10. VARIABLE INTEREST ENTITIES

Cavalier Minerals

On November 10, 2014, the ARLP Partnership's subsidiary, Alliance Minerals, and Bluegrass Minerals Management, LLC ("Bluegrass Minerals") entered into a limited liability company agreement (the "Cavalier Agreement") to create Cavalier Minerals, which was formed to indirectly acquire oil and gas mineral interests, initially through its 71.7% noncontrolling ownership interest in AllDale I and subsequently through its 72.8% noncontrolling ownership interest in AllDale II. Bluegrass Minerals is owned and controlled by the ARH Officer discussed in Note 7 – Long-Term Debt and is Cavalier Minerals' managing member. Alliance Minerals and Bluegrass Minerals initially committed funding of $48.0 million and $2.0 million, respectively, to Cavalier Minerals, and Cavalier Minerals committed funding of $49.0 million to AllDale I. On October 6, 2015, Alliance Minerals and Bluegrass Minerals committed to fund an additional $96.0 million and $4.0 million, respectively, to Cavalier Minerals, and Cavalier Minerals committed to fund $100.0 million to AllDale II.

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


	Year Ended December 31,
	2016		2015		2014
	(in thousands)
Alliance Minerals
Beginning cumulative commitment fulfilled	$	63,498	$	11,520	$	—
Capital contributions - Cash		72,334		51,552		11,520
Capital contributions - Net AllDale Minerals' distributions received by Cavalier Minerals (1)		1,245		426		—
Ending cumulative commitment fulfilled		137,077		63,498		11,520
Remaining commitment (2)		6,923		80,502		36,480
Total committed	$	144,000	$	144,000	$	48,000

Bluegrass Minerals
Beginning cumulative commitment fulfilled	$	2,646	$	480	$	—
Capital contributions - Cash		3,014		2,148		480
Capital contributions - Net AllDale Minerals' distributions received by Cavalier Minerals (1)		52		18		—
Ending cumulative commitment fulfilled		5,712		2,646		480
Remaining commitment (2)		288		3,354		1,520
Total committed	$	6,000	$	6,000	$	2,000

(1)

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

(2)

The remaining commitments were fulfilled in 2017.

At Alliance Minerals' election, Cavalier Minerals will meet its remaining funding commitment to AllDale Minerals through contributions from Alliance Minerals and Bluegrass Minerals or from borrowings under the Cavalier Credit Facility (see Note 7 – Long-Term Debt). The ARLP Partnership expects to fund its remaining commitments utilizing existing cash balances, future cash flows from operations and cash provided from borrowings of debt or equity issuances.

In accordance with the Cavalier Agreement, Bluegrass Minerals is entitled to receive an incentive distribution from Cavalier Minerals equal to 25% of all distributions (including in liquidation) after all members have recovered their investment. The incentive distributions are reduced by certain distributions received by Bluegrass Minerals or its owner from AllDale Minerals Management, LLC ("AllDale Minerals Management"), the managing member of AllDale Minerals. Distributions paid to Alliance Minerals and Bluegrass Minerals from Cavalier Minerals for each period presented are as follows:


	Year Ended December 31,
	2016		2015		2014
	(in thousands)
Alliance Minerals	$	4,546	$	—	$	—
Bluegrass Minerals		189		—		—

Alliance Minerals' ownership interest in Cavalier Minerals at December 31, 2016 and 2015 was 96%. The remainder of the equity ownership is held by Bluegrass Minerals. The ARLP Partnership has consolidated Cavalier Minerals' financial results as it concluded that Cavalier Minerals is a VIE and the ARLP Partnership is the primary beneficiary because neither Bluegrass Minerals nor Alliance Minerals individually has both the power and the benefits related to Cavalier Minerals and the ARLP Partnership are most closely aligned with Cavalier Minerals through its substantial equity ownership. Bluegrass Minerals equity ownership of Cavalier Minerals is accounted for as noncontrolling ownership interest in the consolidated balance sheets. In addition, earnings attributable to Bluegrass Minerals are recognized as noncontrolling interest in the consolidated statements of income.

WKY CoalPlay

On November 17, 2014, SGP Land, LLC ("SGP Land"), a wholly owned subsidiary of SGP, and two limited liability companies ("Craft Companies") owned by irrevocable trusts established by the President and Chief Executive Officer of MGP entered into a limited liability company agreement to form WKY CoalPlay. WKY CoalPlay was formed, in part, to purchase and lease coal reserves. WKY CoalPlay is managed by the ARH Officer discussed in Note 7 – Long-Term Debt, who is also an employee of SGP Land and trustee of the irrevocable trusts owning the Craft Companies. In December 2014 and February 2015, the ARLP Partnership entered into various coal reserve leases with WKY CoalPlay. See Note 18 – Related-Party Transactions for further information on the ARLP Partnership's lease terms with WKY CoalPlay.

The ARLP Partnership has concluded that WKY CoalPlay is a VIE because of the ARLP Partnership's ability to exercise options to acquire reserves under lease with WKY CoalPlay (Note 18 – Related-Party Transactions), which is not within the control of the equity holders and, if it occurs, could potentially limit the expected residual return to the owners of WKY CoalPlay. The ARLP Partnership does not have any economic or governance rights related to WKY CoalPlay and its options that provide the ARLP Partnership with a variable interest in WKY CoalPlay's reserve assets do not give it any rights that constitute power to direct the primary activities that most significantly impact WKY CoalPlay's economic performance. SGP Land has the sole ability to replace the manager of WKY CoalPlay at its discretion and therefore has power to direct the activities of WKY CoalPlay. Consequently, the ARLP Partnership concluded that SGP Land is the primary beneficiary of WKY CoalPlay.

White Oak

Prior to the ARLP Partnership's acquisition of the remaining equity interests in White Oak as discussed in Note 3 – Acquisitions, White Oak was a variable interest entity of which the ARLP Partnership was not the primary beneficiary. The ARLP Partnership held a majority of the Series A Units that had certain distribution and liquidation preferences but only gave it a 40% voting interest in the primary activities of the company. The ARLP Partnership had protective rights and limited participating rights, such as minority representation on their board of directors, restrictions on indebtedness and other obligations, the ability to assume control of the board of directors in certain circumstances, such as an event of default, and the right to approve certain coal sales agreements.

These protective and participating rights did not provide the ARLP Partnership the ability to unilaterally direct any of the primary activities of White Oak that most significantly impacted its economic performance and thus, the ARLP Partnership was not the primary beneficiary for consolidation purposes. Consequentially, the ARLP Partnership accounted for its Series A Units investment as an equity investment. See Note 12 – Equity Method Investments for further information.

The ARLP Partnership

ARLP is a publicly-traded master limited partnership (NASDAQ ticker "ARLP") created in 1999 to acquire certain coal production and marketing assets of ARH. AHGP holds 41.8% of the limited partnership interests in ARLP in addition to a 1.98% general partner interest in the ARLP Partnership through its 100% ownership of MGP. The limited partners do not have substantive kick-out rights to remove the general partner nor do they have substantive participating rights in the activities of ARLP, therefore we determined that ARLP is a VIE. To determine the primary beneficiary of ARLP, we considered that AHGP through its 100% ownership of MGP has the sole ability to direct the activities of ARLP and with its ownership of 41.8% limited partner interest and all the IDRs through MGP, has economic benefit that is significant to ARLP. As a result we determined that AHGP has both the power and benefits with respect to ARLP and is therefore the primary beneficiary and consolidates ARLP.

The Partnership Agreement (the "Agreement") of ARLP requires MGP to distribute on a quarterly basis 100% of ARLP's available cash to ARLP's partners. Available cash is determined as defined in the Agreement and represents all cash with the exception of cash reserves (i) for the proper conduct of the business including reserves for future capital expenditures and for anticipated credit needs of the ARLP Partnership, (ii) to comply with debt obligations or (iii) to provide funds for certain subsequent distributions. MGP is required under the terms of the Agreement to meet the distribution requirements as discussed above. As discussed in Note 7 – Long-Term Debt, the Intermediate Partnership's debt covenants place additional restrictions on distributions from ARLP by limiting cash available for distribution based on various debt covenants pertaining to the most recent preceding quarter. MGP cannot hold cash reserves to provide for subsequent distributions if that would prevent ARLP from making its minimum quarterly distributions or any cumulative distributions in arrears. MGP does not have the ability to amend the Agreement without the consent of a majority of the limited partners.