3. ACQUISITIONS

White Oak Resources

On July 31, 2015 (the "Hamilton Acquisition Date") Hamilton acquired the remaining Series A and B Units, representing 60% of the voting interests of White Oak, from White Oak Finance Inc. and other parties (the "Sellers") for total fair value consideration of $310.3 million (the "Hamilton Acquisition"). The following table summarizes the total fair value of consideration transferred at the Hamilton Acquisition Date:


	(in thousands)

Cash on hand	$	50,000
Contingent consideration		14,800
Settlement of pre-existing relationships		124,379
Previously held equity-method investment		121,155
Total consideration transferred	$	310,334

Effective from the Hamilton Acquisition Date, the ARLP Partnership now owns 100% of the interests in White Oak and has assumed operating control of the White Oak Mine No. 1 (now known as the Hamilton mine), an underground longwall mining operation located in Hamilton County, Illinois. The Hamilton Acquisition was consistent with the ARLP Partnership's general business strategy and a strategic complement to its coal mining operations.

The contingent consideration is payable to the Sellers to the extent Hamilton's quarterly average coal sales price exceeds a specified amount on future sales. Amounts payable under the contingent consideration arrangement are subject to a defined maximum of $110.0 million reduced for any payments that the ARLP Partnership makes under an overriding royalty agreement between White Oak and certain of the Sellers relating to undeveloped mineral interests controlled by White Oak. The ARLP Partnership estimated the fair value of the contingent consideration using a probability-weighted discounted cash flow model. The assumptions used in the model included a risk-adjusted discount rate, forward coal sales price curves, cost of debt, and probabilities of meeting certain threshold prices. The fair value measurement is based on significant inputs not observable in active markets and thus represents a Level 3 fair value measurement.

Prior to the Hamilton Acquisition Date, the ARLP Partnership accounted for its 40% interest in White Oak as an equity method investment (See Note 12 – Investments). The acquisition date fair value of the previous equity interest was $121.2 million and is included in the measurement of the consideration transferred. The ARLP Partnership re-measured its equity investment immediately prior to the Hamilton Acquisition using a discounted cash flow model which resulted in a loss of $52.3 million ("Re-measurement Loss") which is recorded in the line item Acquisition gain, net in our consolidated statements of income. The assumptions used in the determination of the fair value include projected financial information, forward coal price curves, and a risk adjusted discount rate. The assumptions used in this fair value measurement are not observable in active markets and therefore represents a Level 3 fair value measurement.

In connection with the Hamilton Acquisition, the ARLP Partnership settled its pre-existing relationships with White Oak which included existing account balances of $49.6 million. The settlement of pre-existing relationships also included, under business combination accounting, a $74.8 million net gain for above-market terms associated with pre-existing contractual agreements which were comprised of coal leases, a coal handling and preparation agreement, a coal supply agreement, export marketing and transportation agreements and certain debt agreements. The net gain of $74.8 million associated with the settlement of the net above-market terms is recorded in the line item Acquisition gain, net in our consolidated statements of income partially offset by the Re-measurement Loss of $52.3 million discussed above which nets to $22.5 million. These settlements of account balances and settlements of net above-market terms are included in the measurement of consideration transferred for the Hamilton Acquisition. As part of the settlement of these agreements, it considered the rates at which a market participant would enter into these agreements and recognized gains for the above-market rates and losses for the below-market rates contained in the various agreements. The ARLP Partnership developed a discounted cash flow model to determine the fair value of each of these agreements at market rates and compared the valuations to similar models using the contractual rates of the agreements to determine its gains or losses. The assumptions used in these valuation models include processing rates, royalty rates, transportation rates, marketing rates, forward coal price curves, interest rates, projected financial information and risk-adjusted discount rates. These fair value measurements were based on the previously discussed assumptions which are not observable in active markets and therefore represent Level 3 fair value measurements.

The following table summarizes the fair value allocation of assets acquired and liabilities assumed at the Hamilton Acquisition Date:


	(in thousands)

Cash and cash equivalents	$	3,125
Trade receivables		3,018
Prepaid expenses		3,942
Inventories		7,240
Other current assets		9,456
Property, plant and equipment		299,214
Advance royalties		3,349
Deposits		6,981
Other assets		12,829
Total identifiable assets acquired		349,154

Accounts payable		(31,181)
Accrued expenses		(20,987)
Deferred revenue		(517)
Current maturities, long-term debt		(29,529)
Long-term debt, excluding current maturities		(63,973)
Other long-term liabilities		(12,175)
Asset retirement obligations		(12,484)
Total liabilities assumed		(170,846)
Net identifiable assets acquired	$	178,308
Goodwill		132,026
Net assets acquired	$	310,334

The goodwill recognized is attributable to expected synergies and operational cost reductions by using the ARLP Partnership's other owned facilities and reserves as well as utilizing the ARLP Partnership's centralized marketing, operations and administrative functions. All of the goodwill has been allocated to the ARLP Partnership's Hamilton reporting unit included in the Illinois Basin segment.

The ARLP Partnership recognized intangible assets and liabilities associated with the above- and below-market customer contracts in addition to a mining permit as follows:


			Weighted-average	Account in table
	(in thousands)		amortization period	above
Customer contracts and intangibles
Current above-market contracts	$	9,333		Other current assets
Non-current above-market contracts		3,671		Other assets
Current below-market contracts		(4,702)		Accrued expenses
Non-current below-market contracts		(1,525)		Other long-term liabilities
Total customer contract intangibles		6,777	3 years
Mining permit		1,500	20 years	Other assets
Total intangibles acquired	$	8,277

The ARLP Partnership determined the fair value of cash and cash equivalents, trade receivables, prepaid expenses, advanced royalties, deposits, accounts payable, accrued expenses, and deferred revenue approximated White Oak's carrying value given the highly liquid and short-term nature of these assets and liabilities. The ARLP Partnership determined the fair value of inventories, property, plant and equipment (inclusive of mineral interests), and mining permits using a market approach. The market approach included the development of an entity-wide value using discounted cash flows and allocating the entity-wide value back to the underlying assets based on observed market prices. The ARLP Partnership has recorded the fair value of the above- and below-market components of customer contracts acquired as assets and liabilities. The ARLP Partnership determined these fair values through comparison of the terms in the contracts against projected coal prices. The ARLP Partnership also evaluated the acquired asset retirement obligation to determine the cost to fulfill the obligation and applied an appropriate discount rate to determine the fair value. The assumptions used in these fair value measurements are not observable in active markets and thus represent Level 3 fair value measurements. The ARLP Partnership determined the fair value of the long-term debt acquired through comparison of similar debt instruments and interest rates in active markets, and thus the assumptions used for the long-term debt represent Level 2 fair value measurements. (See Note 2 – Summary of Significant Accounting Policies – Fair Value Measurements for more information regarding fair value hierarchy levels.)

The amounts of revenue and earnings inclusive of the $22.5 million in net gains associated with the settlement of pre-existing relationships and the Re-Measurement Loss, both discussed above, included in our consolidated statement of income from the Hamilton Acquisition Date to the period ending December 31, 2015 are as follows:


	(in thousands)

Revenue	$	75,251
Net income		20,687

The following represents the pro forma revenue and net income as of December 31, 2015 as if Hamilton had been included in the consolidated results of AHGP since January 1, 2015. These amounts have been calculated after applying the ARLP Partnership's accounting. Additionally, our results have been adjusted to remove the effect of the ARLP Partnership's equity investment in White Oak and the pre-existing relationships that it had in White Oak.


	(in thousands)
Total revenues
As reported	$	2,273,311
Pro forma		2,336,958

Net income
As reported	$	304,158
Pro forma		293,206

Patriot Coal Corporation

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

On the Initial Closing Date, the ARLP Partnership's subsidiary, Alliance Coal acquired the rights to certain coal supply agreements from an affiliate of Patriot for approximately $21.0 million. Of the $21.0 million purchase price, $9.3 million was paid into escrow subject to obtaining certain assignment consents. In February 2015, $7.5 million of the escrowed amount was released to Patriot for a consent received and $1.8 million was returned to Alliance Coal as a result of a consent not received, reducing the ARLP Partnership's purchase price to $19.2 million. The acquired agreements provided for delivery of a total of approximately 5.1 million tons of coal from 2015 through 2017. Revenues generated by these contracts during 2015 were $130.5 million.

On February 3, 2015 (the "Acquisition Date"), Alliance Coal and Alliance Resource Properties acquired from Patriot an estimated 84.1 million tons of proven and probable medium/high-sulfur coal reserves in western Kentucky (substantially all of which was leased by Patriot), and substantially all of Dodge Hill's assets related to its former coal mining operation in western Kentucky, which principally included underground mining equipment and an estimated 43.2 million tons of non-reserve coal deposits (substantially all of which was leased by Dodge Hill). In addition, the ARLP Partnership assumed Dodge Hill's reclamation liabilities totaling $2.3 million. Also on the Acquisition Date, the Intermediate Partnership's subsidiaries, UC Mining and UC Processing, acquired certain underground mining equipment and spare parts inventory from Patriot's former Highland mining operation.

The mining and reserve assets acquired from Patriot described above are located in Union and Henderson Counties, Kentucky. The mining equipment, spare parts and underground infrastructure that the ARLP Partnership acquired from Patriot has been and is continuing to be dispersed to its existing operations in the Illinois Basin region in accordance with their highest and best use. The ARLP Partnership's purchase price of $19.2 million and $20.5 million paid on the Initial Closing Date and the Acquisition Date, respectively, described above was financed using existing cash on hand. In addition, the ARLP Partnership's purchase price was increased by $8.3 million, comprising $2.1 million cash paid prior to the Acquisition Date related to the transaction and an agreement to pay approximately $6.2 million additional consideration, which was satisfied as of December 31, 2015.

In conjunction with the ARLP Partnership's acquisitions on the Acquisition Date, WKY CoalPlay, LLC ("WKY CoalPlay"), a related-party, acquired approximately 39.1 million tons of proven and probable medium/high-sulfur owned coal reserves located in Henderson and Union Counties, Kentucky from Central States Coal Reserves of Kentucky, LLC, a subsidiary of Patriot, for $25.0 million and in turn leased those reserves to the ARLP Partnership. See Note 18 – Related-Party Transactions for further information on the ARLP Partnership's lease terms with WKY CoalPlay.

The fair value of the acquired tangible and intangible assets and assumed liabilities are based on discounted cash flow projections and estimated replacement cost valuation techniques. The ARLP Partnership used an estimate of replacement cost based on comparable market prices to value the acquired equipment and utilized discounted cash flows to value intangible assets and reserves. Key assumptions used in the valuations included projections of future cash flows, estimated weighted-average cost of capital, and internal rates of return. Due to the unobservable nature of these inputs, these estimates are considered Level 3 fair value measurements.

The following table summarizes the consideration transferred from the ARLP Partnership to Patriot and the fair value allocation of assets acquired and liabilities assumed as valued at the Acquisition Date:


	(in thousands)

Consideration transferred	$	47,874

Recognized amounts of net tangible and intangible assets acquired and liabilities assumed:
Inventories		1,994
Property, plant and equipment, including mineral rights and leased equipment		32,029
Customer contracts, net		19,193
Asset retirement obligation		(2,255)
Other liabilities		(3,087)
Net tangible and intangible assets acquired	$	47,874

Intangible assets related to coal supply agreements, represented as "Customer contracts, net" in the table above are reflected in the Prepaid expenses and other assets line item in the ARLP Partnership's consolidated balance sheet at December 31, 2016. Amortization expense is recognized based on the weighted-average term of the contracts, ranging from 1 to 3 years, on a per unit basis.

MAC

In March 2006, White County Coal and Alexander J. House entered into a limited liability company agreement to form MAC. MAC was formed to engage in the development and operation of a rock dust mill and to manufacture and sell rock dust. White County Coal initially invested $1.0 million in exchange for a 50% equity interest in MAC. The ARLP Partnership's equity investment in MAC was $1.6 million at December 31, 2014. Effective on January 1, 2015, the ARLP Partnership purchased the remaining 50% equity interest in MAC from Mr. House for $5.5 million cash paid at closing. In conjunction with the acquisition, the ARLP Partnership assumed $0.2 million of liabilities and $7.3 million in assets, net of cash acquired, including $4.2 million of goodwill which is reflected in Other and Corporate in the segment presentation (Note 21 – Segment Information) and is included in the Goodwill line item in our consolidated balance sheets.

See Note 2 – Summary of Significant Accounting Policies for more information on our accounting policy for business combinations and goodwill.