Restated and Amended Coal Supply Agreement effective April 1, 1996, between MAPCO Coal Inc., Webster County Coal Corporation, White County Coal Corporation, and Seminole Electric Cooperative, Inc. (Incorporated by reference to Exhibit 10.14 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000). 10.9 Interim Coal Supply Agreement effective May 1, 2000, between Alliance Coal, LLC and Seminole Electric Cooperative, Inc. (Incorporated by reference to Exhibit 10.15 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000). 10.10 Contract for Purchase and Sale of Coal, dated January 31, 1995, between Tennessee Valley Authority and Webster County Coal Corporation. (Incorporated by reference to Exhibit 10.10 of the Registrant's Registration Statement on Form S-1/A filed with the Commission on July 20, 1999). 10.11 Assignment/Transfer Agreement between Andalex Resources, Inc., Hopkins County Coal LLC, Webster County Coal Corporation and Tennessee Valley Authority, dated January 23, 1998, with Exhibit A - Contract for Purchase and Sale of Coal between Tennessee Valley Authority and Andalex Resources, Inc., dated January 31, 1995. (Incorporated by reference to Exhibit 10.11 of the Registrant's Registration Statement on Form S-1/A filed with the Commission on July 20, 1999). 10.12 Contract for Purchase and Sale of Coal, dated July 7, 1998, between Tennessee Valley Authority and Webster County Coal Corporation. (Incorporated by reference to Exhibit 10.12 of the Registrant's Registration Statement on Form S-1/A filed with the Commission on July 20, 1999). 60 62 10.13 Contract for Purchase and Sale of Coal, dated July 7, 1998, between Tennessee Valley Authority and White County Coal Corporation. (Incorporated by reference to Exhibit 10.13 of the Registrant's Registration Statement on Form S-1/A filed with the Commission on July 20, 1999). 10.14 Agreement for Supply of Coal to the Mt. Storm Power Station, dated January 15, 1996, between Virginia Electric and Power Company and Mettiki Coal Corporation. (Incorporated by reference to Exhibit 10. (t) to MAPCO Inc.'s Annual Report on Form 10-K, filed April 1, 1996, File No. 1-5254). *10.15 Coal Sales Agreement, dated October 3, 1998, between Pontiki Coal Corporation and A.E.I. Coal Sales, Inc. (Portions of this agreement have been omitted based on a request for confidential treatment. Those omitted portions have been filed with the Securities and Exchange Commission). *10.16 Amendment No. 1 to Coal Sales Agreement dated February 28, 2001, between Pontiki Coal, LLC and AEI Coal Sales Company, Inc. (Portions of this agreement have been omitted based upon a request for confidential treatment. Those omitted portions have been field with the Securities and Exchange Commission). *10.17 Amended and Restated Put and Call Option Agreement dated February 12, 2001 between ARH Warrior Holdings, Inc. and Alliance Resource Partners, L.P. *10.18 Consulting Agreement for Mr. Sachse dated January 1, 2001. 10.19 Form of Employment Agreement for Messrs. Craft, Pearson, Greenwood, Wesley and Rathburn. (Incorporated by reference to Exhibit 10.6 of the Registrant's Registration Statement on Form S-1/A filed with the Commission on August 9, 1999). *21.1 List of Subsidiaries * Filed here within (b) Reports on Form 8-K: None. 61 63 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, in Tulsa, Oklahoma, on March 14, 2001. ALLIANCE RESOURCE PARTNERS, L.P. By: Alliance Resource Management GP, LLC its managing general partner /s/ Michael L. Greenwood ------------------------------------ Michael L. Greenwood Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ Joseph W. Craft III President, Chief Executive March 14, 2001 - --------------------------- Officer and Director Joseph W. Craft III (Principal Executive Officer) /s/ Michael L. Greenwood Senior Vice President, March 14, 2001 - --------------------------- Chief Financial Officer Michael L. Greenwood and Treasurer (Principal Financial Officer and Principal Accounting Officer) /s/ John J. MacWilliams Director March 14, 2001 - --------------------------- John J. MacWilliams /s/ Preston R. Miller, Jr. Director March 14, 2001 - --------------------------- Preston R. Miller, Jr. /s/ John P. Neafsey Director March 14, 2001 - --------------------------- John P. Neafsey /s/ John H. Robinson Director March 14, 2001 - --------------------------- John H. Robinson /s/ Robert G. Sachse Executive Vice President and March 14, 2001 - --------------------------- Director Robert G. Sachse /s/ Paul R. Tregurtha Director March 14, 2001 - --------------------------- Paul R. Tregurtha
62 64 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------ ----------- 3.1 Amended and Restated Agreement of Limited Partnership of Alliance Resource Partners, L.P. (Incorporated by reference to Exhibit 3.1 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999). 3.2 Amended and Restated Agreement of Limited Partnership of Alliance Resource Operating Partners, L.P. (Incorporated by reference to Exhibit 3.2 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999). 3.3 Certificate of Limited Partnership of Alliance Resource Partners, L.P. (Incorporated by reference to Exhibit 3.6 of the Registrant's Registration Statement on Form S-1 filed with the Commission on May 20, 1999). 3.4 Certificate of Limited Partnership of Alliance Resource Operating Partners, L.P. (Incorporated by reference to Exhibit 3.8 of the Registrant's Statement on Form S-1/A filed with the Commission on July 20, 1999). 4.1 Form of Common Unit Certificate (Included as Exhibit A to the Amended and Restated Agreement of Limited Partnership of Alliance Resource Partners, L.P.). 10.1 Credit Agreement, dated as of August 16, 1999, among Alliance Resource GP, LLC, The Chase Manhattan Bank (as paying agent), Deutsche Bank AG, New York Branch (as documentation agent), Citicorp USA, Inc. and The Chase Manhattan Bank (as co-administrative agents) and the lenders named therein. (Incorporated by reference to Exhibit 10.1 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999). 10.2 Note Purchase Agreement, dated as of August 16, 1999, among Alliance Resource GP, LLC and the purchasers named therein. (Incorporated by reference to Exhibit 10.2 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999). 10.3 Contribution and Assumption Agreement, dated August 16, 1999, among Alliance Resource Holdings, Inc., Alliance Resource Management GP, LLC, Alliance Resource GP, LLC, Alliance Resource Partners, L.P., Alliance Resource Operating Partners, L.P. and the other parties named therein. (Incorporated by reference to Exhibit 10.3 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999). 10.4 Omnibus Agreement, dated August 16, 1999, among Alliance Resource Holdings, Inc., Alliance Resource Management GP, LLC, Alliance Resource GP, LLC and Alliance Resource Partners, L.P. (Incorporated by reference to Exhibit 10.4 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999). 10.5 Alliance Resource Management GP, LLC 2000 Long-Term Incentive Plan (as amended). (Incorporated by reference to Exhibit 10.11 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999). 10.6 Alliance Resource Management GP, LLC Short-Term Incentive Plan. (Incorporated by reference to Exhibit 10.12 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999).
63 65 10.7 Restated and Amended Coal Supply Agreement, dated February 1, 1986, among Seminole Electric Cooperative, Inc., Webster County Coal Corporation and White County Coal Corporation. (Incorporated by reference to Exhibit 10.9 of the Registrant's Registration Statement on Form S-1/A filed with the Commission on July 20, 1999). 10.8 Amendment No. 1 to the Restated and Amended Coal Supply Agreement effective April 1, 1996 between MAPCO Coal Inc., Webster County Coal Corporation, White County Coal Corporation, and Seminole Electric Cooperative, Inc. (Incorporated by reference to Exhibit 10.14 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000). 10.9 Interim Coal Supply Agreement effective May 1, 2000 between Alliance Coal, LLC and Seminole Electric Cooperative, Inc. (Incorporated by reference to Exhibit 10.15 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000). 10.10 Contract for Purchase and Sale of Coal, dated January 31, 1995, between Tennessee Valley Authority and Webster County Coal Corporation. (Incorporated by reference to Exhibit 10.10 of the Registrant's Registration Statement on Form S-1/A filed with the Commission on July 20, 1999). 10.11 Assignment/Transfer Agreement between Andalex Resources, Inc., Hopkins County Coal LLC, Webster County Coal Corporation and Tennessee Valley Authority, dated January 23, 1998, with Exhibit A - Contract for Purchase and Sale of Coal between Tennessee Valley Authority and Andalex Resources, Inc., dated January 31, 1995. (Incorporated by reference to Exhibit 10.11 of the Registration Statement on Form S-1/A filed with the Commission on July 20, 1999). 10.12 Contract for Purchase and Sale of Coal, dated July 7, 1998, between Tennessee Valley Authority and Webster County Coal Corporation. (Incorporated by reference to Exhibit 10.12 of the Registrant's Registration Statement on Form S-1/A filed with the Commission on July 20, 1999). 10.13 Contract for Purchase and Sale of Coal, dated July 7, 1998, between Tennessee Valley Authority and White County Coal Corporation. (Incorporated by reference to Exhibit 10.13 of the Registrant's Registration Statement on Form S-1/A filed with the Commission on July 20, 1999). 10.14 Agreement for Supply of Coal to the Mt. Storm Power Station, dated January 15, 1996, between Virginia Electric and Power Company and Mettiki Coal Corporation. (Incorporated by reference to Exhibit 10. (t) to MAPCO Inc.'s Annual Report on Form 10-K, filed April 1, 1996, File No. 1-5254). *10.15 Coal Sales Agreement, dated October 3, 1998, between Pontiki Coal Corporation and A.E.I. Coal Sales, Inc. (Portions of this agreement have been omitted based on a request for confidential treatment. Those omitted portions have been filed with the Securities and Exchange Commission). *10.16 Amendment No. 1 to Coal Sales Agreement dated February 28, 2001, between Pontiki Coal, LLC and AEI Coal Sales Company, Inc. (Portions of this agreement have been omitted based on a request for confidential treatment. Those omitted portions have been filed with the Securities and Exchange Commission). *10.17 Amended and Restated Put and Call Option Agreement dated February 12, 2001 between ARH Warrior Holdings, Inc. and Alliance Resource Partners, L.P.
64 66 *10.18 Consulting Agreement for Mr. Sachse dated January 1, 2001. 10.19 Form of Employment Agreement for Messrs. Craft, Pearson, Greenwood, Wesley and Rathburn. (Incorporated by reference to Exhibit 10.6 of the Registrant's Registration Statement on Form S-1/A filed with the Commission on August 9, 1999). *21.1 List of Subsidiaries.
*Filed here within 65 EX-10.15 2 h85211ex10-15.txt COAL SALES AGREEMENT 1 EXHIBIT 10.15 CONFIDENTIAL TREATMENT REQUESTED PONTIKI COAL CORPORATION COAL SALES AGREEMENT Administrative Offices: 1717 South Boulder Avenue, Tulsa Oklahoma 74119-4886 Correspondence: P.O. Box 22027, Tulsa OK 74121-2027 Phone: 918-592-7262 // Fax: 918-582-8421 SALES AGREEMENT NO. ISSUE DATE SALESMAN PON98-01 03 October 1998 Gary J. Rathburn BUYER: A.E.I. Coal Sales, Inc. SELLER: Pontiki Coal Corporation 1500 N. Big Run Road P.O. Box 801, Route 1401 Ashland, KY 41102 Lovely, KY 41231 606-395-5348 (phone) 606-395-5529 (fax) SHIP TO: ***** INVOICE TO: A.E.I. Coal Sales, Inc. As directed by Buyer Attn: Accounts Payable 1500 N. Big Run Road Ashland, KY 41102
SELLER'S AGENT: Seller has appointed MAPCO Coal Sales, a division of MAPCO Coal Inc., to act as Seller's Agent for administration of this Agreement. ORIGIN POINT: Pontiki Coal Corporation, Pontiki Mine TERM OF ORDER: ***** thru ***** ***** Year Agreement QUANTITY: ***** Net Tons ***** -- ***** ***** nt per year ***** net tons firm per year ***** thru *****. Starting *****, Seller has the option to increase quarterly shipments by ***** net tons per quarter up to a maximum of ***** tons per year. Seller must give Buyer notice to sell an additional ***** net tons/quarter ***** days in advance of the 1st day of each contract quarter. Failure to do so relieves Buyer of any responsibility to take additional coal in that contract quarter. - ---------- ****** denotes confidential information with respect to which a separate confidential treatment request has been filed with the Securities and Exchange Commission. 2 ROUTING: Norfolk Southern Rail Direct - Responsibility of Buyer SCHEDULE: In accordance with the *****/Marrowbone contract as Attachment B. PONTIKI COAL CORPORATION Coal Sales Agreement page 2 Sales Agreement No: PON98-01 Issued: 03Oct98 Salesman: Gary J. Rathburn DELIVERY POINT: F.O.B. Pontiki Mine in Railcars PRICE: Pontiki Mine ***** thru ***** Invoice Price F.O.B. Railcars at Mine $***** /Net Ton ***** thru ***** Invoice Price F.O.B. Railcars at Mine $***** /Net Ton ***** thru ***** Invoice Price F.O.B. Railcars at Mine $***** /Net Ton ***** thru ***** Invoice Price F.O.B. Railcars at Mine $***** /Net Ton ***** thru ***** Invoice Price F.O.B. Railcars at Mine $***** /Net Ton ***** thru ***** Invoice Price F.O.B. Railcars at Mine $***** /Net Ton ***** thru ***** Invoice Price F.O.B. Railcars at Mine $***** /Net Ton ***** thru ***** Invoice Price F.O.B. Railcars at Mine $***** /Net Ton
During the winter months Seller will provide freezeproofing upon request. Buyer will reimburse Seller at Seller's cost. TYPE OF COAL: Steam Nutslack Coal
QUALITY SPECIFICATIONS: Minimum Maximum Typical Condition - ----------------------- ------- ------- ------- --------- Pontiki Mine BTU *****/lb *****/lb As Received MOISTURE *****% As Received ASH *****% As Received SO2/MMBTU *****# As Received
Size: 2" x 0" Above mine specs apply on a monthly weighted average basis, except as otherwise provided in Attachment A. The coal shall comply with all other quality specifications set forth in Attachment A. SAMPLING AND ANALYSIS: Sampling & analysis in accordance with Attachment A. PREMIUM/PENALTY PROVISIONS: Calculated on monthly weighted average. Fractions pro rata. Btu: Premium/Penalty of $*****/nt for each ***** btu above/below *****. $***** x ((Actual - *****) / *****) x tons received under PO = Adjustment Payment to be mailed on or before the 25th of the month following the month the coal was received. Seller to invoice Buyer separately for quality adjustments. 3 See Attachment A for additional premium/penalty provisions. WEIGHT DETERMINATION: Railroad Weight Certificates as provided by Buyer at destination. PONTIKI COAL CORPORATION Coal Sales Agreement page 3 Sales Agreement No: PON98-01 Issued: 03Oct98 Salesman: Gary J. Rathburn PAYMENT TERMS: Coal Received 01st - 15th due 10th of next month 16th - 31st due 25th of next month Payment remittance may come directly from Buyer or *****. If payment by check to: MAPCO Coal Sales, P.O. Box 70374, Chicago IL 60673 (MAPCO Coal Sales serving in capacity as Sales Agent for Pontiki Coal Corporation.) If payment by wire to: First National Bank of Chicago, Chicago IL, ABA number 071000013, MAPCO Coal account number 55-63968. GOVERNMENTAL ACTION: Seller will receive the benefit of Buyer's Governmental Action Clause with Customer. ENTIRE AGREEMENT. It is agreed that the terms set forth hereinabove and in Attachments A and B attached hereto constitute the entire agreement between Buyer and Seller with respect to the subject coal and that all other Agreements, both oral and written, with respect to the subject coal made prior to the date hereof are merged herein and no modification or assignment shall be effective unless agreed to in writing. ACCEPTED AND AGREED TO: ACCEPTED AND AGREED TO: BY: /s/ Marc Merritt BY: /s/ Gary Rathburn ------------------------ --------------------------- DATE: 10/14/98 DATE: 10/3/98 ------------------------ --------------------------- TITLE: President TITLE: Senior V.P. - Marketing -------------------- --------------------------- BUYER: A.E.I. COAL SALES, INC. SELLER: PONTIKI COAL CORPORATION 4 Attachment A to Pontiki Coal Sales Agreement OTHER TERMS AND CONDITIONS 1. TESTING. The coal shall be analyzed in accordance with ASTM procedures at Seller's cost. The resulting analysis will determine the quality of coal delivered under this Agreement. A portion (split) of samples taken by Seller shall be sent to Buyer. A portion (referee split) of each sample shall be retained for a period of thirty (30) days after the end of the month in which the samples were taken. Seller will notify Buyer of sample analysis within 24 hours. 5 2. RISK OF LOSS. Upon completion of unloading of a railcar, the risk of loss of coal in that railcar shall be Buyer's. 3. EXPRESS WARRANTIES. Seller warrants that Buyer shall receive good title to all coal delivered hereunder and Buyer agrees that Seller makes no other express warranties except those identified in the quality provisions of the Agreement. 4. IMPLIED WARRANTIES. All warranties of merchantability or of fitness for a particular purpose or arising from a course of dealing or usage of trade are specifically excluded. 5. LIMITATION OF LIABILITY. In no event shall either party be liable to the other for incidental or consequential damages in respect to the coal delivered under this Agreement. 6. EXCUSE. "Force majeure" includes war, fire, flood, strike, railroad car shortage, labor disruption, force majeure affecting Seller's suppliers and Buyer's customers, accident, riot, acts of God, acts or orders of federal or state government and any contingencies of like or different character beyond the reasonable control of either party which directly interferes with the production, supply or transportation of the coal to be delivered and accepted under this Agreement. The parties shall be excused from their performance of any obligation under this Agreement when the proximate cause of such nonperformance is a circumstance of force majeure, except that a Buyer shall not be excused from accepting and paying-for coal already shipped or delivered by Seller. In the event the party claiming force majeure gives to the other prompt written notice of such force majeure, the obligations of the notifying party so far as they are affected by the circumstance of force majeure shall be suspended during, but for no longer than, the continuation of the force majeure circumstance. Deliveries of coal excused by a circumstance of force majeure shall resume upon removal of the force majeure condition. 7. ASSIGNMENT. Neither Seller nor Buyer may assign the rights or delegate the obligations created by this Agreement without the express written consent of the other party, such consent not to be unreasonably withheld. 8. NONWAIVER. Failure of either party at the time to require performance of terms and conditions of this Agreement shall not limit that party's right to enforce the provisions of this Agreement, or shall any waiver of any breach of any provision be a waiver of any succeeding breach of the provision itself or of any other provision. 9. GOVERNING LAW. This Agreement shall be construed and enforced according to the laws of Kentucky. Subject to Section 16 below, any lawsuit or legal proceeding that arises under or by reason of this Agreement shall have its venue in Federal or State court in Kentucky. 10. REMEDIES CUMULATIVE. Except as specifically provided, each remedy under this Agreement is in addition to any other remedy provided in this Agreement or by law, including, but not limited to, actions for specific performance. 6 11. SUCCESSORS. This Agreement shall bind and inure to the benefit of the parties and their respective successors and assigns. 12. ATTORNEY'S FEES. If either party commences any legal action or suit arising out of this Agreement, the prevailing party in such action or suit shall be entitled to recover reasonable attorneys' fees and expenses, including fees and expenses on appeal and petition for review, as determined by the appropriate court. In the event that different parties prevail on different issues in the legal action or suit, the parties may choose to (a) pay their own attorney's fees and expenses or, (b) reasonably allocate the costs associated with each issue. 13. ADDITIONAL PENALTY/PREMIUM PROVISIONS. Moisture If the weighted average moisture content calculated on a per purchase order basis exceeds *****%, a price adjustment of $***** per ton per percentage point (fractions pro rata) will be credited to Buyer for all tons shipped that month. If the weighted average moisture content of any trainload shipment of coal exceeds *****%, a price adjustment of $***** per ton will be credited to Buyer for all tons in such trainload shipment. Grindability if the weighted average grindability calculated on a per purchase order basis is less than *****, a price adjustment of $***** per ton per grind point (fractions pro rata) will be credited to Buyer for all tons shipped that month. If the grindability of any trainload shipment of coal is less than *****, a price adjustment of $***** per ton will be credited to Buyer for all tons on such trainload shipment. Ash If the weighted average ash content calculated on a per purchase order basis exceeds *****%, a price adjustment of $***** per ton per percentage point (fractions pro rata) will be credited to Buyer for all tons shipped under that purchase order. If the ash content of any trainload shipment of coal exceeds *****%, a price adjustment of $***** per ton will be credited to Buyer for all tons in such trainload shipment. SO(2) In no event shall any individual trainload shipment have sulfur in excess of ***** lbs. SO(2)/MMBtu. Seller agrees to notify Buyer if any shipment of coal hereunder exceeds ***** lbs. SO(2)/MMBtu within twenty-four (24) hours after it is loaded. Buyer shall have the right to reject or reconsign such shipment, at Seller's expense. In the event that a trainload shipment of coal is rejected by Buyer, Seller shall reimburse Buyer for its actual costs incurred including transportation from the mine to destination. ***** will not unload any trainload shipment delivered hereunder until it has received Seller's analysis reflecting a sulfur content of ***** pounds SO(2)/MMBtu or less. Seller agrees to reimburse Buyer for any demurrage incurred by ***** as a result of its holding any trainload shipment while awaiting receipt of such analysis. 14. For each shipment of coal, Seller will promptly forward to Buyer an invoice specifying the date shipped, weight of the shipment and the invoice amount. Interest will be charged on past due accounts at the rate per annum equal to the prime rate charged by Chemical Bank of New York on the date payment is due, or the highest rate of interest allowed by applicable law, whichever is lower. Noncompliance with said terms of payment shall give the Seller the right to suspend further shipments until payment is made for all previous shipments. Further, in the event of non-compliance by AEI Resources, Inc. with its obligations under its guaranty of this 7 Agreement, the Seller shall have the right to suspend further shipments until adequate security for payment is furnished or, if such security is not promptly furnished and thereafter maintained, to cancel this Agreement with respect to shipments not made. The foregoing remedies of Seller are not to be considered exclusive but shall be cumulative and be in addition to any other remedies in favor of Seller as provided herein or by law. 15. Seller may, but shall not be required to, supply coal from other sources which conforms to the coal quality requirements of this Agreement. The cost of such substitute coal shall not exceed the delivered cost per ton for coal to be supplied from the source mine shown on the face of this Agreement. Any substitute coal that Seller may provide shall be sold to Buyer under the same terms and conditions of this Agreement. Seller's right to furnish substitute coal shall not affect its right to claim force majeure excuse because of events occurring at the mine. Buyer has the right to approve such substitute coal, which approval shall not be unreasonably withheld. 16. All claims, demands, disputes, controversies, and differences that may arise between the parties hereto that cannot be settled between the parties shall be finally resolved by arbitration pursuant to the commercial rules of the American Arbitration Association governing such proceeding which is to be held and conducted before a panel of three (3) arbitrators in Lexington, Kentucky. A decision of the majority of the arbitrators shall be binding upon the parties hereto. 17. This Agreement shall be construed and enforced in accordance with the laws of Kentucky. 18. All remedial and payment obligations of the parties provided herein shall survive the termination, cancellation or expiration of this Agreement. October 3, 1998 Attachment B to Pontiki Coal Sales Agreement (a) (1) On or prior to December 1 of each calendar year during the term hereof, Seller shall provide Buyer with a tentative schedule of monthly coal shipments during 8 the ensuing calendar year. Buyer shall promptly review this schedule and notify Seller of any modifications within ten (10) business days of receipt. Buyer and Seller shall then agree on the tentative monthly shipping schedule for the ensuing calendar year on or prior to December 20. (2) Buyer shall specify to Seller on or prior to the twenty-fifth day of each calendar month during the term hereof the dates and destinations for shipments to be made hereunder in the next succeeding calendar month; provided, however, that Buyer reserves the right to change the destination of such shipments at any time. (b) The term "ton" as used herein shall mean a net ton of two thousand pounds, avoirdupoi weight. (c) Seller will load coal sold hereunder pursuant to trainload or other applicable tariffs (and supplements) established by the railroad that will haul the coal, and such other tariffs as may evolve that are mutually acceptable to Buyer, Seller and the railroad. Loading of trains at the rate of at least 10,000 tons in a 4-hour period will be performed by Seller, exclusive of holidays, in accordance with the provisions of applicable freight tariffs. (d) Buyer and Seller shall mutually arrange for the necessary rail cars to make the specified deliveries and Seller shall cause the coal to be loaded in a manner that will assure reasonably uniform consistency as to size and quality. Seller shall cause each rail car to be loaded to full visible capacity, and shall reimburse Buyer for any penalty and freight charges resulting from deficits in carload minimum weight. Seller shall pay any costs of demurrage or storage at the shipping points not caused by Buyer. EX-10.16 3 h85211ex10-16.txt AMENDMENT NO.1 TO COAL SALES AGREEMENT 1 EXHIBIT 10.16 CONFIDENTIAL TREATMENT REQUESTED AMENDMENT NO. 1 TO COAL SALES AGREEMENT This AMENDMENT NO. 1 TO COAL SALES AGREEMENT (this "Amendment") dated February 28, 2001, by and between PONTIKI COAL, LLC, a Delaware limited liability company, successor by merger to Pontiki Coal Corporation ("Seller"), and AEI COAL SALES COMPANY, INC., a Kentucky corporation ("Buyer"). RECITALS A. Buyer and Seller are parties to that certain Coal Sales Agreement #PON98-01, dated October 3, 1998 (the "Agreement"). Capitalized terms not otherwise defined herein shall have the meaning set forth in the Agreement. B. Buyer and Seller wish to amend certain provisions of the Agreement, as set forth herein. NOW, THEREFORE, in consideration of the mutual promises hereby made, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Amendments. The Agreement is hereby amended as follows: (a) All references in the Agreement to "Pontiki Coal Corporation" are hereby deleted in their entirety and replaced with "Pontiki Coal, LLC." (b) All references in the Agreement to "MAPCO Coal Sales" and "MAPCO Coal Sales, a division of MAPCO Coal, Inc." are hereby deleted in their entirety and replaced with "Alliance Coal Sales, a division of Alliance Coal, LLC." (c) All references in the Agreement to "A.E.I. Coal Sales, Inc." are hereby deleted in their entirety and replaced with "AEI Coal Sales Company, Inc." (d) A second sentence is hereby added to the "QUANTITY" section of the Agreement as follows: "Notwithstanding anything else contained in this Agreement, in addition to the ***** net tons currently committed to be delivered during *****, Seller shall deliver an additional ***** net tons ratably over the last ***** of said year. The purchase price for said tons shall be $***** per net ton if paid via ***** Payment, or $***** per net ton if Seller has exercised its option for Buyer to pay via ***** Payment pursuant to Section 1(e) of this Amendment, and the Btu specifications for said tons shall be the amended Btu specifications set forth in this Amendment." - ---------- *****denotes confidential information with respect to which a separate confidential treatment request has been filed with the Securities and Exchange Commission. 2 (e) The section of the Agreement entitled "PRICE" is hereby deleted in its entirety and replaced with the following: "PRICE/PAYMENT: Seller shall have the option (exercisable in accordance with the next two sentences) to require payment by Buyer by (a) ***** or (b) *****; provided, however, that nothing herein shall abrogate Seller's rights at law or equity, including under KRS Section *****. "***** PRICE: Pontiki Mine ***** thru ***** Invoice Price FOB Railcars at Mine $***** ***** thru ***** Invoice Price FOB Railcars at Mine $***** ***** thru ***** Invoice Price FOB Railcars at Mine $***** ***** thru ***** Invoice Price FOB Railcars at Mine $***** ***** thru ***** Invoice Price FOB Railcars at Mine $***** ***** thru ***** Invoice Price FOB Railcars at Mine $***** "***** PRICE: Pontiki Mine ***** thru ***** Invoice Price FOB Railcars at Mine $***** ***** thru ***** Invoice Price FOB Railcars at Mine $***** ***** thru ***** Invoice Price FOB Railcars at Mine $***** ***** thru ***** Invoice Price FOB Railcars at Mine $***** ***** thru ***** Invoice Price FOB Railcars at Mine $***** ***** thru ***** Invoice Price FOB Railcars at Mine $*****
***** Seller's wire account instructions are as follows: Alliance Coal, LLC c/o Bank One, NA. Chicago, IL ABA No. 071000013 Account No. 55-63968. Remittance may come directly from Buyer, *****, ***** or other customers of Buyer acceptable to Seller. ***** (f) The section of the Agreement entitled "QUALITY SPECIFICATIONS" is hereby deleted in its entirety and replaced with the following:
"QUALITY SPECIFICATIONS: Minimum Maximum Typical Condition - ------------------------ Pontiki Mine BTU *****/LB *****/LB As Received Moisture *****% As Received Ash *****% As Received S02/MMBtu *****LB As Received
2 3 Size: 2" x 0" Above mine specs apply on a monthly weighted average basis, except as otherwise provided in Attachment A. The coal shall comply with all other quality specifications set forth in Attachment A." (g) The section of the Agreement entitled "PREMIUM/PENALTY PROVISIONS" is hereby deleted in its entirety and replaced with the following: "PREMIUM/PENALTY AND TONNAGE ADJUSTMENT PROVISIONS: Quality adjustments calculated on semi-monthly weighted average. Fractions pro rata. Btu: Premium/Penalty of $*****/nt for each ***** Btu above/below *****. $***** x ((Actual-*****) / *****) x tons received = Adjustment. ***** Seller shall invoice Buyer for quality adjustments and estimate-to-actual tonnage adjustments with shipment dates and actual weights. See Attachment A for additional premium/penalty provisions." (h) The section of the Agreement entitled "PAYMENT TERMS" is hereby deleted in its entirety and not replaced. (i) The section of the Agreement entitled "GOVERNMENT ACTION" is hereby deleted in its entirety and replaced with the following: "GOVERNMENTAL ACTION: Seller will receive the benefit of Buyer's Governmental Action Clause with Customer, a copy of which is attached as Exhibit A hereto and incorporated herein by reference." (j) Section 2 of Attachment A is hereby deleted in its entirety and replaced with the following: "2. RISK OF LOSS. Upon completion of loading of a railcar, the risk of loss of coal in that railcar shall be Buyer's." (k) The last sentence of Section 6 of Attachment A is hereby deleted in its entirety and replaced with the following: "Deliveries of coal excused by a circumstance of force majeure shall not be made up unless mutually agreed upon by the parties hereto. (l) The subsection of Section 13 of Attachment A entitled "SO(2)" is hereby deleted in its entirety and replaced with the following: "S02. In no event shall any individual trainload shipment have sulfur in excess of ***** lbs. S02/MMBtu. Seller agrees to notify Buyer if any shipment of coal hereunder exceeds ***** lbs. S02/MMBtu within twenty-four (24) hours after it is loaded. Buyer shall have the right to reject or re-consign such shipment, at Seller's expense, in which event Seller shall reimburse Buyer for its actual costs incurred including, but not limited 3 4 to, rail transportation, diversion, rerouting and railcar demurrage; provided, however, that Buyer shall use commercially reasonable efforts to mitigate any such costs. In the event that Buyer and Buyer's customer accept the shipment and Buyer incurs penalties for excess S02/MMBtu from Buyer's customer, Seller shall reimburse Buyer any costs incurred in connection with such penalties including the cost of providing emission allowances; provided, however, that Buyer shall use commercially reasonable efforts to mitigate any such costs. Notwithstanding anything to the contrary set forth within this paragraph, before Buyer rejects or re-consigns a shipment or Buyer accepts the shipment and incurs penalties for excess S02/MMBtu from Buyer's customer, Buyer shall notify Seller of Buyer's intention to reject, re-consign or incur penalties, and Seller shall have the right to either (i) re-purchase the shipment from Buyer and immediately pay Buyer by wire transfer the payment Seller previously received from Buyer for such shipment or (ii) reduce Buyer's accounts receivable account balance for the value of such shipment if payment has not already been received by Seller from Buyer for such shipment, after which, in either case of (i) or (ii), Seller shall regain title to and have the right to re-consign said shipment. Seller shall reimburse Buyer for its actual rail related transportation costs (if any) incurred set forth hereinabove within this paragraph as a result of Seller re-consigning any such shipment, which re-consignment shall be at Seller's expense." (m) Section 15 of Attachment A is hereby deleted in its entirety and replaced with the following: "Seller may, but shall not be required to, supply coal from other sources that conform to the coal quality requirements of the Agreement, provided that Seller shall give Buyer at least forty-five (45) days prior notice thereof. The cost of such substitute coal shall not exceed the delivered cost per ton for coal to be supplied from the source mine shown on the face of this Agreement, and Seller shall bear any increased transportation costs. Any substitute coal that Seller may provide shall be sold to Buyer under the same terms and conditions of this Agreement. Seller's right to furnish substitute coal shall not affect it right to claim force majeure because of events occurring at the mine." (n) Section 17 of Attachment A is hereby deleted in its entirety and replaced with the following: "17. No Defaults. The parties hereto mutually acknowledge and agree that: (a) as of the date of this Amendment no condition exists which, with the giving of notice or the lapse of time or both, would constitute a default under the Agreement; and (b) all amounts due and owing under this Agreement as of the date hereof have been satisfied by the party responsible for such payments (other than with respect to payments for any premium or penalty adjustments still outstanding in the ordinary course of business)." (o) Section (a)(1) of Attachment B to the Agreement is hereby deleted in its entirety and replaced with the following: "(1) On or prior to the first (1st) day of each calendar month during the term hereof, Seller shall provide Buyer with a tentative schedule of monthly coal shipments during the next calendar month. Buyer 4 5 shall promptly review this schedule and notify Seller of any modifications within ten (10) business days of receipt. Buyer and Seller shall then agree on the tentative monthly shipping schedule for the next calendar month on or prior to the twentieth (20th) day of such calendar month." 2. Conflicting Language. To the extent that any language contained in the Agreement conflicts with any language contained in this Amendment, the language contained in this Amendment shall control. 3. Counterparts. The Amendment may be executed in any number of counterparts, including by means of facsimile, each of which shall be an original, but all of which together shall constitute one and the same instrument. 4. Ratification As Amended. Except as amended by this Amendment, the Agreement remains unchanged and in full force and effect. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 5 6 IN WITNESS WHEREOF, the parties hereto have executed and delivered this Amendment as of the date first set forth above. SELLER: PONTIKI COAL, LLC By: /s/ GARY J. RATHBURN ------------------------------------- Name: Gary J. Rathburn ---------------------------------- Title: Senior Vice President - Marketing --------------------------------- BUYER: AEI COAL SALES COMPANY, INC. By: /s/ MARC MERRITT ---------------------------------- Name: Marc Merritt --------------------------------- Title: President --------------------------------- 6 7 CONFIDENTIAL TREATMENT REQUESTED EXHIBIT A--GOVERNMENTAL ACTION CLAUSE 5.2 Buyer and Sellers recognize that the prices set forth in Paragraph 5.1 may require adjustment, either increase or decrease, because of the imposition of federal or state legislation or regulation after July 1, 1996, or any changes in the interpretation and enforcement of existing federal or state requirements after July 1, 1996, that impose or change a tax, assessment or other governmental charge based on the volume of tons produced or the price of coal sold by Sellers under this Agreement. In the event of such an imposition, either party may submit to the other party detailed documentation of the proposed price adjustment, and Sellers and Buyer shall meet to discuss and attempt to agree upon an adjustment to reflect the actual change in Sellers' costs. In the event that Sellers elect to supply coal from sources other than Marrowbone, the provisions of this Paragraph 5.2 shall only apply to the price of coal from such sources if (i) Sellers purchase such coal for resale to Buyer under a contract with a term of at least one (1) year, and (ii) the contract between Sellers and the supplier of such coal provides for the payment by Sellers to the supplier of the types of costs described in this Paragraph 5.2, including any such costs in effect at the time Sellers execute a contract for the purchase of coal from such sources. In the event that Sellers elect to blend coal subject to price adjustments pursuant to this Paragraph 5.2 with other coals, only the price for the percentage of such coal supplied to Sellers that is subject to this Paragraph 5.2 shall be adjusted. In the event Sellers and Buyer are unable to agree as to the amount the price per ton should be increased or decreased, then the matter shall be submitted to an independent third party experienced in the matters in question that is acceptable to both Sellers and Buyer. The cost of such third party shall be borne equally by Buyer and Sellers. The price increase or decrease per ton, as determined by the independent third party, shall be binding on both Sellers and Buyer; provided, however, that any increase shall not exceed the amount previously proposed by Sellers, and any decrease shall not exceed the amount previously proposed by Buyer. In the event a third party cannot be agreed upon, the provisions of Paragraph 18.0, Third Party Selection shall apply. 18.0 Third Party Selection. In the event that the parties are unable to agree upon an independent third party to resolve matters referenced in Paragraphs 5.2, 7.4, and/or 8.3, the Center for Public Resources, New York, shall appoint an independent third party qualified in such matters to render a binding decision regarding any such disagreement pursuant to these three Paragraphs. 7 EX-10.17 4 h85211ex10-17.txt AMENDED & RESTATED PUT AND CALL OPTION AGREEMENT 1 EXHIBIT 10.17 AMENDED AND RESTATED PUT AND CALL OPTION AGREEMENT AMENDED AND RESTATED PUT AND CALL OPTION AGREEMENT, dated as of February 12, 2001 (the "Agreement"), between ARH WARRIOR HOLDINGS, INC., a Delaware corporation ("AWH"), and ALLIANCE RESOURCE PARTNERS, L.P., a Delaware limited partnership (the "MLP"), amending and restating that certain Put and Call Option Agreement, dated as of January 26, 2001 (the "Original Put and Call Agreement"), between AWH and the MLP. WITNESSETH: WHEREAS, AWH has formed Warrior Coal, LLC, a Delaware limited liability company ("Warrior Coal"), and owns all of the limited liability company member interests in and to Warrior Coal; and WHEREAS, contemporaneously with the execution and delivery of the Original Put and Call Agreement, Warrior Coal entered into (i) a Stock Purchase and Sale Agreement, dated as of the date hereof (the "Stock Purchase Agreement"), among Warrior Coal, as purchaser, and David Roberts, Paul Roberts and Julie Hober, as sellers, pursuant to which Warrior Coal purchased all of the issued and outstanding shares of capital stock of Warrior Coal Corporation ("WCC"), Warrior Coal Mining Company ("WCMC") and Roberts Bros. Coal Co., Inc. ("RBCC"), and (ii) an Asset Purchase and Sale Agreement, dated as of the date hereof (the "Asset Purchase Agreement"), among Warrior Coal, as purchaser, and Christian Coal Corp. and Richland Mining Co., Inc., as sellers, pursuant to which Warrior Coal purchased certain assets, and assumed certain liabilities, of Christian Coal Corp. and Richland Mining Co., Inc.; WHEREAS, contemporaneously with the execution and delivery of the Original Put and Call Agreement, SGP Land, LLC ("SGP Land") entered into an Asset Purchase and Sale Agreement, dated as of the date hereof (as the same may be amended, modified or supplemented from time to time in accordance with the terms thereof, the "Cardinal Asset Purchase Agreement"), between SGP Land, as purchaser, and Cardinal Trust, LLC ("Cardinal Trust"), as seller, pursuant to which SGP Land purchased certain assets and assumed certain liabilities of Cardinal Trust; WHEREAS, AWH has contributed capital to Warrior Coal for the purpose of financing the acquisitions contemplated by the Stock Purchase Agreement and the Asset Purchase Agreement; WHEREAS, contemporaneously with the execution and delivery of the Stock Purchase Agreement and the Asset Purchase Agreement, AWH and the MLP entered into the Original Put and Call Agreement, pursuant to which (i) AWH acquired the right to put to the MLP during a specified period, and the MLP became obligated to purchase from AWH, all of AWH's limited liability company interests in and to Warrior Coal, upon the terms and conditions set forth therein, and (ii) the MLP acquired the right to call from AWH during a specified period, and 2 AWH became obligated to sell to the MLP, all of AWH's limited liability company interests in and to Warrior Coal, upon the terms and conditions set forth therein; and WHEREAS, AWH and the MLP desire to amend and restate the Original Put and Call Agreement in its entirety upon the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the mutual agreements contained herein and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, AWH and the MLP hereby agree as follows: Section 1. Definitions. Where used in this Agreement, the following terms shall have the meanings set forth in this Section 1 (such meanings to be, when appropriate, equally applicable to both the singular and plural forms of the terms defined): "Asset Purchase Agreement" shall have the meaning specified in the second Whereas clause hereof. "AWH" shall have the meaning specified in the preamble hereof. "Call Option" means the right of the MLP to purchase from AWH and to cause AWH to sell to the MLP (or its designee) Warrior Coal, as contemplated by Section 3 hereof. "Call Option Period" shall mean the period from and including April 12, 2003 to and including December 31, 2006. "Call Option Price" means the sum of (i) $10,000,000.00, (ii) an amount of interest equal to the product of (x) the amount set forth in clause (i) hereof multiplied by (y) twelve percent (12%) per annum, compounded annually (determined based on a 360-day year, actual days elapsed from January 26, 2001 up to (but not including) the date on which the purchase and sale of Warrior Coal shall be consummated in connection with the exercise of the Call Option), and (iii) an amount equal to the product of (x) the amount determined pursuant to clause (ii) hereof and (y) twenty-five percent (25%). "Capital Lease" means, at any time, a lease with respect to which the lessee is required concurrently to recognize the acquisition of an asset and the incurrence of a liability in accordance with GAAP. "Capital Lease Obligation" means, with respect to Warrior Coal or any Subsidiary thereof and a Capital Lease, the amount of the obligation of Warrior Coal or such Subsidiary as the lessee under such Capital Lease which would, in accordance with GAAP, appear as a liability on a balance sheet of Warrior Coal or such Subsidiary. "Cardinal Asset Purchase Agreement" shall have the meaning specified in the third Whereas clause hereof. 2 3 "Cardinal Trust" shall have the meaning specified in the third Whereas clause hereof. "Consolidated Subsidiary" means, with respect to any Person at any time, any Subsidiary the accounts of which would be consolidated with those of such first Person in its consolidated financial statements in accordance with GAAP. "Debt" means, with respect to any Person, without duplication, (a) its liabilities for borrowed money; (b) its liabilities for the deferred purchase price of property acquired by it (excluding accounts payable arising in the ordinary course of business but including, without limitation, all liabilities created or arising under any conditional sale or other title retention agreement with respect to any such property); (c) its Capital Lease Obligations; (d) all liabilities secured by any Lien with respect to any property owned by such Person (whether or not it has assumed or otherwise become liable for such liabilities); (e) all its liabilities in respect of letters of credit or instruments serving a similar function issued or accepted for its account by banks or other financial institutions (whether or not representing obligations for borrowed money), other than any thereof incurred in the ordinary course of business of such Person and which are issued (i) to support such Person's obligations in respect of workmen's compensation or unemployment insurance laws, the payment or retirement benefits or performance guarantees relating to coal deliveries or insurance deductibles and aggregating, in the case of Warrior Coal and its Subsidiaries, no more than $2,000,000 at any time outstanding for all of the foregoing or (ii) in respect of current trade payables of such Person; and (f) any Guaranty of such Person with respect to liabilities of a type described in any of clauses (a) through (e) hereof. Debt of such Person shall include all obligations of such Person of the character described in clauses (a) through (f) to the extent such Person remains legally liable in respect thereof notwithstanding that any such obligation is deemed to be extinguished under GAAP. "GAAP" means generally accepted accounting principles consistently applied in the United States. 3 4 "Guaranty" and, with correlative meaning, "Guaranteed" means, with respect to any Person, any obligation (except the endorsement in the ordinary course of business of negotiable instruments for deposit or collection) of such Person guaranteeing or in effect guaranteeing any Debt of any other Person in any manner, whether directly or indirectly, including (without limitation) obligations incurred through an agreement, contingent or otherwise, by such person: (a) to purchase such Debt or any property constituting security therefor; (b) to advance or supply funds (i) for the purchase or payment of such Debt, or (ii) to maintain any working capital or other balance sheet condition or any income statement condition of any other person or otherwise to advance or make available funds of the purchase or payment of such Debt; (c) to lease properties or to purchase properties or services primarily for the purpose of assuring the owner of such Debt of the ability of any other person to make payment of the Debt; or (d) otherwise to assure the owner of such Debt against loss in respect thereof. In any computation of the Debt of the obligor under any Guaranty, the Debt that is the subject of such Guaranty shall be assumed to be a direct obligation of such obligor. The amount of any Guaranty shall be equal to the outstanding amount of the Debt guaranteed, or such lesser amount to which the maximum exposure of such person shall have been specifically limited. "Inventory" means inventory held for sale or lease in the ordinary course of business. "Lien" means, with respect to any Person, any mortgage, lien, pledge, charge, security interest, production payment or other encumbrance, or any interest or title of any vendor, lessor, lender or other secured party to or of such Person under any conditional sale or other title retention agreement or Capital Lease, upon or with respect to any property or asset of such Person (including in the case of stock, stockholder agreements, voting trust agreements and all similar arrangements); provided, however, "Lien" shall not include any of the following: (i) any negative pledge, or (ii) any royalty interest or overriding royalty interest under any lease, sublease or other similar agreement entered into in the ordinary course of business. "Material Adverse Effect" means a material adverse effect on the business, operations, affairs, financial condition, assets or properties of Warrior Coal and its Subsidiaries, taken as a whole (unless the context shall expressly require otherwise). 4 5 "Original Put and Call Agreement" shall have the meaning specified in the preamble hereof. "Permitted Liens" means each of the following: (a) Liens for property taxes, assessments or other governmental charges which are not yet due and payable and delinquent or the validity of which is being contested in good faith; (b) statutory Liens of landlords and Liens of carriers, warehousemen, mechanics, materialmen and other similar Liens, in each case, incurred in the ordinary course of business for sums not yet due and payable or the amount, applicability or validity thereof is being contested by Warrior Coal or any Subsidiary thereof on a timely basis in good faith and in appropriate proceedings, and Warrior Coal or such Subsidiary has established adequate reserves therefor in accordance with GAAP on the books of Warrior Coal or such Subsidiary. (c) Liens incurred or deposits made in the ordinary course of business (i) in connection with workers' compensation, unemployment insurance and other types of social security or retirement benefits, or (ii) to secure (or to obtain letters of credit that secure) the performance of tenders, statutory obligations, surety bonds, appeal bonds, bids, leases, performance bonds, purchase, construction or sales contracts and other similar obligations, in each case not incurred or made in connection with the borrowing of money, the obtaining of advances or credit or the payment of the deferred purchase price of property; (d) any attachment or judgment Lien for the payment of money in an aggregate amount not to exceed $1,000,000, provided that the execution or other enforcement of such Liens is effectively stayed and the claims secured thereby are contested by Warrior Coal or any Subsidiary thereof on a timely basis in good faith and in appropriate proceedings, and Warrior Coal or such Subsidiary has established adequate reserves therefor in accordance with GAAP on the books of Warrior Coal or such Subsidiary; and (e) leases or subleases granted to others, zoning restrictions, easements, licenses, reservations, provisions, covenants, conditions, waivers, restrictions on the use of property or irregularities of title (and with respect to leasehold interests, mortgages, obligations, liens and other encumbrances incurred, created, assumed or permitted to exist and arising by, through or under a landlord or owner of the leased property, with or without consent of the lessee), and not interfering with, the ordinary conduct of the business of Warrior Coal or any Subsidiary thereof, provided that such Liens do not, in the aggregate, materially detract from the value of such property or impair the use of such property. 5 6 "Person" shall mean an individual, partnership, limited liability company, corporation (including a business trust), joint stock company, trust, unincorporated association, joint venture or other entity, or a government or any political subdivision or agency thereof. "Put Option" means the right of AWH to sell Warrior Coal to the MLP (or its designee) and to cause the MLP (or its designee) to purchase Warrior Coal from AWH, as contemplated by Section 2 hereof. "Put Option Period" shall mean the ten day period from and including January 2, 2003 to and including January 11, 2003. "Put Option Price" means the sum of (i) $10,000,000.00 and (ii) an amount of interest equal to the product of (x) the amount set forth in clause (i) hereof multiplied by (y) twelve percent (12%) per annum, compounded annually (determined based on a 360-day year, actual days elapsed from January 26, 2001 up to (but not including) the date on which the purchase and sale of Warrior Coal shall be consummated in connection with the Put Option). "RBCC" shall have the meaning specified in the second Whereas clause hereof. "SGP Land" shall have the meaning specified in the third Whereas clause hereof. "SGP Revolving Credit Agreement" shall mean the Revolving Credit Agreement, dated as of January 26, 2001, between Alliance Resource GP, LLC, a Delaware limited liability company, as lender, and Warrior Coal, as borrower, as the same may be amended, modified or supplemented from time to time in accordance with the terms thereof. "Stock Purchase Agreement" shall have the meaning specified in the second Whereas clause hereof. "Subsidiary" means, with respect to any Person, any corporation, limited liability company, partnership, joint venture, association, trust or other entity of which (or in which) more than 50% of (a) the issued and outstanding shares of capital stock or partnership interests (or their equivalent) having ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether at the time capital stock of any other class or classes of such corporation shall or might have voting power upon the occurrence of any contingency), (b) the interests in the capital or profits of such partnership, limited liability company, joint venture or association with ordinary voting power to elect a majority of the board of directors (or Persons performing similar functions) of such partnership, limited liability company, joint venture or association, or (c) the beneficial interests in such trust or other entity with ordinary voting power to elect a majority of the board of trustees (or Persons performing similar functions) of such trust or other entity, is at the time, directly or indirectly, owned or controlled by such Person, 6 7 by such Person and one or more of its Subsidiaries, or by one or more of such Person's other Subsidiaries. "Third Party Consents" shall have the meaning specified in Section 8 hereof. "Warrior Coal" shall have the meaning set forth in the first Whereas clause hereof. "WCC" shall have the meaning specified in the second Whereas clause hereof. "WCMC" shall have the meaning specified in the second Whereas clause hereof. Section 2. Put Option. During the Put Option Period, AWH shall have the right to put and sell to the MLP (or to any Subsidiary of the MLP designated by the MLP), and the MLP (or such designee) shall have the obligation to purchase from AWH, all of the limited liability company interests in and to Warrior Coal held by AWH provided (i) AWH shall have given not less than ninety (90) days or more than one hundred fifty (150) days written notice to the MLP prior to the commencement of the Put Option Period of its desire to put Warrior Coal to MLP, (ii) after giving effect to such put, the MLP (or such designee) shall own not less than 100% of the limited liability company interests in and to Warrior Coal, (iii) the MLP shall pay or cause to be paid to AWH the Put Option Price, (iv) all Third Party Consents shall have been obtained or waived in writing and (v) since January 26, 2001, there shall not have occurred a material adverse change in the business, operations, affairs, financial condition, assets or properties of Warrior Coal and its Subsidiaries, taken as a whole. Promptly following the exercise by AWH of the Put Option, the parties hereto shall cooperate with one another and shall negotiate in good faith a purchase and sale agreement containing terms and conditions reasonable and customary for a transaction of the type so contemplated, including representations and warranties regarding AWH's title in and to the limited liability company interests of Warrior Coal and Warrior Coal's title in and to the limited liability company interests or capital stock (or their equivalent) of each Subsidiary, if any, of Warrior Coal, for the purpose of consummating the sale of Warrior Coal by AWH to the MLP (or such designee); provided, however, that in no event shall the consideration payable by the MLP (or such designee) to AWH upon consummation of such transaction be greater or less than the Put Option Price. If the Put Option shall have been exercised, AWH and the MLP (or its designee) shall consummate the purchase and sale of Warrior Coal during the Put Option Period; provided, however, that if the purchase and sale of Warrior Coal in connection with the exercise of such Put Option shall not have been consummated during the Put Option Period and the parties hereto shall be diligently proceeding in good faith and using their best efforts to consummate such purchase and sale, then the right of AWH to put and sell Warrior Coal to the MLP during the Put Option Period shall continue thereafter for not more than fifteen (15) days to the extent necessary to consummate such transaction. Section 3. Call Option. During the Call Option Period, the MLP (or any subsidiary of the MLP designated by the MLP) shall have the right to call and purchase from AWH, and AWH shall have the obligation to sell to the MLP (or such designee), all of the limited liability company interests in and to Warrior Coal held by AWH provided (i) the MLP shall have given written notice to AWH, which notice may not be given prior to the commencement of the Call 7 8 Option Period, (ii) after giving effect to such call, the MLP (or such designee) shall own not less than 100% of the limited liability company interests in and to Warrior Coal, (iii) the MLP shall pay or caused to be paid to AWH the Call Option Price and (iv) all Third Party Consents shall have been obtained or waived in writing. Promptly following the exercise by the MLP of the Call Option, the parties hereto shall cooperate with one another and shall negotiate in good faith a purchase and sale agreement, containing terms and conditions reasonable and customary for a transaction of the type so contemplated, including representations and warranties regarding AWH's title in and to the limited liability company interests of Warrior Coal and Warrior Coal's title in and to the limited liability company interests or capital stock (or their equivalent) of each Subsidiary, if any, of Warrior Coal, for the purpose of consummating the purchase of Warrior Coal by the MLP (or its designee) from AWH; provided, however, that in no event shall the consideration payable by the MLP (or such designee) to AWH upon consummation of such transaction be greater or less than the Call Option Price. If the Call Option shall have been exercised, AWH and the MLP (or its designee) shall enter into such purchase and sale agreement as soon as reasonably practicable following (but not more than 90 days after) receipt by AWH of such written notice; provided, however, that if the purchase and sale of Warrior Coal in connection with the exercise of such Call Option shall not have been consummated within such 90 days' period and the parties hereto shall be diligently proceeding in good faith to consummate such purchase and sale, then the right of the MLP to call and purchase Warrior Coal from AWH during such 90 days' period shall continue thereafter for such period of time as shall be reasonably necessary to consummate such transaction. Section 4. Representations and Warranties of the MLP. In order to induce AWH to enter into this Agreement, the MLP represents and warrants as of the date hereof as follows: (a) Existence, Power and Authority. The MLP is a limited partnership duly organized, validly existing and in good standing under the laws of the State of Delaware, and has full partnership power and authority to execute and deliver this Agreement and to carry out the transactions contemplated hereby. (b) Authorization; Enforceable Obligations. This Agreement has been duly authorized, executed and delivered by the MLP and constitutes the legal, valid and binding obligation of the MLP, enforceable against it in accordance with its terms, except as such enforceability may be limited by general principles of the law of equity or by any applicable bankruptcy, reorganization, insolvency, moratorium or similar laws and laws affecting creditors' rights generally. (c) No Legal Bar. The execution, delivery and performance by the MLP of this Agreement (i) do not or will not violate the certificate of limited partnership, or other formation document of the MLP, and (ii) do not or will not violate or conflict with any law, governmental rule or regulation or any judgment, writ, order, injunction, award or decree of any court, arbitrator, administrative agency or other governmental authority applicable to the MLP. 8 9 Section 5. Representations and Warranties of AWH. In order to induce the MLP to enter into this Agreement, AWH represents and warrants as of the date hereof as follows: (a) Existence, Power and Authority. AWH is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, with full corporate power and authority to carry on its business as currently conducted and has full corporate power and authority to execute and deliver this Agreement and to carry out the transactions contemplated hereby. (b) Authorization; Enforceable Obligations. This Agreement has been duly authorized, executed and delivered by AWH and constitutes the legal, valid and binding obligation of AWH, enforceable against it in accordance with its terms. except as such enforceability may be limited by general principles of the law of equity or by any applicable bankruptcy, reorganization, insolvency, moratorium or similar laws and laws affecting creditors' rights generally. (c) No Legal Bar. The execution, delivery and performance by AWH of this Agreement (i) do not or will not violate the certificate of incorporation, or by-laws or other formation document of AWH, and (ii) do not or will not violate or conflict with any law, governmental rule or regulation or any judgment, writ, order, injunction, award or decree of any court, arbitrator, administrative agency or other governmental authority applicable to AWH. Section 6. Affirmative and Negative Covenants. AWH covenants and agrees that, until the earlier of (x) the expiration of the Call Option Period (or, in the event the MLP shall have exercised its Call Option and, pursuant to the proviso contained in the last sentence of Section 3 hereof, the parties hereto shall be negotiating the sale of Warrior Coal beyond the Call Option Period, then the expiration of such additional period of time as contemplated by such proviso), (y) the sale of Warrior Coal by AWH to the MLP in connection with the exercise of the Put Option or the Call Option, as the case may be, and (y) the termination of this Agreement pursuant to Section 8 hereof: (a) Compliance with Laws, Etc. AWH shall cause Warrior Coal and its Subsidiaries to comply, in all material respects, with all applicable laws, rules, regulations and orders, except to the extent failure so to comply, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect. (b) Preservation of Limited Liability Company Existence, Etc. AWH shall cause Warrior Coal and each Subsidiary thereof to preserve and maintain its existence, legal structure, rights (charter and statutory), permits, licenses, approvals, privileges, franchises and intellectual property; provided however, that AWH shall not be required to cause Warrior Coal or any Subsidiary thereof to preserve any right, permit, license, approval, privilege, franchise or intellectual property if the Board of Directors (or persons performing similar functions) of or on behalf of Warrior Coal or such Subsidiary shall determine that the preservation thereof is no longer desirable in the conduct of the 9 10 business of Warrior Coal or such Subsidiary and that the loss thereof, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect. (c) Maintenance of Properties, Etc. AWH shall cause Warrior Coal and each Subsidiary thereof to maintain and preserve all of its properties that are used or useful in the conduct of Warrior Coal's or such Subsidiary's business in good working order and condition, ordinary wear and tear expected, except to the extent the failure to so maintain or preserve such properties, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect. (d) Disposition of Limited Liability Company Interests. AWH shall not sell, transfer, convey, pledge or otherwise dispose of any limited liability company interest in or to Warrior Coal, except as otherwise contemplated by Section 2 or 3 of this Agreement, and AWH shall not permit Warrior Coal to sell, transfer, convey, pledge or otherwise dispose of any of the limited liability company interests or capital stock (or their equivalent) of any Subsidiary of Warrior Coal. (e) Liens, Etc. AWH shall not permit Warrior Coal or any Subsidiary thereof to create, incur, assume or suffer to exist any Lien on or with respect to any of its properties of any character (including, without limitation, accounts) whether now owned or hereafter acquired, or sign or file or suffer to exist under the Uniform Commercial Code of any jurisdiction, a financing statement that names Warrior Coal or any Subsidiary thereof as Debtor, or sign or suffer to exist any security agreement authorizing any secured party thereunder to file such financing statement, or assign any accounts or other right to receive income, except: (i) Liens, if any, granted or created under or pursuant to the Stock Purchase Agreement or the Asset Purchase Agreement or any other agreement entered into in connection therewith; (ii) Permitted Liens; (iii) with respect to Warrior Coal and its Subsidiaries, taken as a whole, other Liens incurred in the ordinary course of business securing obligations in an amount not to exceed $1,000,000; (iv) Liens existing on the date hereof; (v) non-recourse Liens upon or in real property or equipment acquired or held by Warrior Coal or any Subsidiary thereof in the ordinary course of business to secure the purchase price of such property or equipment or to secure non-recourse, tax-exempt Debt incurred solely for the purpose of financing the acquisition, construction or improvement of any such property or equipment to be subject to such Liens, or Liens exiting on any such property or equipment at the time of acquisition (other than any such Liens created in contemplation of such acquisition that do not secure the purchase price), or extensions, renewals or 10 11 replacements of any of the foregoing for the same or a lesser amount; provided, however, that no such Lien shall extend to or cover any property other than the property or equipment being acquired, constructed or improved, and no such extension, renewal or replacement shall extend to or cover any property not theretofore subject to the Lien being extended, renewed or replaced; (vi) the replacement, extension or renewal of any Lien permitted by clauses (iii) through (v) above upon or in the same property theretofore subject thereto or the replacement, extension or renewal (without increase in the amount or change in any direct or contingent obligor) of the Debt secured thereby; (vii) Liens on personal property leased under leases (including synthetic leases) entered into by Warrior Coal or any Subsidiary thereof which are accounted for as operating leases in accordance with GAAP to the extent not prohibited under Section 6(i) hereof; (viii) easements, exceptions or reservations in any property of Warrior Coal or any Subsidiary thereof granted or reserved for the purpose of pipelines, roads, the removal of oil, gas, coal or other minerals, and other like purposes, for the joint or common use of real property, facilities and equipment, which are incidental to, and do not materially interfere with, the ordinary conduct of the business of Warrior Coal or such Subsidiary; and (ix) Liens on documents of title and the property covered thereby securing obligations in respect of letters of credit that are commercial letters of credit (i.e., obtained for the purpose of paying all or a portion of the purchase price of such property) to the extent not prohibited under Section 6(f) hereof. (f) Debt. AWH shall not permit Warrior Coal or any of its Subsidiaries to create, incur, assume or suffer to exist any Debt, except: (i) Debt owed to the MLP or any Subsidiary thereof; (ii) Debt created under the SGP Revolving Credit Agreement; (iii) Debt assumed under or pursuant to the Stock Purchase Agreement or the Asset Purchase Agreement; and (iv) non-recourse Debt secured by Liens permitted by Section 6(e)(v) hereof. (g) Mergers, Etc. AWH shall not permit Warrior Coal or any Subsidiary thereof to merge into or consolidate with any Person or permit any Person to merge into it or convey, transfer or lease substantially all of its assets in a single transaction or series of transactions to any Person, except that: 11 12 (i) any of WCC, WCMC and RBCC (or all of them) may merge into Warrior Coal, provided that, in the case of any such merger, Warrior Coal shall be the surviving entity and shall have succeeded to all of the assets and properties of WCC, WCMC or RBCC (or all of them), as the case may be; (ii) any Subsidiary of Warrior Coal may merge into or consolidate with any wholly owned Subsidiary of Warrior Coal, provided that, in the case of any such merger or consolidation, the Person formed by such merger or consolidation shall be a wholly owned subsidiary of Warrior Coal and such Person shall have succeeded to all of the assets and properties of such Subsidiary; and (iii) any Subsidiary of Warrior Coal may merge into or consolidate with Warrior Coal, provided that Warrior Coal is the surviving entity and shall have succeeded to all of the assets and properties of such Subsidiary. (h) Sales, Etc., of Assets. AWH shall not permit Warrior Coal or any Subsidiary thereof to sell, lease, transfer or otherwise dispose of any assets, or grant any option or other right to purchase, lease or otherwise acquire any assets, except; (i) sales of Inventory in the ordinary course of Warrior Coal's or its Subsidiaries' business; (ii) with respect to Warrior Coal and its Subsidiaries, taken as a whole, sale of assets that are obsolete or no longer used or useful for fair value in an aggregate amount not to exceed $500,000.00 over the term of this Agreement; (iii) sales of assets by Warrior Coal or any Subsidiary thereof to the MLP or any Subsidiary thereof; (iv) in a transaction authorized by Section 6(g) hereof; and (v) with respect to Warrior Coal and its Subsidiaries, taken as a whole, sales of other assets with a fair value in an amount not to exceed $500,000.00 individually or $1,000,000.00 in the aggregate over the term of this Agreement; provided however, that the purchase price paid to Warrior Coal or any such Subsidiary for such asset shall be no less than the fair market value of such asset at the time of such sale and such sale shall be in the best interest of Warrior Coal or such Subsidiary, as determined in good faith by the Board of Directors (or other person performing such functions) of Warrior Coal or such Subsidiary. (i) Restricted Payments. AWH shall not permit Warrior Coal or any such Subsidiary thereof to declare or pay any dividends, repurchase or redeem any capital stock or other equity interest, return any capital to its members or shareholders as such, make any distribution of assets to its members or shareholders as such (each of the foregoing being a "Restricted Payment"), except that any wholly-owned Subsidiary of 12 13 Warrior Coal shall be permitted to declare, make or incur a liability to make any such Restricted Payment to Warrior Coal or any wholly-owned Subsidiary of Warrior Coal. (j) Lease Obligations. AWH shall not permit Warrior Coal or any Subsidiary thereof to create, incur, assume or suffer to exist any obligations as lessee (excluding for this purpose obligations as lessee under Capital Leases) (i) for the rental or hire of real or personal property in connection with any sale and leaseback transaction, (ii) for the rental or hire of other personal property of any kind under operating leases or agreements to lease having an original term of one year or more that would cause the direct and contingent liabilities of Warrior Coal and its Subsidiaries, taken as a whole, in respect of all such obligations to exceed $1,000,000.00 payable in any period of 12 consecutive months, or (iii) for the rental or hire of other real property under leases or agreements to lease other than in the ordinary course of business. (k) Amendments of Constitutive Documents. AWH shall not permit Warrior Coal or any Subsidiary thereof to amend its Certificate of Formation, limited liability company operating agreement, charter, by-laws, partnership agreement or other constituent document in any manner that has a Material Adverse Effect. (l) Generally. Except for any transaction permitted under this Section 6, AWH shall not permit Warrior Coal or any Subsidiary thereof to enter into any transaction that is reasonably expected to have a Material Adverse Effect. (m) No Amendments To Credit Agreement. AWH shall not permit Warrior Coal to amend or modify any term or condition of the SGP Revolving Credit Agreement (or any credit agreement refinancing such indebtedness) except for such amendments or modifications thereof that do not increase or alter in any material respect the obligations of Warrior Coal thereunder or have a Material Adverse Effect. Section 7. Default; Termination. In the event that a party hereto shall have failed to perform or comply with in any material respect any agreement or covenant binding upon such party (such defaulting party, the "Defaulting Party", and the non-defaulting party, the "Non-Defaulting Party") and such default shall have continued unremedied for more than 45 days after receipt of notice in writing of such default from the Non-Defaulting Party (or such longer period as shall be reasonably necessary to cure such default provided the Defaulting Party is diligently proceeding in good faith to cure such default), then the Non-Defaulting Party may, by the giving of not less than 15 days' written notice to the Defaulting Party, terminate this Agreement. In the event of such termination, the non-defaulting party shall be entitled to such remedies as are available to it under applicable law. Section 8. Further Assurances. In the event that the Put Option is exercised by AWH or the Call Option is exercised by the MLP, each party hereto shall, at their own expense, cooperate with one another in good faith and execute and deliver such additional documents and take such further actions as such other party hereto may reasonably request in order to more fully give effect to the purposes and intent of this Agreement, to carry out the terms hereof and to fully and completely convey Warrior Coal to the MLP (or its designee) as contemplated hereby. 13 14 Without limiting the foregoing, the parties hereto agree to use their commercially reasonable efforts to obtain the consent of such third parties, including the consents of all lenders to the MLP or any of its Subsidiaries, if required (collectively, the "Third Party Consents"), as shall be necessary or appropriate for the purpose of consummating the sale of Warrior Coal by AWH to the MLP as contemplated by this Agreement. Section 9. Amendment and Restatement. The parties hereto agree that the Original Put and Call Agreement is amended and restated in its entirety upon the terms and conditions contained herein. Section 10. Miscellaneous. (a) Notices. Any notice required or permitted hereunder is to be in writing and may be given by telecopy, telex, cable or other customary means of electronic communication or by registered or certified mail (return receipt requested) or express courier, postage prepaid. All notices, statements, requests and demands given to or made upon any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given or made (i) in the case of notice delivered by overnight express courier, one business day after the business day such notice was delivered to such courier, (ii) in the case of notice delivered by first class mail, three business days after being deposited in the mail, postage prepaid, return receipt requested, (iii) in the case of notice by hand, when delivered, or (iv) in the case of notice by any customary means of telecommunication, when sent provided confirmation of receipt or answer back has been received, in each case if addressed: to AWH, to it at: ARH Warrior Holdings, Inc. 1717 South Boulder Avenue Tulsa, OK 74119 Attention: Thomas L. Pearson Telephone: (918) 295-7606 Telecopy: (918) 295-7361 to the MLP, to it at: Alliance Resource Partners, L.P. c/o Alliance Resource Management, L.P. 1717 South Boulder Avenue Tulsa, OK 74119 Attention: Michael L. Greenwood Telephone: (918) 295-7622 Telecopy: (918) 295-7357 14 15 or such other address for notice as any party hereto may designate for itself in a notice to the other party, except in cases where it is expressly provided herein that such notice, statement, request or demand shall not be effective until received by the party to whom it is addressed. (b) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED ACCORDING TO THE LAWS OF THE STATE OF OKLAHOMA, WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAWS. (c) Assignment. Except as otherwise permitted hereunder, no party to this Agreement shall assign its rights or delegate its obligations hereunder to any other Person without the prior written consent of the other party hereto. (d) Integration. This Agreement constitutes the entire agreement between AWH and the MLP with respect to the subject matter hereof and there are no promises, undertakings, representations or warranties by AWH or the MLP relative to the subject matter hereof not expressly set forth or referred to herein. (e) Severability. The provisions of this Agreement are severable, and if any clause or provision of this Agreement shall be held invalid or unenforceable in whole or in part in any jurisdiction, then such clause or provision shall, as to such jurisdiction, be ineffective to the extent of such invalidity or unenforceability without in any manner affecting the validity or enforceability of such clause or provision in any other jurisdiction or the remaining provisions hereof in any jurisdiction. (f) Counterparts. This Agreement may be executed in any number of counterparts and by each party hereto on separate counterparts, each complete set of which, when so executed and delivered by all parties, shall be an original, but all such counterparts shall together constitute but one and the same instrument. (g) Headings, Bold Type and Table of Contents. The section headings, subsection headings, and bold type used herein have been inserted for convenience of reference only and do not constitute matters to be considered in interpreting this Agreement. 15 16 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first set forth above. ARH WARRIOR HOLDINGS, INC. By: /s/ Thomas L. Pearson ------------------------------------------ Name: Thomas L. Pearson Title: Senior Vice President - Law and Administration, General Counsel and Secretary ALLIANCE RESOURCE PARTNERS, L.P. By: Alliance Resource Management GP, LLC, its Managing General Partner By: /s/ Michael L. Greenwood -------------------------------------- Name: Michael L. Greenwood Title: Senior Vice President, Chief Financial Officer and Treasurer 16 EX-10.18 5 h85211ex10-18.txt EMPLOYEE AGREEMENT - MR CRAFT 1 Exhibit 10.18 January 1, 2001 Mr. Robert G. Sachse 2685 East 37th Street Tulsa, OK 74105 Re: Consulting Agreement Dear Robert: This letter will confirm the basis upon which Alliance Resource Management GP, LLC ("Alliance") has engaged you ("Consultant") to provide certain advisory and consulting services with respect to strategic planning, marketing, and potential acquisitions and mergers involving Alliance, acting as the managing general partner of Alliance Resource Partners, L.P. ("ARLP"). Specifically, the terms and conditions of our understanding are as follows: 1. Advisory and Consulting Services. During the term of this agreement, Consultant agrees to perform to the best of his abilities such advisory and consulting work for Alliance and ARLP as the Board of Directors of Alliance, its President and Chief Executive Officer, or his designees, may from time to time request. Consultant agrees to perform such of the following advisory and consulting services as Alliance reasonably requests: (a) To the extent Alliance deems it appropriate and reasonable, Consultant will familiarize himself with the business, operations, properties, financial condition and prospects of Alliance and ARLP, each's strategic development plans, management succession plans, and such other facets of Alliance as its President and Chief Executive Officer shall direct. (b) Consultant will advise and assist Alliance and ARLP and each's management in the formulation of potential strategic alliances with power generators as well as transportation and transmission companies. (c) Consultant will advise and assist Alliance and ARLP and each's management in (i) identifying potential acquisition targets, (ii) considering the desirability of effecting a growth transaction and, if Alliance believes such a transaction to be desirable, in developing a general strategy for accomplishing such a transaction, (iii) assisting in the preparation and distribution of materials concerning such merger and/or acquisition candidates, (iv) making presentations to the Board of Directors of Alliance concerning any proposed transaction, and (v) the course of the negotiation of a transaction and participate, if requested, in such negotiations. 2 Mr. Robert G. Sachse January 1, 2001 Page 2 (d) Secondarily to the advisory and consulting services described above, Consultant will advise and assist Alliance and ARLP and each's management in developing similar strategies and analyses in diversification opportunities (i.e., other than traditional coal acquisitions), that may be available to ARLP. (e) Consultant will render such other advisory and consulting services as Alliance, acting through its President and Chief Executive Officer, may reasonably request, giving due consideration to Consultant's experience and expertise. 2. Extent of Advisory and Consulting Services. Consultant shall devote approximately fifty percent (50%) of his normal business time (i.e., estimated at approximately 125 days annually), attention and energies as well as his best talents and abilities to the business of Alliance and ARLP in accordance with the President and Chief Executive Officer's instructions and directions. Consultant will, upon request of Alliance's President and Chief Executive Officer, perform such advisory and consulting work at Alliance's offices in Tulsa, Oklahoma, or at such other places and at such other times as Alliance and Consultant shall from time to time agree upon, subject only to reimbursement of Consultant's reasonable travel and living expenses. During the term of this Agreement, Consultant will not engage in any other coal business or coal-related business activity, whether or not such business activity is pursued for gain, profit or other pecuniary advantage, except to the extent permitted with the express written authorization of Alliance. The preceding sentence does not preclude Consultant from owning for investment purposes less than One Percent (1%) of the outstanding equity interests in any publicly-traded entity engaged in the coal business or coal-related business activities so long as Consultant does not directly or indirectly participate in the management of such entity. 3. Term. Subject to the provisions for termination set forth in Paragraph 11 below, Consultant is retained for a term of three (3) years and this Consulting Agreement shall be effective beginning August 14, 2000, and terminate on August 13, 2003. Consultant and Alliance agree that, on or after March 31, 2003, both parties will initiate discussions in good faith to define the role and relationship, if any, of Consultant with Alliance subsequent to the termination date of this Consulting Agreement. 4. Consulting Fee. For services performed hereunder, Consultant shall receive as compensation the sum of One Hundred Fifty Thousand Dollars ($150,000) per annum, payable monthly in equal amounts of Twelve Thousand Five Hundred Dollars ($12,500). Within ten (10) days following receipt of Consultant's invoice for services and reimbursement of reasonable expenses, if any, for the preceding month, Alliance shall reimburse Consultant for such expenses, subject to its right to review and retroactively adjust any inappropriate expense reimbursement in the future. In addition to the foregoing, for services performed hereunder, Consultant shall receive as compensation (a) the sum of Seven Thousand Five Hundred Dollars ($7,500) per calendar quarter (or pro rata portion thereof) paid by Alliance as follows: (a) 250 common units 3 Mr. Robert G. Sachse January 1, 2001 Page 3 of ARLP, plus (b) the cash difference between $7,500 less the market value of such 250 common units payable on the last day of each calendar quarter calculated by the closing price per common unit averaged over the immediately preceding two (2) week period as reported in The Wall Street Journal, and (c) group health coverage (i.e., medical, prescription drug, dental, and vision coverage) for Consultant and his family (i.e., Mrs. Elizabeth H. Sachse, spouse, and Robert B. Sachse, son) substantially similar to that offered participants in the Alliance Coal, LLC and Affiliates health plan. 5. Limitation of Reimbursable Expenses. Whenever possible and practical, Consultant will take advantage of reduced rates for airfare, lodging and car rental. Consultant shall not be reimbursed for first class airfare. 6. Independent Contractor. Consultant is an independent contractor under this Consulting Agreement with Alliance. Neither Alliance, nor Consultant have the authority to bind the other to any third person or otherwise to act in any way as the representative of the other, unless otherwise expressly agreed to in writing signed by both parties hereto. Consultant shall not be deemed for any purpose to be the employee, agent, servant or representative of Alliance. Alliance shall have no direction or control of Consultant except in results to be obtained. The parties agree that this Consulting Agreement, or its implementation, does not create a joint employer, single employer, alter ego, agency relationship or successor relationship between Alliance and ARLP, on one hand, and Consultant, on the other hand. Furthermore, Consultant acknowledges that he is solely responsible for, and Consultant shall not be entitled to secure from Alliance, any health and welfare benefits (including by way of illustration and not limitation, medical, dental, vision, life, accidental death and dismemberment, pension, profit sharing, worker's compensation, or other similar benefits), except as specifically provided in Paragraph 4 above. 7. Taxes and Unemployment Compensation. Consultant shall pay and hereby assumes exclusive liability for payment of any and all Federal, state and other locally imposed income taxes, contributions, assessments and taxes for unemployment insurance, old age benefits, annuities or other purposes which are measured by or based upon the compensation paid to Consultant under this Consulting Agreement. In addition, Consultant agrees to reimburse Alliance for any of the aforesaid taxes or contributions which by law Alliance may be required to pay because of Consultant's failure to pay the same. 8. Insurance. (a) Consultant, from the time of commencement of the advisory and consulting services described hereinabove until the termination of this Consulting Agreement, shall maintain at his own expense appropriate personal insurance including homeowners, automobile 4 Mr. Robert G. Sachse January 1, 2001 Page 4 liability. (b) Alliance will provide to Consultant coverage under its automobile liability insurance covering owned, non-owned and hired vehicles used by Consultant only during the performance of services rendered hereunder with combined single limits of at least Five Hundred Thousand Dollars ($500,000) per occurrence, covering liability for bodily injury or sickness, including death and property damage. 9. Indemnity and Contribution. Alliance agrees to indemnify Consultant to the full extent lawful against any and all claims, losses and expenses incurred (including all reasonable fees and disbursements of Consultant incurred in connection with the performance of services hereunder) including, but not limited to, such expenses as may be incurred with investigation of and preparation for any pending or threatened claims in any litigation or other proceedings arising therefrom) arising out of Consultant's engagement hereunder; provided, however, that Consultant shall notify Alliance of any such claim and, so long as in the reasonable judgment of Consultant there is no conflict of interest, Alliance shall have the option to defend Consultant with counsel of it's own choosing (including counsel retained to also defend Alliance), and provided, further, there shall be excluded from any such indemnification any claim, loss or expense that arises primarily out of or is based primarily upon any action or failure to act by Consultant, other than an action or failure to act undertaken at the request of or with the written consent of Alliance, that is found in a final judicial determination (or a settlement tantamount thereto) to constitute bad faith, willful misconduct, or gross negligence on the part of Consultant. In the event that the foregoing indemnity is unavailable or insufficient to hold Consultant harmless, then Alliance shall contribute to amounts paid or payable by Consultant in respect of any such claims, losses and expenses in such proportion as approximately reflects the relative benefits received by, and fault of, Alliance and Consultant in connection with the matters as to which such claims, losses and expenses relate and other equitable considerations. 10. Termination of Agreement. Notwithstanding the provisions of Paragraphs 3 and 4 hereinabove, the retention of Consultant shall terminate upon the first to occur of the following events: (a) the demise of Mr. Robert G. Sachse, (b) the mental illness or disability of Mr. Robert G. Sachse, if he is unable to perform substantially his duties for a period of two continuous months; provided, however, a decision to so terminate the consulting services provided by Consultant herewith must be made by the Board of Directors of Alliance in good faith, and must be based upon medical reports and reasonable medical advice which shall establish or indicate the Consultant's incapacity may continue for an indefinite period. When, after such two months of disability or mental illness, the Board of Directors of Alliance decides to terminate Consultant's retention hereunder, such 5 Mr. Robert G. Sachse January 1, 2001 Page 5 termination shall be effective thirty (30) days after written notice of such decision has been delivered to Consultant. The compensation provided for under the terms of this Consulting Agreement shall continue during the period of Consultant's disability or mental illness until this Consulting Agreement shall be terminated by Alliance; (c) the termination of the term of this Consulting Agreement on August 13, 2003, unless otherwise extended by the parties hereto; (d) the breach by either party hereto of any material term of this Consulting Agreement; provided written notice of the breach setting forth sufficient detail(s) of the alleged breach is tendered by the non-breaching party and such material breach or default hereunder is not cured within a reasonable time period, but in no event shall such cure period exceed thirty (30) days after notice is received; and (e) Subsequent to the first year of the three-year term hereunder, in the event that either Consultant or Alliance determine in good faith that an equitable adjustment in the per annum rate is in order as a result of (a) an increase or decrease of the time required by Consultant to fulfill the obligations hereunder, and/or (b) a material change in the Company's growth strategy, then Alliance and/or Consultant may provide notice of their respective intent to reopen discussions concerning the annual aggregate consulting fee paid hereunder. In such event, the parties agree to negotiate in good faith for a period of not more than thirty (30) days a mutually acceptable adjustment to the annual consulting rate fee. Should the parties not be able to reach an amicable agreement, either party may terminate this Consulting Agreement by providing sixty (60) days advance written notice of such termination. In the event this Consulting Agreement is terminated in accordance with this Paragraph 10, the parties acknowledge that the provisions of Paragraphs 5, 11, 12, 13, 14, 17 and 18 shall survive termination, except if the Agreement is terminated by Alliance pursuant to Paragraph 10(e), the terms of Paragraph 12(b) will not survive. 11. Nondisclosure by Consultant. Consultant acknowledges and agrees that any information obtained by Consultant while providing the advisory and consulting services to Alliance is highly confidential, and is important to Alliance and to the effective operation of its businesses. As a result, Consultant therefore agrees that while retained by Alliance, and at any time thereafter, it will make no disclosure of any kind, directly or indirectly, concerning any confidential matters relating to Alliance of any of its activities. Moreover, Consultant agrees to execute the Confidentiality Agreement designated Exhibit "A," and attached hereto and incorporated by reference herein. 12. Noncompetition by Consultant. 6 Mr. Robert G. Sachse January 1, 2001 Page 6 (a) During the term hereof and, except as otherwise consented to in writing by Alliance, Consultant agrees not to compete with Alliance and ARLP in the United States, including Alaska. Except as provided for in Paragraph 2 hereinabove, Consultant agrees that during the term of the Consulting Agreement, he will not work for, advise, consult with, serve or assist in any way, directly or indirectly, any party whose business is in any way competitive with the activities or businesses of Alliance and ARLP, and Consultant agrees further that he will himself not compete in any way, directly or indirectly, with Alliance and ARLP, and that he will not purchase or otherwise acquire any interest of any kind in a business which is in any way competitive with Alliance and ARLP. (b) Upon termination of this Consulting Agreement, except as otherwise consented to in writing by Alliance, Consultant agrees not to compete with Alliance's and/or ARLP's interests in the United States, including Alaska, for a period of two (2) years following such termination. The interests of Alliance and ARLP protected from competition by the preceding sentence are expressly limited to those projects, business agreements, transactions, and other business transactions (whether successfully closed or not) in which Consultant has been (i) actively and directly involved on behalf of Alliance during the term of this Consulting Agreement and (ii) concerns confidential and propriety information that is subject to the Confidentiality Agreement referred to in Paragraph 11 above. (c) Within the two preceding paragraphs, the parties hereto recognizing that irreparable injury will result to Alliance and ARLP, each's business and property in the event of Consultant's breach of this agreement not to compete, in that such consulting services are based primarily upon this Consulting Agreement, agree that in the event of Consultant's breach of its agreement not to compete, Alliance and ARLP shall be entitled, in addition to any other remedies and damages available, to an injunction to restrain the violation thereof by Consultant, his partners, employees and all persons acting for or with him. 13. Notices. All notices made in connection with this Consulting Agreement shall be in writing, except as otherwise expressly permitted hereunder. Any notice or other communication in connection herewith shall be deemed duly given (a) two business days after it is sent by express, registered or certified mail, return receipt requested, postage prepaid or (b) on the business day after it is sent by overnight courier, in every case, addressed as follows: IF TO CONSULTANT, AT: Mr. Robert G. Sachse 2685 East 37th Street Tulsa, OK 74105 7 Mr. Robert G. Sachse January 1, 2001 Page 7 IF TO ALLIANCE, AT Alliance Resource Management GP, LLC 1717 South Boulder Avenue P.O. Box 22027 Tulsa, OK 74121-22027 Attn: Joseph W. Craft III and Thomas L. Pearson, Esq. or, in any case, any such other address as may be specified in writing to the other party hereto. Any party may give notice or other communication in connection therewith using any other means (including, but not limited to, personal delivery, messenger service, telecopy, telex, telephone or other oral communication or ordinary mail), but no such notice or other communication shall be deemed to have been duly given unless and until it is actually received by the individual for whom it is intended. 14. Mediation. (a) All disputes, controversies and claims (collectively, "Disputes") arising out of, relating to, or in connection with this Consulting Agreement, or the breach, termination of validity hereof, that are not otherwise resolved by negotiation between Alliance and Consultant, may be resolved by mediation. Any party to a Dispute may request that the matter be submitted to mediation by written notice to that effect. Within ten (10) days after receipt of said notice, the other party shall give written notice stating whether or not it consents to mediation; provided that no parties shall be required to submit to mediation unless it consents, which consent shall be in its sole discretion; and provided further that a request for mediation shall not in any way interfere with, compromise, limit or restrict the parties' right to seek any judicial remedies whatsoever. (b) If both parties consent, mediation shall be initiated in accordance with the Center for Public Resources' Model Procedure for Mediation of Business Disputes, provided that the mediation shall take place in Tulsa, Oklahoma or such other place as the parties may mutually determine. (c) Any settlement agreement mutually reached in the course of the mediation shall be recorded in a definitive agreement, which, when duly executed and delivered by both parties hereto shall be binding and conclusive upon the parties. 15. Assignment. This Consulting Agreement shall not be assignable by any party without the prior written consent of the other party (which consent shall not be unreasonably withheld). Notwithstanding the foregoing, the parties hereto understand that the personal 8 Mr. Robert G. Sachse January 1, 2001 Page 8 services of Consultant are essential to receive the benefits of this agreement. Any purported assignment in violation of this paragraph shall be void. 16. Amendment; Waivers, Etc. No amendment, modification or discharge of this Consulting Agreement, and no waiver hereunder, shall be valid or binding unless set forth in writing and duly executed by the party as to enforcement of the amendment, modification, discharge or waiver is sought. Any such waiver shall constitute a waiver only with respect to the specific matter described in such writing and shall in no way impair the rights of the party granting such waiver in any other respect or at any other time. 17. Governing Law. This Consulting Agreement shall be governed by and construed in accordance with the internal laws of the State of Oklahoma, without given effect to the conflict of laws rules thereof. 18. Waiver of Jury Trial. (a) THE PARTIES TO THIS CONSULTING AGREEMENT EXPRESSLY WAIVE AND FOREGO ANY RIGHT TO RECOVER PUNITIVE, EXEMPLARY, OR SIMILAR DAMAGES IN ANY ARBITRATION, LAWSUIT, LITIGATION OR PROCEEDING ARISING OUT OF OR RESULTING FROM ANY CONTROVERSY OR CLAIM ARISING OUT OF OR RELATING TO THIS CONSULTING AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. (b) EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE UNDER THIS CONSULTING AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND THEREFORE IT HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS CONSULTING AGREEMENT OR THE SERVICES CONTEMPLATED HEREBY. EACH PARTY CERTIFIES AND ACKNOWLEDGES THAT (i) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE WAIVERS SET FORTH IN SUBPARAGRAPH (a) ABOVE, (ii) IT UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF SUCH WAIVERS, (iii) IT MAKES SUCH WAIVERS VOLUNTARILY, AND (iv) IT HAS BEEN INDUCED TO ENTER INTO THIS CONSULTING AGREEMENT BY, AMONG OTHER THINGS, WAIVERS AND CERTIFICATIONS IN THIS SECTION. 19. Binding Effect. This Consulting Agreement shall be binding upon and enure to 9 Mr. Robert G. Sachse January 1, 2001 Page 9 the benefit of the parties hereto and their respective heirs, successors, and permitted assigns, if any. 20. Entire Agreement. This Consulting Agreement constitutes the entire agreement and supersedes all prior agreements and understandings, both written and oral, between the parties with respect to the subject matter hereof. 21. Counterparts. This Consulting Agreement may be executed in counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument. 22. Headings. The headings contained in this Consulting Agreement are for purposes of convenience only and shall not affect the meaning or interpretation of this consulting agreement. * * * The foregoing represents the entirety of our agreement, superseding all prior communications and understandings of the subject, and I invite you to accept it by countersigning the enclosed copy of this letter, where indicated below, and returning the copy at your earliest opportunity. I look forward to the exciting opportunities that lie ahead for Alliance and the role that you will play in our future. Very truly yours, By: /s/ Joseph W. Craft III ------------------------------------- Joseph W. Craft III President and Chief Executive Officer AGREED AND ACCEPTED this 26 day of March, 2001. By: /s/ Robert G. Sachse ------------------------------- Robert G. Sachse, an individual 10 Exhibit "A" January 1, 2001 Mr. Robert G. Sachse 2685 East 37th Street Tulsa, OK 74105 Re: Confidentiality Agreement Dear Robert: In regard to the Consulting Agreement executed contemporaneously herewith, you have been retained to provide certain advisory and consulting services to Alliance Resource Management GP, LLC and its affiliates (collectively, "Alliance"). In order for you to accomplish the tasks that you have been requested to undertake and complete, it will be necessary for you to receive information concerning Alliance that is regarded as highly confidential. Before you are provided with such information, Alliance must have assurance that you recognize the confidential nature of this information and that you are willing to maintain the information in confidence. In consideration and as a condition to your being furnished with, or granted access to, such information: 1. You acknowledge that certain information, whether provided orally or in writing relating to Alliance including, but not limited to, technical, financial and marketing information, which Alliance or its representatives agree to furnish to you or which shall be acquired as a result hereto (collectively, the "Information") is confidential and proprietary information. 2. You agree that all information shall be retained in strict confidence by you and used for the sole purpose of providing the aforementioned advisory and consulting services and shall not be used by you in way detrimental to Alliance, nor used by you or any third party for its competitive benefit, or disclosed directly or indirectly to any third party without the prior written permission of Alliance; provided, however, that such restrictions shall not apply to Information which: (a) at the time of disclosure is in the public domain; (b) after disclosure becomes a part of the public domain by publication through no violation of this Confidentiality Agreement; (c) was in your possession prior to being furnished to you by or on behalf of Alliance; (d) is hereafter lawfully disclosed to you by a person other than Alliance, or any of its advisors, agents, employees, directors, officers, or other representatives, which person to the best of your knowledge, has a legal right to disclose the same and the Information disclosed was not acquired by such person, either directly or indirectly, in violation of an obligation of confidence to Alliance; or (e) is required to be disclosed by you in accordance with applicable law after written 11 Mr. Robert G. Sachse January 1, 2001 Page 2 notice thereof to Alliance. 3. Unless otherwise consented to in writing by Alliance, it is understood that all such Information may not be disclosed to your directors, officers, employees, and authorized representatives, if any. 4. You further agree not to disperse and duplicate any of the Information. All Information will remain the property of Alliance, and you will return all Information (original and copies) to Alliance, at the request of Alliance. All analyses, documents, memoranda, notes or other records maintained in any form whatsoever, prepared by you, based on, or containing Information shall be destroyed at the request of Alliance with written confirmation thereof by you of such destruction. 5. In the event that you are requested or required by oral questions, interrogatories, requests for Information or documents subpoena, civil investigation demand, or other similar process to disclose any of the Information acquired by you in the course of your dealing hereunder with Alliance, or its representatives, it is agreed that you will provide Alliance with prompt notice of such requests so that Alliance may seek an appropriate protective order and/or waive compliance with the provisions of this Confidentiality Agreement. It is further agreed that if, in the absence of a protective order or the receipt of a waiver hereunder, you are, nonetheless, in the written opinion of counsel, compelled to disclose any of the Information to any tribunal or else stand liable for contempt or suffer other censor or penalty, you may disclose to such tribunal only that portion of the Information which is legally required without liability hereunder and you will exercise your best efforts at Alliance's expense to obtain a protective order or other reliable assurance that confidential treatment will be accorded to the Information furnished hereunder; provided, however, that a copy of the aforementioned written opinion of counsel shall be furnished to Alliance prior to any such disclosure. 6. Without the prior written notice of Alliance, you will not make any statement, any public announcement, or release to trade publications or to the press. With respect to customers, competitors, and other third parties with whom you have dealings during the term of the Consulting Agreement, you may identify yourself as an independent contractor or consultant to Alliance, but shall otherwise maintain the confidence of the terms and conditions of this Consulting Agreement, except as shall be necessary, in the opinion of your counsel, to comply with the requirements of applicable law and only after written notice thereof to MAPCO Coal. 7. This Confidentiality Agreement shall expire two (2) years from the date of termination of the aforementioned Consulting Agreement. 8. This Confidentiality Agreement shall be governed and construed in accordance with the laws of the State of Oklahoma. 12 Mr. Robert G. Sachse January 1, 2001 Page 3 Please indicate your agreement by signing this letter, where indicated below. Sincerely, Alliance Resource Management GP, LLC By: /s/ Thomas L. Pearson -------------------------------- Thomas L. Pearson Senior Vice President ACCEPTED AND ACKNOWLEDGED THIS 26 day of March 2001. By: /s/ Robert G. Sachse ------------------------------- Robert G. Sachse, an individual EX-21.1 6 h85211ex21-1.txt LIST OF SUBSIDIARIES 1 EXHIBIT 21.1 LIST OF SUBSIDIARIES First Tier Subsidiary: Alliance Resource Operating Partners, L.P. ("AROP") (98.9999% limited partner interest) Second Tier Subsidiary: Alliance Coal, LLC ("ALLC") (AROP holds a 99.999% non-managing membership interest) Third Tier Subsidiaries: (ALLC holds a 100% membership interest in each of the third-tier subsidiaries) Alliance Land, LLC Alliance Properties, LLC Backbone Mountain, LLC Excel Mining, LLC Gibson County Coal, LLC Hopkins County Coal, LLC MC Mining, LLC Mettiki Coal, LLC Mettiki Coal (WV), LLC Mt. Vernon Transfer Terminal, LLC Pontiki Coal, LLC Webster County Coal, LLC White County Coal, LLC All of the above entities are formed under the laws of the state of Delaware. -----END PRIVACY-ENHANCED MESSAGE-----