Alliance Resource Partners Annual Report 2010

FY2010 Annual Report · Alliance Resource Partners

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Alliance Resource Partners, L.P. Alliance Holdings GP, L.P.

2 0 1 0 A N N U A L R E P O R T

Why Alliance?

* Standard & Poor’s Capital IQ, November 12, 2010 ranking of 7,500 companies.

Alliance Mirrors Success.

Record-breaking financials ten years straight makes Alliance Resource Partners, L.P.
(ARLP) an investment story worth sharing.

Steady and strong, ARLP has carefully advanced

complex, is currently under construction and

its mission since 1999 when our partnership

expected to start longwall production in early

formed. In ten short years, we’ve built upon

2012. ARLP also manages a coal loading terminal

our original coal mining operations, adding

on the Ohio River.

mining units and facilities and transforming our

partnership into an industry leader. Today, ARLP

We believe our culture of credibility and

is the fourth-largest coal producer in the eastern

excellence allows every member of the ARLP

United States and the tenth-largest in the nation.

family to contribute to our partnership’s success.

Employees epitomized that philosophy in 2010

Many things motivate us, but topping the list is our

by realizing a lost-time accident rate that was

role in supplying a low-cost energy source critical

one-third below the industry average and the

to the American way of life and economic growth.

lowest rate in our partnership’s history. We

ARLP is a diversified producer and marketer of

also set new benchmarks for production, sales

coal to major utilities and industrial users primarily

volumes, revenues, EBITDA and net income.

in the United States. We also export about five

percent of our annual coal sales around the world.

The first publicly traded master limited

ARLP has 697 million tons of proven and

provided unitholders a 31 percent compounded

probable coal reserves and we operate a total

annual return over the past decade. The power of

of nine mining complexes in the Illinois Basin,

our strength in numbers continues to unfold.

partnership in our industry peer group, ARLP has

Northern Appalachian and Central Appalachian

coal-producing regions. Tunnel Ridge, our tenth

Strong Financials Provide
Operating Strength.

ARLP’s healthy balance sheet reflects conservative leverage and ample liquidity.

As opportunities and challenges merged during

In addition, our net income per basic and diluted

2010, ultimately the framework materialized to

limited partner unit increased 87.6 percent to $6.68.

achieve the best financial results our partnership

has ever recorded.

Achievements like these allow ARLP to share even

more success with unitholders. The fourth quarter

Our marketing team’s strategy strengthened ARLP’s

of 2010 was the eleventh consecutive quarter that

long-term domestic coal sales position and also

ARLP’s Board of Directors increased unitholders’

moved more coal into export markets. The team’s

cash distribution and it did so while maintaining

efforts reduced our coal inventory, increased

one of the highest distribution coverage ratios in the

the average year-over-year coal sales price by

master limited partnership sector.

9.9 percent to $51.21 per ton and bumped sales

volume 21.3 percent to a record 30.3 million tons.

ARLP is committed to ensuring that sophisticated

safety technology is part of all existing facilities

On the production side of our business, ARLP’s

and expansion projects. This includes making

operating groups delivered the highest output in

investments in advanced communications and

our partnership’s history. They successfully

tracking technology and sophisticated ventilation

expanded the River View complex, which began

systems. During 2010, we dedicated $289.9 million

production in 2009, to eight continuous mining

in capital expenditure funds primarily for our River

units. River View’s 600 employees are now able

View Mine expansion and Tunnel Ridge development,

to produce 7 million tons of high-sulfur coal per

as well as for maintenance projects totaling

year. Our Pattiki Mine was idled for eight weeks

approximately $90.5 million.

during 2010 due to a vertical hoist conveyor system

failure. During that period as the mine was phased

We completed a $300 million bank term loan at

back to full capacity, other ARLP operations

the end of 2010, taking advantage of attractive

accelerated their coal production to help

debt markets. The financing increased our liquidity,

overcome this challenge.

strengthened our balance sheet and enhanced our

ability to pursue new growth opportunities.

These actions and others pushed revenues, EBITDA*

and net income to all-time ARLP highs. A comparison

These are more than numbers. They demonstrate

of our 2010 results with those in 2009 shows:

the fundamental achievements that allow us to push

forward with continued excellence in 2011 and beyond.

Revenues

+30.8 percent to $1.6 billion

EBITDA

+46.7 percent to $499.5 million

Net income

+67.1 percent to $321.0 million

* Please see the inside back cover for a definition of EBITDA and GAAP to non-GAAP reconciliation information.

S
N
O
T

N
O
L
L
M

ARLP Coal - Tons Produced
2006-2010

ARLP Coal - Tons Sold
2006-2010

S
N
O
T

N
O
L
L
M

2
0
0
6

2
0
0
7

2
0
0
8

2
0
0
9

2
0
1
0

2
0
0
6

2
0
0
7

2
0
0
8

2
0
0
9

2
0
1
0

ARLP Revenues
2006-2010

ARLP EBITDA
2006-2010

S
N
O
L
L
M
N

S
R
A
L
L
O
D

S
N
O
L
L
M
N

S
R
A
L
L
O
D

1800

1600

1400

1200

1000

800

S
N
O
L
L
M
N

S
R
A
L
L
O
D

600

500

400

300

200

100

2
0
0
6

2
0
0
7

2
0
0
8

2
0
0
9

2
0
1
0

2
0
0
6

2
0
0
7

2
0
0
8

2
0
0
9

2
0
1
0

ARLP Net Income
2006-2010

Total Assets
2006-2010

350

300

250

200

150

100

S
N
O
L
L
M
N

S
R
A
L
L
O
D

1600

1400

1200

1000

800

600

2
0
0
6

2
0
0
7

2
0
0
8

2
0
0
9

2
0
1
0

2
0
0
6

2
0
0
7

2
0
0
8

2
0
0
9

2
0
1
0

ARLP Distributions Paid
2001-2010

4.00

3.00

2.00

1.00

2
0
0
1

2
0
0
2

2
0
0
3

2
0
0
4

2
0
0
5

2
0
0
6

2
0
0
7

2
0
0
8

2
0
0
9

2
0
1
0

Why Coal?

ALMOST HALF OF AMERICA’S ELECTRICITY
IS TRADITIONALLY GENERATED BY COAL.

Recoverable coal reserves in the United States exceed that of any other

country and represent more than one-quarter of the world’s total coal

reserves. Half of the coal produced by ARLP alone each year generates

the same amount of power created annually by all of the nation’s available

wind energy.

Powered Up. Lights On.

Coal is by far the most abundant fossil fuel in the United States for electricity generation.

Life takes on new possibilities every single day

the U.S. total of coal-fired generating capacity to

with the flip of a switch. Electric utilities (like those

330 gigawatts.

with whom ARLP has significant long-term coal

supply agreements) power homes, businesses,

The coal and electric industries, in conjunction

hospitals, schools and industries. Electricity is

with government agencies, work diligently

core to America’s prosperity, jobs, technology,

to reduce emissions associated with coal

education, comfort and entertainment.

consumption. Power plant scrubber equipment,

catalytic converters and electrostatic

The coal supply in the U.S. exceeds that of any

precipitators are examples of enhanced

other fossil fuel. The nation’s recoverable coal

technology employed by utilities to burn coal

reserves pack the energy equivalent of one trillion

more efficiently and cleanly than ever before.

barrels of oil. That amount of energy is roughly

The efforts have been successful: Emissions of

equal to the entire world’s known oil reserves.

major pollutants from coal-fueled power plants

have been reduced by 84 percent per unit of

The U.S. depends on approximately 600

electricity generated since 1970. Meanwhile,

coal-fired plants for power. These facilities

demand for coal to generate electricity has

are projected to remain the backbone of the

nearly doubled during this time. Without a doubt,

nation’s electricity generation for years to come.

coal is an increasingly clean and integral part of

Between now and 2035, 21 gigawatts of new

America’s energy future.

generation are expected to be added, increasing

Why Now?

Production Growth + Sales Growth = Success.

We entered 2011 with about 95 percent of ARLP’s estimated production committed and
priced and with solid contracts booked for 2012 and beyond.

A legacy of record-setting achievements provides

Gibson South is an ARLP expansion project

ARLP the necessary commitment to reach even

that is in the permitting process. Located near

higher. This is a challenge we accept with

Princeton, Indiana, Gibson South has about

enthusiasm, supported by calculated planning:

48 million tons of medium-sulfur coal and

Coal sales on the books for 2011 have grown to

production capacity of about 3.0 million tons

between 32.0 million tons and 33.0 million tons,

to 3.5 million tons per year. Our goal is to bring

with all but about 5 percent under contract and

Gibson South online sometime during 2014.

priced. To meet this robust need, production has

been ramped up to deliver between 31.6 million

ARLP’s other development projects remain on

tons and 32.6 million tons of coal. Our completed

the horizon. Penn Ridge, located in Washington

River View complex expansion is a critical key to

County, Pennsylvania, has an estimated 57 million

delivering this increased tonnage.

tons of high-sulfur coal reserves. Sebree, located

in Western Kentucky, has an estimated 24 million

The momentum will continue when our new

tons of high-sulfur coal reserves.

Tunnel Ridge complex starts its longwall

production in early 2012. Located in the Northern

The flexibility and willingness to shift resources

Appalachian coal region, Tunnel Ridge holds

when and where needed allow ARLP to meet

97 million tons of high-sulfur Pittsburg No. 8 coal.

customer expectations with exceptional service.

When the mine is at full production capacity, a

team of 340 employees will produce approximately

5.5 million tons to 6 million tons a year.

Disciplined Planning. Excellent Results.

2011 is on pace to extend ARLP’s bottom line performance streak for another year.

Responsible management is ARLP’s foundation

ARLP is actively participating in the export

for success. We understand the importance

market – moving about 1.0 million tons of

electricity plays in advanced society and

metallurgical coal overseas – to capture the

remain impressed with our customers’ ability

favorable international market dynamics. As

to consistently deliver reliable, low-cost power

we increase our production, ARLP will look for

to consumers. We respect and value our

additional opportunities to participate in the

employees, as they are responsible for ARLP’s

growing international demand for coal.

achievements. We appreciate the support of our

partners and unitholders and we are committed

To fill customer demand, it is critical that ARLP’s

to continue providing them the solid returns they

mines remain in excellent shape and that we

expect from us.

continue to grow. During 2011, ARLP estimates

capital expenditures will range from $320.0 million

Emerging economies, led by China and India,

to $360.0 million to cover ongoing development

are reshaping the global energy landscape.

activities at Tunnel Ridge, general maintenance and

These countries are relying heavily on coal to

infrastructure improvements. As a result of these

fuel their economic growth and in turn, improve

investments, ARLP expects 2011 depreciation,

the quality of life for their people. As worldwide

depletion and amortization expenses to increase

demand continues to increase, the U.S. coal

to a range of $160.0 million to $170.0 million,

industry is benefitting from sales to higher-

compared with $146.9 million in 2010. On a

priced export markets. If export demand grows

five-year planning horizon, ARLP estimates

as it did in 2010, forward pricing dynamics will

maintenance capital expenditures of approximately

continue to flourish.

$4.70 per ton produced. Actual expenses will

BY 2035, COAL IS EXPECTED TO

REMAIN THE PRIME SOURCE

FOR ELECTRICITY, IN THE

UNITED STATES.

COAL
43%

OTHER
32%

NATURAL
GAS
25%

vary due to timing of construction and maintenance

schedules, as well as changes in Mine Safety and Health

Administration laws and regulations.

To keep pace as the world’s fastest-growing fuel, the coal

industry must employ dedicated and highly motivated

people. Today, the coal industry provides direct jobs

for almost 90,000 Americans who live across 25 states.

ARLP’s union-free workforce totaled 3,558 employees at

the end of 2010 and we expect that number to increase to

3,700 by the end of 2011.

ARLP is committed to attracting people who understand

how their efforts help power America’s success.

ARLP continuously implements and often establishes

the coal industry’s best practices regarding safe

working environments, equipment, ongoing training,

compensation, benefits and recognition. As a result,

ARLP has developed a team of professionals in our

mining complexes and support offices whose operational

practices drive superior earnings performance.

By aligning the interests of customers, employees,

management and unitholders, ARLP has been able to

achieve a consistent and stable record of cash flow and

distribution growth. Looking forward, we will continue to

rely on our financial integrity as we further expand our

strength in numbers.

Mining Complexes

Illinois Basin

Central Appalachia

Northern Appalachia

1. Pattiki
Pattiki Mine

2. Dotiki
Dotiki Mine

3. Warrior
Warrior Mine

4. Hopkins
Elk Creek Mine

5. Gibson
Gibson North Mine

6. Pontiki
Excel No. 2 Mine

7. MC Mining
Excel No. 3 Mine

8. Mettiki
Mountain View Mine

9. River View
River View Mine

Under Construction

10. Tunnel Ridge
Estimated reserves: 97 million tons

Mine Development Projects

11. Gibson South
Estimated reserves: 48 million tons

12. Penn Ridge
Estimated reserves: 57 million tons

13. Sebree
Estimated reserves: 24 million tons

Transfer Terminal

▲ Mount Vernon Transfer Terminal
Operates a coal loading terminal on

the Ohio River

ARLP remains committed to a business plan that inspires success and
continues to reward supporters. The journey has been exceptional for
ten years and it is our intention to continue forward on the same path.

Our determination to be a leader within the coal industry is a commitment ARLP takes seriously.

We will continue to manage our business with a disciplined approach and thoughtfully pursue new

opportunities. We also will remain focused on delivering exceptional value to our unitholders by creating

sustainable growth in cash flow and distributions.

Much of the foundation for a successful 2011 already is in place and should result in greater coal sales

volumes and sales prices. Those achievements are expected to produce the following increases for

2011, when compared with our 2010 results:

Revenues*

+10.8 to 17.1 percent, or $1.75 billion to $1.85 billion

Net income

+7.5 to 20.0 percent, or $345.0 million to $385.0 million

EBITDA

+9.0 to 17.0 percent, or $545.0 million to $585.0 million

* Excludes transportation revenues

ARLP’s anticipated 2011 results are expected to benefit from a full year of River View running all eight

of its mining units and the Pattiki Mine’s return to full production capacity. The numbers also take into

account challenges facing our industry: the domestic steam coal supply remains under pressure from

growth in global coal demand and production is constrained due to heightened regulatory intervention.

Our long-term view of the supply/demand dynamics in the domestic market remains positive. After two

difficult years, the United States economy is showing signs of growth, raising expectations for higher

electricity consumption in the future and pointing to increased coal demand.

Your support provides ARLP confidence and strength. Thank you.

Joseph W. Craft III
ARLP President, Chief Executive Officer and Director
AHGP President, Chief Executive Officer and Chairman of the Board

March 8, 2011

Reconciliation Of GAAP “Cash Flows Provided By Operating Activities” To Non-GAAP “EBITDA”
Reconciliation Of Non-GAAP “EBITDA” To GAAP “Net Income”

Year Ended December 31
(in thousands)

2010

2009

2008

2007

2006

Cash flows provided by operating activities
Non-cash compensation expense
Asset retirement obligations
Coal inventory adjustment to market
Net gain (loss) on foreign currency exchange
Net gain (loss) on sale of property, plant and equipment
Gain on sale of coal reserves
Gain from insurance recoveries for property damage
Gain from insurance settlement proceeds received in a prior period
Loss on retirement of vertical hoist conveyor system
Other
Net effect of working capital changes
Interest expense, net
Income tax expense (benefit)

EBITDA
Depreciation, depletion and amortization
Interest expense, net
Income tax (expense) benefit
Cumulative effect of accounting change

520,588
(4,051
(2,579
(498
(274
(234
-
-
-
(1,204
(1,448
(42,402
29,862
1,741

)
)
)
)
)

)
)
)

499,501
(146,881
)
(29,862
)
(1,741
)
-

)
)
)

282,741
(3,582
(2,678
(3,030
653
)
(136
-
-
-
-
(537
36,440
29,798
708

)

340,377
(117,524
(29,798
(708
-

)
)
)

261,041
(3,931
(2,827
(452
-
911
5,159
-
-
-
(366
(19,661
18,418
(480

257,812
(105,278
(18,418
480
-

)
)
)

)
)

)

)
)

)
)
)

)

244,012
(3,925
(2,419
(21
-
3,189
-
2,357
5,088
-
( 811
7,898
9,952
1,669

266,989
(85,310
(9,952
(1,669
-

)
)
)

Net income
Net (income) loss attributable to noncontrolling interest

321,017
-

192,347
(190

)

134,596
(420

)

170,058
332

$
$

250,923
(4,112
(2,101
(319
-
1,188
-
-
-
-
(1,119
(5,317
9,175
2,443

)
)
)

)
)

250,761
(66,489
(9,175
(2,443
112

)
)
)

172,766
161

Net income attributable to ARLP

321,017

192,157

134,176

170,390

$
$

172,927

EBITDA is defined as net income attributable to ARLP before net interest expense, income taxes, depreciation, depletion and amortization, cumulative effect of accounting
change and net income attributable to noncontrolling interest. EBITDA is used as a supplemental financial measure by our management and by external users of our financial
statements such as investors, commercial banks, research analysts and others to assess: the financial performance of our assets without regard to financing methods,
capital structure or historical cost basis; the ability of our assets to generate cash sufficient to pay interest costs and support our indebtedness; our operating performance
and return on investment as compared to those of other companies in the coal energy sector, without regard to financing or capital structures; and the viability of acquisitions
and capital expenditure projects and the overall rates of return on alternative investment opportunities.

EBITDA should not be considered as an alternative to net income, income from operations, cash flows from operating activities or any other measure of financial
performance presented in accordance with generally accepted accounting principles. EBITDA is not intended to represent cash flow and does not represent the measure of
cash available for distribution. Our method of computing EBITDA may not be the same method used to compute similar measures reported by other companies, or EBITDA
may be computed differently by us in different contexts (i.e., public reporting versus computation under financing agreements).

Forward-Looking Statements

This Annual Report contains forward-looking statements and information that are based on the beliefs of Alliance Resource Partners, L.P. and Alliance Holdings GP, L.P.
(the “Partnerships”) and those of their respective general partners (the “General Partners”), as well as assumptions made by and information currently available to them.
When used in this Annual Report, words such as “anticipate,” “project,” “expect,” “plan,” “goal,” “forecast,” “intend,” “could,” “believe,” “may,” “continue,” “estimate,” “will”
and similar expressions and statements regarding the plans and objectives of the Partnerships for future operations, are intended to identify forward-looking statements.

Although the Partnerships and their General Partners believe that such expectations reflected in such forward-looking statements are reasonable at the time such statements
are made, neither the Partnerships nor the General Partners can give assurances that such expectations will prove to be correct. Such statements are subject to a variety of
risks, uncertainties and assumptions. For a description of such risks and uncertainties, please see the forward-looking statements included in the Annual Reports on Form
10-K for Alliance Resource Partners, L.P. and Alliance Holdings GP, L.P. which are available by request or can be viewed on the Partnerships’ respective Web sites. If one
or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect, actual results may vary materially from those the Partnerships anticipated,
estimated, projected or expected.

The Partnerships have no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

General Information

Partnership Tax Details

The following information applies to Alliance Resource
Partners, L.P. (ARLP) and Alliance Holdings GP, L.P. (AHGP)
unless specified otherwise.

Partnership Offices

1717 South Boulder Avenue, Suite 400
Tulsa, OK 74119
(918) 295-7600

Partnership Mailing Address

P.O. Box 22027
Tulsa, OK 74121-2027

Contact

Brian L. Cantrell
Senior Vice President and Chief Financial Officer
(918) 295-7674
brian.cantrell@arlp.com

Business Structure

Publicly traded master limited partnership.

Common Unit Trading

Common units are traded on the NASDAQ Global Select Market.

NASDAQ Ticker Symbols

Alliance Resource Partners, L.P.
Alliance Holdings GP, L.P.

ARLP
AHGP

Common Units Outstanding (12/31/2010)

ARLP 36,716,855 common units
AHGP 59,863,000 common units

Independent Auditors

Deloitte & Touche LLP
One Technology Center
100 South Cincinnati Avenue, Suite 700
Tulsa, OK 74103

Unitholder Information

Cash Distributions

The partnerships expect to make quarterly distributions to
unitholders of record on the applicable record dates according
to the following schedules:

Alliance Resource Partners, L.P.

Within 45 days after the end of each March, June, September
and December.

Alliance Holdings GP, L.P.

Within 50 days after the end of each March, June, September
and December.

Unitholders are partners in the partnership and receive quarterly cash
distributions. Cash distributions generally are not taxable as long as the
individual unitholder’s tax basis remains above zero.

A partnership generally is not subject to federal or state income
tax. The annual income, gains, losses, deductions or credits of the
partnership flow through to the unitholders, who are required to report
their allocated share of these amounts on their individual tax returns,
as though the unitholder had incurred these items directly.

Schedule K-1

Unitholders of record receive Schedule K-1 packages that summarize
their allocated share of the partnership’s reportable tax items for the
fiscal year. It is important to note that cash distributions received
should not be reported as taxable income. Only the amounts provided
on the Schedule K-1 should be entered on each unitholder’s tax return.

Schedule K-1 information also is available on our Web sites. Please
visit www.arlp.com and www.ahgp.com.

Unitholders should refer questions regarding their Schedule K-1
as follows:

By Mail

K-1 Support
P.O. Box 799060
Dallas, TX 75379-9060

By Phone/Fax

Alliance Resource Partners, L.P.
Phone (800) 485-6875 Fax (866) 554-3842

Alliance Holdings GP, L.P.
Phone (866) 867-4060 Fax (866) 554-3842

Transfer Agent and Registrar

Direct requests regarding transfer of units, lost certificates, lost
distribution checks or address changes to:

American Stock Transfer and Trust Company
Attn: Shareholder Services
59 Maiden Lane – Plaza Level
New York, NY 10038
(800) 937-5449

Investor Information and Form 10-K

For more information or free copies of the 2010 Form 10-K, please
contact the appropriate e-mail address or phone number listed below.
Form 10-K also may be downloaded from the Partnerships’ Web sites.

Alliance Resource Partners, L.P.

E-mail:
investorrelations@arlp.com
(918) 295-7674
Phone:
Web site: www.arlp.com

Alliance Holdings GP, L.P.

investorrelations@ahgp.com
E-mail:
(918) 295-1415
Phone:
Web site: www.ahgp.com

P.O. Box 22027, Tulsa, Oklahoma 74121-2027 | www.arlp.com | www.ahgp.com