the 2011 Annual Report Alliance Resource Partners, L.P. | Alliance Holdings GP, L.P. Create sustainable cash-flow growth and deliver consistent increases in unitholder distributions. F e l l o w U n i t h o l d e r s Alliance Resource Partners, L.P. (arlp) and Alliance Holdings GP, L.P. (ahgp) are on a winning streak. For the 11th consecutive year, the Alliance Partnerships set new financial and operating records. Once considered the up-and-comer among coal producers, it’s rewarding to know that Alliance’s people, strategy and execution have delivered winning results. Alliance’s team has stayed focused and gone 11-for-11, an incredible achievement on any scorecard. What matters now, though, is what’s next. Alliance remains focused on expanding and adjusting to ever-changing dynamics. The following provides background statistics, plus a look at what lies ahead for this team in 2012. 1 Following A Powerful Playbook. Alliance has grown to become the third-largest long-term relationships with our customers. We coal producer in the eastern United States – an invest in ways that broaden our capabilities. impressive achievement, reflecting extraordinary We keep a conservative balance sheet. We grow growth and a vision fulfilled. In 1999, ARLP emerged strategically. We recruit the best people in our in the public markets committed to delivering results industry. All of these things keep our team in and rewarding those who supported our vision. balance and allow us to thrive. Our profits jumped 21.3 percent to $389.4 million and we expect them to be even higher in 2012. ARLP’s 11th record-breaking year in a row Alliance operates 10 underground mining complexes was accomplished by growing our production in five states, including Tunnel Ridge, our new 6.6% and revenues by 14.5% in 2011. Consistent mining complex in West Virginia, and controls more with the previous 10 years, we continued to than 911 million tons of coal reserves. In addition, execute on our strategy to create sustainable construction is underway at our new Gibson South growth in cash flow and deliver consistent growth mine in southern Indiana. Through our recent in unitholder distributions. transactions with White Oak Resources, LLC, we are also purchasing and funding development of 2 So how are we doing it? Discipline. Alliance reserves, constructing surface facilities and making understands that coal is the workhorse of the equity investments in a new mining complex in nation’s energy infrastructure and our team strives southern Illinois. to ensure the availability of this critical resource. We take measured steps to keep our competitive Our energy is focused on moving Alliance forward position strong. We maintain highly valued and achieving another record year. 4 97% of Alliance’s anticipated 2012 coal volumes are contractually committed and priced. 5 S N O T I N O L L M I ArlP Coal – tons Produced 2007-2011 ArlP Coal – tons sold 2007-2011 35 30 25 20 15 10 S N O T I N O L L M I 35 30 25 20 15 10 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 2 0 1 1 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 2 0 1 1 ArlP revenues 2007-2011 ArlP eBitdA 2007-2011 I S N O L L M N I I S R A L L O D I S N O L L M N I I S R A L L O D S R A L L O D 1800 1600 1400 1200 1000 800 I S N O L L M N I I S R A L L O D 600 500 400 300 200 100 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 2 0 1 1 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 2 0 1 1 ArlP net income 2007-2011 ArlP total Assets 2007-2011 350 300 250 200 150 100 I S N O L L M N I I S R A L L O D 1600 1400 1200 1000 800 600 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 2 0 1 1 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 2 0 1 1 ArlP distributions Paid AhGP distributions Paid Distributions paid per lp unit 2007-2011 4.00 3.00 2.00 1.00 0 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 2 0 1 1 every number tells A story. It’s tough to contain our enthusiasm after wrapping Alliance’s 2011 performance provided solid building up the best performance in our Partnerships’ blocks for current operations. Revenues – driven history. Take a look at the charts on the facing by increased coal sales volumes and higher price page. The upward-moving lines reflect production realizations – totaled $1.8 billion, up 14.5 percent increases, solid sales contracts, strong customer from 2010. EBITDA** grew to $570.8 million, a relationships and disciplined investments. Our focus 14.3 percent increase compared with the prior year. on the fundamentals has allowed Alliance to deliver Net income jumped 21.3 percent to $389.4 million, these results. or $8.13 per unit. Alliance unitholders’ cash distributions have increased for 15 consecutive quarters. Alliance’s strong financial results allow us to So what about our lineup for the new season? consistently enhance the rewards for our owners. Alliance’s strong balance sheet provides the During the past decade, ARLP delivered a resources needed to support operational 27.2 percent compounded annual return to momentum. Expansion projects continue to unitholders. That statistic places ARLP – for the strengthen our presence in critical, growing markets. third year in a row – in the top 1 percent of more than And, anticipated increases in price realizations 7,000 companies ranked by Standard & Poor’s.* and coal sales volumes will drive revenues to Growth at AHGP has also been impressive. Since into the following expectations° for our operating new highs. Collectively, these indicators translate its 2006 IPO, AHGP’s distributions to unitholders activities in 2012: have more than tripled and its unit price has more than doubled. Revenues°° – $2.0 billion to $2.1 billion EBITDA – $590.0 million to $680.0 million During 2011, ARLP’s distributions to unitholders Net income – $360.0 million to $440.0 million increased 15.1 percent ending the year at an annualized $3.96 per unit, while AHGP’s distributions to unitholders grew by nearly 21 percent ending the year at an annualized $2.55 per unit. Based on our current operating plans, we expect distributions for 2012 to grow at a similar pace. * Standard & Poor’s, Capital IQ, November 2011 ranking. ** Please see the inside back cover for a definition of EBITDA and GAAP to non-GAAP reconciliation information. ° Excludes the impact on ARLP’s 2012 consolidated financial results from its commitments to and preferred equity investments in White Oak Resources, LLC. ° ° Excludes transportation revenues. 7 Alliance is the dream team. Meet the Alliance team members and you understand the lifeblood of our business. Bringing their talents together creates an organization that is second to none. At Alliance we have a saying, “It’s who you’re with.” We believe that success begins with people working toward shared goals and that inspired players are game changers. It’s why we provide our team with ongoing training, the best equipment and a steadfast commitment to safety. We’ve also created a network of health clinics for our workers and their families. The clinics provide our team with excellent medical services – fostering wellness and enhancing productivity. Our 3,800+ employees prove daily that they have the resilience to adapt to challenges and the tenacity to reach new performance goals. Alliance’s 11-year, record-breaking streak is a culmination of our team’s shared spirit and determination to be successful. We are gratified by past performance and eagerly anticipating what our team will accomplish next. 8 Low-cost producing regions with growing market opportunities. expansion is on the horizon. Alliance’s commitment and focus continue to create opportunities for the future. The Illinois Basin and Northern Appalachia continue to be Alliance’s favorite plays. Both are incredibly rich in low-cost, scrubber-quality coal, highly desired by power generators. new opportunities must offer volume growth and attractive returns, plus meet our well-defined objectives. Building for the Future When considering expansion options, Alliance follows a Organic Growth Project New Tunnel Ridge Complex Northern Appalachia Organic Growth Project New Gibson South Mine Illinois Basin Preferred Equity Investment White Oak Mine No. 1 Illinois Basin special teams Matrix Design Group, LLC Designs, develops and markets innovative safety and productivity technology used in underground mining. disciplined approach. We also make sure Alliance has the bench strength and resources to maximize the performance of assets added to our lineup. Tunnel Ridge, our newest addition to the team, is on the cusp of becoming a solid contributor. With this Northern Appalachian longwall scheduled to start production in the second quarter of this year, Tunnel Ridge is expected to produce up to 3.4 million tons of coal in 2012, ultimately growing to an annual production capacity of 6.5 to 6.8 million tons in 2013 and beyond. Next up is Gibson South, Alliance’s newest continuous mining operation under construction in the Illinois Basin. We currently expect this new mine to begin initial production in the third quarter of 2014, reaching full annual production capacity of approximately 3.0 to 3.5 million tons in 2015. Our White Oak Resources investment, announced in 2011, brings us a substantial reserve base that’s ideal for longwall operations. The transaction’s low-risk structure is designed to provide consistent, long-term cash flows from royalty, throughput and equity distribution payments. We expect White Oak to begin making meaningful financial contributions in 2015 once its Mine No. 1 longwall production has begun. Alliance’s capital expenditures, including maintenance, for 2012 are estimated to be in the range of $400 million to $425 million.* 11 * Excludes capital expenditures related to ARLP’s commitment to White Oak Resources, LLC. the importance of depth. Coupling volume growth with an impressive We’re excited about our Tunnel Ridge startup. contract portfolio allows Alliance to stay on the With this new mine, Alliance estimates its 2012 coal offense despite facing tough coal market challenges. production will be in the range of 34 million to Sometimes, though, the unexpected happens 35 million tons and coal sales volumes will be and interrupts production flow. For example, a between 34.75 million to 35.85 million tons. We regulatory dispute in 2011 resulted in the decision also expect our sales prices to increase by that our Pontiki Complex must operate with one 2 to 4 percent. less mining unit in the future. We expect double-digit growth in 2012 for both coal production and sales volumes. Challenges just make us work harder and focus on Alliance’s sales team already has secured our game plan. Strong performance with Alliance’s commitments for approximately 33.5 million tons in other operations drove 2011’s production to 2013, 27.2 million tons in 2014 and 19.8 million tons 30.8 million tons, a 6.6 percent increase when in 2015. A lion’s share of each of those amounts has compared with 2010. By capitalizing on pricing and pricing in place. brokerage opportunities, Alliance’s 2011 average coal sales price increased $4.74 per ton sold and sales volumes climbed to 31.9 million tons. The result was more than $1.8 billion in revenues. 12 equipment Check. While our eye is always surveying new reserve areas at our Dotiki, the field, Alliance has an unwavering MC Mining and Mountain View commitment to keep current operations. We’ll also complete the assets in top-performing condition. Dotiki Mining Complex’s new coal Significant 2012 maintenance preparation plant that’s currently projects include transitions into under construction. Illinois Indiana Ohio 14 10 Pennsylvania Maryland 8 12 1 5 11 9 13 2 3 4 West Virginia Kentucky 6 7 Virginia 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 Mine Development Projects 13. Sebree Estimated reserves: 25 million tons 14. Penn Ridge Estimated reserves: 57 million tons Transfer Terminal Mount Vernon Transfer Terminal Operates a coal loading terminal on the Ohio River 8. Mettiki Mountain View Mine 9. River View River View Mine 10. Tunnel Ridge Estimated reserves: 100 million tons Development production: 2011 & full startup 2012 Under Construction 11. Gibson South Mine Estimated reserves: 61 million tons Production startup: 2014 12. White Oak Resources Mine No. 1 Estimated reserves: 205 million tons Production startup: 2015 13 Coal: the home-Field Advantage. For more than a century, coal has been America’s low-cost natural resource to generate electricity. That’s something to celebrate: affordable energy empowers economic growth, which results in jobs and provides tax revenue. Coal fuels ingenuity, industry and prosperity. Other countries in the world, seeking to emulate America’s success, understand coal’s importance in helping to drive gross domestic product. China, which currently leads the world in GDP growth, has increased its coal production from 1 billion tons per year to 3 billion tons per year in the last decade. The U.S. Congressional Research Service records America’s recoverable coal reserves as being 262 billion short tons, meaning the nation holds more than 28 percent of the world’s supply. That places the U.S. as number one in domestic coal resources – with Russia, China and India ranking distant second, third and fourth places, respectively. Interestingly, China currently generates 71 percent of its electricity with coal. Meanwhile, coal’s market share for power generation in the United States 14 has slipped from 50 percent to 45 percent. It is time for coal to be recognized as a power of U.S. growth. Coal is cost effective, provides critical, high-paying jobs, and helps the U.S. retain its competitive and secure home-field advantage. Alliance’s Focus: Expanding Market Opportunities Low-Cost Producing Regions High-Return Organic Development Projects Disciplined Acquisitions 15 Alliance believes that coal will continue to be the primary source of electric power generation in the United States for the next several decades. We remain committed to expanding our presence in the Illinois Basin and Northern Appalachian regions, which are poised to power the eastern U.S. for years to come. No one sets the bar higher than Alliance. Our disciplined approach positions us to win. For 2012, Alliance will continue to focus on executing the fundamentals that created our 11 past successful seasons. Those who invest in our Partnerships can be assured of our determination to maintain a clear strategy designed to extend our exceptional track record by delivering strong performance and an active growth profile. We remain committed to our strategy, and believe ARLP and AHGP will again provide our unitholders with attractive distribution growth. The Alliance team made our record-breaking streak possible, and their dedication and persistence will continue to drive our success. After 11 record-breaking seasons and with new opportunities on deck in 2012, our team is ready to compete in what could be Alliance’s most impressive year ever. Joseph W. Craft III ARLP President, Chief Executive Officer and Director AHGP President, Chief Executive Officer and Chairman of the Board March 7, 2012 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) 2011 2010 2009 2008 2007 Cash flows provided by operating activities Non-cash compensation expense Asset retirement obligations Coal inventory adjustment to market Equity in loss of affiliates, net 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 $ 573,983 (6,235) (2,546) (386) (3,404) - 634 - - - - (1,488) (10,870) 21,579 (431) 570,836 (160,335) (21,579) 431 $ 520,588 (4,051) (2,579) (498) $ 282,741 (3,582) (2,678) (3,030) $ 261,041 (3,931) (2,827) (452) $ 244,012 (3,925) (2,419) (21) (274) (234) - - - (1,204) (1,448) (42,402) 29,862 1,741 653 (136) - - - - (537) 36,440 29,798 708 - 911 5,159 - - - (366) (19,661) 18,418 (480) - 3,189 - 2,357 5,088 - (811) 7,898 9,952 1,669 499,501 (146,881) (29,862) (1,741) 340,377 (117,524) (29,798) (708) 257,812 (105,278) (18,418) 480 266,989 (85,310) (9,952) (1,669) Net income Net (income) loss attributable to noncontrolling interest 389,353 - 321,017 - 192,347 (190) 134,596 (420) 170,058 332 Net income of ARLP $ 389,353 $ 321,017 $ 192,157 $ 134,176 $ 170,390 EBITDA is defined as net income attributable to ARLP before net interest expense, income taxes, depreciation, depletion and amortization 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 (e.g., 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 (12/31/2011) ARLP 36,775,741 common units AHGP 59,863,000 common units Independent Auditors Ernst & Young LLP 1700 One Williams Center Tulsa, OK 74172 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 2011 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. investorrelations@arlp.com E-mail: Phone: (918) 295-7674 Web site: www.arlp.com Alliance Holdings GP, L.P. investorrelations@ahgp.com E-mail: Phone: (918) 295-1415 Web site: www.ahgp.com P.O. Box 22027, Tulsa, Oklahoma 74121-2027 | www.arlp.com | www.ahgp.com