8. 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 6 – Long-Term Debt and is Cavalier Minerals' managing member. Alliance Minerals and Bluegrass Minerals initially committed funding of $48.0 million and $2.0 million, respectively, to Cavalier Minerals, and Cavalier Minerals committed funding of $49.0 million to AllDale I. On October 6, 2015, Alliance Minerals and Bluegrass Minerals committed to fund an additional $96.0 million and $4.0 million, respectively, to Cavalier Minerals, and Cavalier Minerals committed to fund $100.0 million to AllDale II. Contributions in the three months ended March 31, 2017 sufficiently completed funding to Cavalier Minerals for these commitments. As of March 31, 2017, Cavalier Minerals is not expected to call on further funding of these commitments from Alliance Minerals and Bluegrass Minerals.

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


	Three Months Ended
	March 31,
	2017		2016
	(in thousands)
Alliance Minerals
Beginning cumulative commitment fulfilled	$	137,077	$	63,498
Capital contributions - Cash		6,035		19,080
Capital contributions - Net AllDale Minerals' distributions received by Cavalier Minerals (1)		—		399
Ending cumulative commitment fulfilled		143,112		82,977
Remaining commitment		888		61,023
Total committed	$	144,000	$	144,000

Bluegrass Minerals
Beginning cumulative commitment fulfilled	$	5,712	$	2,646
Capital contributions - Cash		251		795
Capital contributions - Net AllDale Minerals' distributions received by Cavalier Minerals (1)		—		17
Ending cumulative commitment fulfilled		5,963		3,458
Remaining commitment		37		2,542
Total committed	$	6,000	$	6,000

(1)

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

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


	Three Months Ended
	March 31,
	2017		2016
	(in thousands)
Alliance Minerals	$	4,563	$	—
Bluegrass Minerals		190		—

Alliance Minerals' ownership interest in Cavalier Minerals at March 31, 2017 was 96%. The remainder of the equity ownership is held by Bluegrass Minerals. The ARLP Partnership has consolidated Cavalier Minerals' financial results as it concluded that Cavalier Minerals is a variable interest entity ("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 is 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 our condensed consolidated balance sheets. In addition, earnings attributable to Bluegrass Minerals are recognized as noncontrolling interest in our condensed consolidated statements of income.

WKY CoalPlay

On November 17, 2014, SGP Land, LLC ("SGP Land"), a wholly-owned subsidiary of SGP, and two limited liability companies ("Craft Companies") owned by irrevocable trusts established by the President and Chief Executive Officer of MGP entered into a limited liability company agreement to form WKY CoalPlay, LLC ("WKY CoalPlay"). WKY CoalPlay was formed, in part, to purchase and lease coal reserves. WKY CoalPlay is managed by the ARH Officer discussed in Note 6 – Long-Term Debt, who is also an employee of SGP Land and trustee of the irrevocable trusts owning the Craft Companies. In December 2014 and February 2015, the ARLP Partnership entered into various coal reserve leases with WKY CoalPlay. During the three months ended March 31, 2017, the ARLP Partnership paid $10.8 million of advanced royalties to WKY CoalPlay. As of March 31, 2017, the ARLP Partnership had $30.1 million of advanced royalties outstanding under the leases, which is reflected in the Advance royalties, net line items in our condensed consolidated balance sheets.

The ARLP Partnership has concluded that WKY CoalPlay is a VIE because of its ability to exercise options to acquire reserves under lease with WKY CoalPlay, which is not within the control of the equity holders and, if it occurs, could potentially limit the expected residual return to the owners of WKY CoalPlay. The ARLP Partnership does not have any economic or governance rights related to WKY CoalPlay and the ARLP Partnership's options that provide it 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.

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 41.7% 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 variable interest entity. 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 41.7% limited partner interest and all the incentive distribution rights 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 6 – 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.