Edgar Filing: ALLIANCE RESOURCE PARTNERS LP

arlp_Current folio_10Q

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________to________________

Commission File No.: 0-26823

ALLIANCE RESOURCE PARTNERS, L.P.

(Exact name of registrant as specified in its charter)

Delaware

73-1564280

(State or other jurisdiction of

incorporation or organization)

(IRS Employer Identification No.)

1717 South Boulder Avenue, Suite 400, Tulsa, Oklahoma 74119

(Address of principal executive offices and zip code)

(918) 295-7600

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [X ] Yes [ ] No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.


Large Accelerated Filer [X]	Accelerated Filer [ ]	Non-Accelerated Filer [ ]	Smaller Reporting Company [ ]
		(Do not check if smaller reporting company)
Emerging Growth Company [ ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No

As of November 6, 2017, 130,704,217 common units are outstanding.

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TABLE OF CONTENTS

PART I

FINANCIAL INFORMATION


		Page

ITEM 1.	Financial Statements (Unaudited)

	ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES

	Condensed Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016	1

	Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2017 and 2016	2

	Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2017 and 2016	3

	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016	4

	Condensed Consolidated Statement of Partners' Capital for the nine months ended September 30, 2017	5

	Notes to Condensed Consolidated Financial Statements	6

ITEM 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	26

ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	39

ITEM 4.	Controls and Procedures	40

	Forward-Looking Statements	41

PART II

OTHER INFORMATION

ITEM 1.	Legal Proceedings	43

ITEM 1A.	Risk Factors	43

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43

ITEM 3.	Defaults Upon Senior Securities	43

ITEM 4.	Mine Safety Disclosures	43

ITEM 5.	Other Information	43

ITEM 6.	Exhibits	44

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PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except unit data)

(Unaudited)


	September 30,		December 31,
	2017		2016
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	18,393	$	39,782
Trade receivables		129,031		152,032
Other receivables		709		279
Due from affiliates		288		271
Inventories, net		87,667		61,051
Advance royalties, net		1,207		1,207
Prepaid expenses and other assets		10,356		22,050
Total current assets		247,651		276,672
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment, at cost		2,938,362		2,920,988
Less accumulated depreciation, depletion and amortization		(1,436,470)		(1,335,145)
Total property, plant and equipment, net		1,501,892		1,585,843
OTHER ASSETS:
Advance royalties, net		40,578		29,372
Equity investments in affiliates		144,349		138,817
Cost investments		102,800		—
Goodwill		136,399		136,399
Other long-term assets		32,983		25,939
Total other assets		457,109		330,527
TOTAL ASSETS	$	2,206,652	$	2,193,042

LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Accounts payable	$	73,597	$	64,055
Due to affiliates		759		906
Accrued taxes other than income taxes		20,544		18,273
Accrued payroll and related expenses		41,124		41,576
Accrued interest		13,083		316
Workers' compensation and pneumoconiosis benefits		9,732		9,897
Current capital lease obligations		28,220		27,196
Other current liabilities		16,697		14,778
Current maturities, long-term debt, net		100,000		149,874
Total current liabilities		303,756		326,871
LONG-TERM LIABILITIES:
Long-term debt, excluding current maturities, net		385,449		399,446
Pneumoconiosis benefits		64,197		62,822
Accrued pension benefit		39,497		42,070
Workers' compensation		52,477		40,400
Asset retirement obligations		125,146		125,266
Long-term capital lease obligations		64,358		85,540
Other liabilities		16,248		17,203
Total long-term liabilities		747,372		772,747
Total liabilities		1,051,128		1,099,618

PARTNERS' CAPITAL:
Alliance Resource Partners, L.P. ("ARLP") Partners' Capital:
Limited Partners - Common Unitholders 130,704,217 and 74,375,025 units outstanding, respectively		1,173,066		1,400,202
General Partners’ interest		14,781		(273,788)
Accumulated other comprehensive loss		(37,694)		(38,540)
Total ARLP Partners' Capital		1,150,153		1,087,874
Noncontrolling interest		5,371		5,550
Total Partners' Capital		1,155,524		1,093,424
TOTAL LIABILITIES AND PARTNERS' CAPITAL	$	2,206,652	$	2,193,042

See notes to condensed consolidated financial statements.

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ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except unit and per unit data)

(Unaudited)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2017		2016		2017		2016
SALES AND OPERATING REVENUES:
Coal sales	$	435,162	$	533,817	$	1,256,168	$	1,357,578
Transportation revenues		8,009		7,692		24,933		19,732
Other sales and operating revenues		10,018		10,565		31,888		26,743
Total revenues		453,189		552,074		1,312,989		1,404,053

EXPENSES:
Operating expenses (excluding depreciation, depletion and amortization)		295,385		326,891		796,845		842,417
Transportation expenses		8,009		7,692		24,933		19,732
Outside coal purchases		—		1,514		—		1,514
General and administrative		15,005		18,114		45,982		53,015
Depreciation, depletion and amortization		69,962		101,432		194,109		245,736
Total operating expenses		388,361		455,643		1,061,869		1,162,414

INCOME FROM OPERATIONS		64,828		96,431		251,120		241,639

Interest expense (net of interest capitalized for the three and nine months ended September 30, 2017 and 2016 of $107, $47, $354 and $320, respectively)		(10,773)		(8,001)		(28,904)		(23,386)
Interest income		4		3		82		8
Equity in income of affiliates		3,798		1,105		10,414		1,041
Cost investment income		2,800		—		2,800		—
Debt extinguishment loss		—		—		(8,148)		—
Other income		774		293		2,461		545
INCOME BEFORE INCOME TAXES		61,431		89,831		229,825		219,847

INCOME TAX EXPENSE (BENEFIT)		5		7		(3)		4

NET INCOME		61,426		89,824		229,828		219,843

LESS: NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST		(155)		(44)		(425)		(40)

NET INCOME ATTRIBUTABLE TO ALLIANCE RESOURCE PARTNERS, L.P. ("NET INCOME OF ARLP")	$	61,271	$	89,780	$	229,403	$	219,803

GENERAL PARTNERS' INTEREST IN NET INCOME OF ARLP	$	612	$	20,571	$	21,362	$	60,723

LIMITED PARTNERS' INTEREST IN NET INCOME OF ARLP	$	60,659	$	69,209	$	208,041	$	159,080

BASIC AND DILUTED NET INCOME OF ARLP PER LIMITED PARTNER UNIT (Note 9)	$	0.52	$	0.91	$	2.32	$	2.08

DISTRIBUTIONS PAID PER LIMITED PARTNER UNIT	$	0.5000	$	0.4375	$	1.3750	$	1.5500

WEIGHTED-AVERAGE NUMBER OF UNITS OUTSTANDING – BASIC AND DILUTED		114,237,979		74,375,025		87,924,986		74,347,157

See notes to condensed consolidated financial statements.

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ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2017		2016		2017		2016

NET INCOME	$	61,426	$	89,824	$	229,828	$	219,843

OTHER COMPREHENSIVE INCOME (LOSS):

Defined benefit pension plan
Amortization of prior service cost (1)		46		—		140		—
Amortization of net actuarial loss (1)		774		787		2,319		2,365
Total defined benefit pension plan adjustments		820		787		2,459		2,365

Pneumoconiosis benefits
Amortization of net actuarial gain (1)		(479)		(660)		(1,613)		(1,982)
Total pneumoconiosis benefits adjustments		(479)		(660)		(1,613)		(1,982)

OTHER COMPREHENSIVE INCOME		341		127		846		383

COMPREHENSIVE INCOME		61,767		89,951		230,674		220,226

Less: Comprehensive income attributable to noncontrolling interest		(155)		(44)		(425)		(40)

COMPREHENSIVE INCOME ATTRIBUTABLE TO ARLP	$	61,612	$	89,907	$	230,249	$	220,186

(1)

Amortization of prior service cost and net actuarial gain or loss is included in the computation of net periodic benefit cost (see Notes 10 and 12 for additional details).

See notes to condensed consolidated financial statements.

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ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Nine Months Ended
	September 30,
	2017		2016

CASH FLOWS FROM OPERATING ACTIVITIES	$	456,079	$	494,528

CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant and equipment:
Capital expenditures		(105,455)		(70,267)
Increase (decrease) in accounts payable and accrued liabilities		4,182		(7,965)
Proceeds from sale of property, plant and equipment		1,488		756
Contributions to equity investments in affiliates		(16,487)		(65,367)
Purchase of cost investment		(100,000)		—
Distributions received from investments in excess of cumulative earnings		10,880		2,167
Payment for acquisition of business		—		(1,011)
Payment for acquisition of customer contracts		—		(23,000)
Net cash used in investing activities		(205,392)		(164,687)

CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under securitization facility		100,000		44,600
Payments under securitization facility		(100,000)		(27,700)
Payments on term loan		(50,000)		(106,250)
Borrowings under revolving credit facilities		165,000		140,000
Payments under revolving credit facilities		(420,000)		(215,000)
Borrowings under long-term debt		400,000		—
Payment on long-term debt		(145,000)		—
Proceeds on capital lease transactions		—		33,881
Payments on capital lease obligations		(20,186)		(17,769)
Payment of debt issuance costs		(16,221)		—
Payment for debt extinguishment		(8,148)		—
Contributions to consolidated company from affiliate noncontrolling interest		251		2,557
Net settlement of employee withholding taxes on vesting of Long-Term Incentive Plan		(2,988)		(1,336)
Cash contributions by General Partners		905		47
Distributions paid to Partners		(173,284)		(194,870)
Other		(2,405)		(60)
Net cash used in financing activities		(272,076)		(341,900)

NET CHANGE IN CASH AND CASH EQUIVALENTS		(21,389)		(12,059)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		39,782		33,431

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	18,393	$	21,372

SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest	$	13,679	$	20,194
Cash paid for income taxes	$	10	$	7

NON-CASH INVESTING AND FINANCING ACTIVITY:
Accounts payable for purchase of property, plant and equipment	$	12,414	$	4,669
Assets acquired by capital lease	$	—	$	37,089
Market value of common units issued under Long-Term Incentive and Directors Deferred Compensation Plans before tax withholding requirements	$	8,149	$	3,642

See notes to condensed consolidated financial statements.

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ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL

(In thousands)

(Unaudited)


						Accumulated
	Number of	Limited		General		Other
	Limited Partner	Partners’		Partners’		Comprehensive		Noncontrolling		Total Partners’
	Units	Capital		Capital (Deficit)		Income (Loss)		Interest		Capital
Balance at January 1, 2017	74,375,025	$	1,400,202	$	(273,788)	$	(38,540)	$	5,550		1,093,424
Comprehensive income:
Net income	—		208,041		21,362		—		425		229,828
Actuarially determined long-term liability adjustments	—		—		—		846		—		846
Total comprehensive income	—		—		—		—		—		230,674
Issuance of units to Long-Term Incentive Plan participants upon vesting	222,011		(2,988)		—		—		—		(2,988)
Issuance of units to MGP in Exchange Transaction	56,100,000		14,171		(14,171)		—		—		—
Issuance of units to SGP in Exchange Transaction	7,181		(320,838)		320,838		—		—		—
Exchange Transaction fees	—		(1,550)		—		—		—		(1,550)
Common unit-based compensation	—		8,947		—		—		—		8,947
Distributions on common unit-based compensation	—		(2,392)		—		—		—		(2,392)
General Partners contributions	—		—		905		—		—		905
Contributions to consolidated company from affiliate noncontrolling interest	—		—		—		—		251		251
Distributions from consolidated company to affiliate noncontrolling interest	—		—		—		—		(855)		(855)
Distributions to Partners	—		(130,527)		(40,365)		—		—		(170,892)
Balance at September 30, 2017	130,704,217	$	1,173,066	$	14,781	$	(37,694)	$	5,371	$	1,155,524

See notes to condensed consolidated financial statements.

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ALLIANCE RESOURCE PARTNERS, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.ORGANIZATION AND PRESENTATION

Significant Relationships Referenced in Notes to Condensed Consolidated Financial Statements

References to "we," "us," "our" or "ARLP Partnership" mean the business and operations of Alliance Resource Partners, L.P., the parent company, as well as its consolidated subsidiaries.

References to "ARLP" mean Alliance Resource Partners, L.P., individually as the parent company, and not on a consolidated basis.

References to "MGP" mean Alliance Resource Management GP, LLC, ARLP's sole general partner and, prior to the Exchange Transaction discussed below, its managing general partner.

References to "SGP" mean Alliance Resource GP, LLC, ARLP's special general partner prior to the Exchange Transaction discussed below.

References to "Intermediate Partnership" mean Alliance Resource Operating Partners, L.P., the intermediate partnership of Alliance Resource Partners, L.P.

References to "Alliance Resource Properties" mean Alliance Resource Properties, LLC, the land-holding company for the mining operations of Alliance Resource Operating Partners, L.P.

References to "Alliance Coal" mean Alliance Coal, LLC, the holding company for the mining operations of Alliance Resource Operating Partners, L.P., also referred to as our primary operating subsidiary.

References to "AHGP" mean Alliance Holdings GP, L.P., individually as the parent company, and not on a consolidated basis.

References to "AGP" mean Alliance GP, LLC, the general partner of Alliance Holdings GP, L.P.

Organization

ARLP is a Delaware limited partnership listed on the NASDAQ Global Select Market under the ticker symbol "ARLP." ARLP was formed in May 1999 to acquire, upon completion of ARLP's initial public offering on August 19, 1999, certain coal production and marketing assets of Alliance Resource Holdings, Inc., a Delaware corporation ("ARH"), consisting of substantially all of ARH's operating subsidiaries, but excluding ARH. ARH is owned by Joseph W. Craft III, the President and Chief Executive Officer and a Director of MGP, and Kathleen S. Craft. SGP, a Delaware limited liability company, is owned by ARH. SGP owns 20,641,168 common units of AHGP’s 59,863,000 outstanding common units, 7,181 common units of ARLP and, prior to the Exchange Transaction discussed below, owned a 0.01% special general partner interest in both ARLP and the Intermediate Partnership.

We are managed by MGP, a Delaware limited liability company and the sole general partner of ARLP. MGP holds a non-economic general partner interest in ARLP, a 1.0001% managing general partner interest in the Intermediate Partnership and a 0.001% managing member interest in Alliance Coal. AHGP is a Delaware limited partnership that was formed to become the owner and controlling member of MGP. AHGP completed its initial public offering on May 15, 2006. AHGP owns directly and indirectly 87,188,338 common units of ARLP’s 130,704,217 outstanding common units. AHGP indirectly owns 100% of the members' interest of MGP. ARLP and its consolidated subsidiaries represent virtually all the net assets and operations of AHGP. See discussions below regarding MGP’s and AHGP’s change of ownership in ARLP effective with the Exchange Transaction on July 28, 2017.

Exchange Transaction

On July 28, 2017, MGP contributed to ARLP all of its incentive distribution rights ("IDRs") and its managing general partner interest in ARLP in exchange for 56,100,000 ARLP common units and a non-economic general partner interest in ARLP. In conjunction with this transaction and on the same economic basis as MGP, SGP also contributed to ARLP its 0.01% general partner interests in both ARLP and the Intermediate Partnership in exchange for 7,181 ARLP common units (collectively the "Exchange Transaction"). In connection with the Exchange Transaction, ARLP amended its partnership agreement to reflect, among other things, cancellation of the IDRs and the economic general partner interest

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in ARLP and issuance of a non-economic general partner interest to MGP. MGP is the sole general partner of ARLP following the Exchange Transaction, and no control, management or governance changes otherwise occurred.

The Exchange Transaction constituted an exchange of equity interests between entities under common control and not a transfer of a business. Therefore, the exchange resulted in a reclassification, as of the date of the Exchange Transaction, of a $306.7 million deficit capital balance from the General Partners' interest line item to the Limited Partners - Common Unitholders line item in our condensed consolidated balance sheets. The reclassification amounts represented the carrying value of the exchanged interests, which included the SGP’s deficit balance associated with its prior special general partner interests in ARLP and the Intermediate Partnership, partially offset, by MGP’s capital balance associated with its prior managing general partner interest in ARLP. The SGP deficit balance primarily resulted from contribution and assumption agreements associated with the formation of the ARLP Partnership in 1999.

Simultaneously with the Exchange Transaction discussed above, MGP became a wholly-owned subsidiary of MGP II, LLC ("MGP II") which is owned 100% directly and indirectly by AHGP and was created in connection with the Exchange Transaction. MGP II holds the 56,100,000 ARLP common units discussed above.

Basis of Presentation

The accompanying condensed consolidated financial statements include the accounts and operations of the ARLP Partnership and present the consolidated financial position as of September 30, 2017 and December 31, 2016, the results of operations and comprehensive income for the three and nine months ended September 30, 2017 and 2016, cash flows for the nine months ended September 30, 2017 and 2016, and changes in partners' capital for the nine months ended September 30, 2017 of ARLP, the Intermediate Partnership (a subsidiary of ARLP and a variable interest entity of which ARLP is the primary beneficiary), Alliance Coal (a subsidiary of the Intermediate Partnership and a variable interest entity of which the Intermediate Partnership is the primary beneficiary) and other directly and indirectly wholly- and majority-owned subsidiaries of the Intermediate Partnership and Alliance Coal. The Intermediate Partnership, Alliance Coal and their wholly- and majority-owned subsidiaries represent virtually all the net assets of the ARLP Partnership. MGP's interests in both Alliance Coal and the Intermediate Partnership are reported as part of the general partner interest in the ARLP Partnership. For the periods presented prior to the Exchange Transaction, MGP's managing general partner interest and IDRs in ARLP and the SGP's special general partner interests in ARLP and the Intermediate Partnership are also reported as part of the general partner interest in the ARLP Partnership. All intercompany transactions and accounts have been eliminated. See Note 7 – Variable Interest Entities for more information regarding ARLP's consolidation of the Intermediate Partnership and Alliance Coal. See Note 9 – Net Income of ARLP Per Limited Partner Unit for more information regarding allocations to the limited and general partner interests.

These condensed consolidated financial statements and notes are unaudited. However, in the opinion of management, these financial statements reflect all normal recurring adjustments necessary for a fair presentation of the results for the periods presented. Results presented for prior periods have been recast to reflect an immaterial reclassification of depreciation, depletion, and amortization capitalized into coal inventory as an adjustment to Depreciation, depletion, and amortization rather than Operating expenses (excluding depreciation, depletion, and amortization). This reclassification did not impact Total operating expenses, Income from operations, Net income, Net income of ARLP or Basic and diluted net income of ARLP per limited partner unit. Results for interim periods are not necessarily indicative of results to be expected for the full year ending December 31, 2017.

These condensed consolidated financial statements and notes are prepared pursuant to the rules and regulations of the Securities and Exchange Commission for interim reporting and do not include all of the information normally included with financial statements prepared in accordance with generally accepted accounting principles ("GAAP") of the United States. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2016.

Use of Estimates

The preparation of the ARLP Partnership's condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in our condensed consolidated financial statements. Actual results could differ from those estimates.

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Investments

Our investments and ownership interests in which we do not have a controlling financial interest are accounted for either under the cost method of accounting if we do not have the ability to exercise significant influence over the entity, or under the equity method of accounting if we have the ability to exercise significant influence over the entity.

Historical cost is used to account for investments accounted for under the cost method and distributions received on those investments are recorded as income unless those distributions are considered a return on investment in which case the historical cost is reduced. Our cost method investment includes Kodiak Gas Services, LLC ("Kodiak"). See Note 8 – Investments for further discussion of this cost method investment.

Investments accounted for under the equity method are initially recorded at cost, and the difference between the basis of our investment and the underlying equity in the net assets of the joint venture at the investment date, if any, is amortized over the lives of the related assets that gave rise to the difference. In the event our ownership entitles us to a disproportionate sharing of income or loss, our equity in income or losses of affiliates is allocated based on the hypothetical liquidation at book value ("HLBV") method of accounting.

Under the HLBV method, equity in income or losses of affiliates is allocated based on the difference between our claim on the net assets of the equity method investee at the end and beginning of the period, with consideration of certain eliminating entries regarding differences of accounting for various related-party transactions, after taking into account contributions and distributions, if any. Our share of the net assets of the equity method investee is calculated as the amount we would receive if the equity method investee were to liquidate all of its assets at net book value and distribute the resulting cash to creditors, other investors and us according to the respective priorities. None of our current equity investments use the HLBV method. Our last use of this method was in 2015 which will be discussed in our upcoming Form 10-K.

Our equity method investments include AllDale Minerals, LP ("AllDale I"), and AllDale Minerals II, LP ("AllDale II") (collectively "AllDale Minerals"), both held by our subsidiary Cavalier Minerals JV, LLC ("Cavalier Minerals"). We also have an equity method investment in AllDale Minerals III, LP ("AllDale III") which is not held through Cavalier Minerals but rather held directly by us. See Note 8 – Investments for further discussion of these equity method investments.

We review our investments and ownership interests accounted for under both the equity method of accounting and the cost method of accounting for impairment whenever events or changes in circumstances indicate a loss in the value of the investment may be other-than-temporary.

2.NEW ACCOUNTING STANDARDS

New Accounting Standards Issued and Adopted

In January 2017, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") 2017-04, Intangibles–Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ("ASU 2017-04"). The ASU simplifies the subsequent measurement of goodwill by eliminating the need for an entity to determine the implied fair value of goodwill to calculate an impairment charge. Under the new guidance an entity compares the fair value of the reporting unit containing the goodwill to its carrying value and records any excess carrying value as an impairment charge. This new standard is applied prospectively and is effective for annual and interim periods beginning after December 15, 2019; however, early adoption is permitted. We have early adopted this new standard and will apply the guidance to any future goodwill impairment assessments.

In March 2016, the FASB issued ASU 2016-09, Compensation–Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"). ASU 2016-09 simplifies the accounting for several aspects of share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, flexibility in the accounting for forfeitures and classification on the statement of cash flows. ASU 2016-09 was effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods, with early adoption permitted. The adoption of ASU 2016-09 did not have a material impact on our condensed consolidated financial statements.

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In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory ("ASU 2015-11"). ASU 2015-11 simplifies the subsequent measurement of inventory. It replaces the current lower of cost or market test with the lower of cost or net realizable value test. Net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The new standard was applied prospectively and was effective for annual reporting periods beginning after December 15, 2016 and interim periods within those annual periods, with early adoption permitted. The adoption of ASU 2015-11 did not have a material impact on our condensed consolidated financial statements.

New Accounting Standards Issued and Not Yet Adopted

In March 2017, the FASB issued ASU 2017-07, Compensation–Retirement Benefits (Topic 715) ("ASU 2017-07"). ASU 2017-07 requires that an employer disaggregate the service cost component from the other components of net benefit cost. It also provides explicit guidance on how to present the service cost component and the other components of net benefit cost in the income statement and allows only the service cost component of net benefit cost to be eligible for capitalization. The new guidance will be applied retroactively to all periods presented. ASU 2017-07 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. We do not anticipate ASU 2017-07 will have a material impact on our consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments–Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). ASU 2016-13 changes the impairment model for most financial assets and certain other instruments to require the use of a new forward-looking "expected loss" model that generally will result in earlier recognition of allowances for losses. The new standard will require disclosure of significantly more information related to these items. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted for the fiscal year beginning after December 15, 2018, including interim periods. We are currently evaluating the effect of adopting ASU 2016-13, but do not anticipate it will have a material impact on our consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) ("ASU 2016-02"). ASU 2016-02 increases transparency and comparability among organizations by requiring lessees to record right-to-use assets and corresponding lease liabilities on the balance sheet and disclosing key information about lease arrangements. The new guidance will classify leases as either finance or operating (similar to current standard's "capital" or "operating" classification), with classification affecting the pattern of income recognition in the statement of income. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. We have developed an assessment team and are currently evaluating the effect of adopting ASU 2016-02.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"). ASU 2014-09 is a new revenue recognition standard that provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle of the new standard is as follows:

An entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

ASU 2014-09 was originally effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date ("ASU 2015-14"), which deferred the effective date by one year while providing the option to early adopt the standard on the original effective date.

We developed an assessment team to determine the effect of adopting ASU 2014-09. As part of our assessment process, we applied the five-step analysis outlined in the new standard to certain contracts representative of the majority of our coal sales contracts and determined that our pattern of recognition appears consistent between both the new and existing standards. We also reviewed the expanded disclosure requirements under the new standard and determined the additional information to be disclosed. In addition, we reviewed our business processes, systems and internal controls over financial reporting to support the new recognition and disclosure requirements under the new standard. Based on the results of our assessment team, we have started our implementation of the new standard. We continue to report our implementation progress for the new standard to our management and audit committee of our general partner.

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We continue to monitor closely, (a) activities of the FASB and various non-authoritative groups with respect to implementation issues that may impact our determinations, (b) existing contracts for consistency with current implementation determinations derived from our assessment process and (c) our revenue recognition policy, where applicable, for required modifications.

We do not expect that the adoption of the new standard will have a material impact on our financial statements, but will require expanded disclosures including presenting, by type and by segment, revenues for all periods presented and expected revenues by year for performance obligations that are unsatisfied or partially unsatisfied as of the date of presentation. The new standard allows for two methods of adoption: a full retrospective adoption method and a modified retrospective method. We have elected to use the modified retrospective method of adoption, which allows a cumulative effect adjustment to equity as of the date of adoption. As we do not anticipate a change in the recognition pattern of our revenues, we do not expect to have a cumulative effect adjustment when we adopt the new standard.

3.CONTINGENCIES

Various lawsuits, claims and regulatory proceedings incidental to our business are pending against the ARLP Partnership. We record accruals for potential losses related to these matters when, in management's opinion, such losses are probable and reasonably estimable. Based on known facts and circumstances, we believe the ultimate outcome of these outstanding lawsuits, claims and regulatory proceedings will not have a material adverse effect on our financial condition, results of operations or liquidity. However, if the results of these matters were different from management's current opinion and in amounts greater than our accruals, then they could have a material adverse effect.

4.INVENTORIES

Inventories consist of the following:


	September 30,		December 31,
	2017		2016
	(in thousands)

Coal	$	51,657	$	29,242
Supplies (net of reserve for obsolescence of $5,015 and $4,940, respectively)		36,010		31,809
Total inventories, net	$	87,667	$	61,051

5.FAIR VALUE MEASUREMENTS

The following table summarizes our fair value measurements within the hierarchy:


	September 30, 2017						December 31, 2016
	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
	(in thousands)
Measured on a recurring basis:
Contingent consideration	$	—	$	—	$	9,700	$	—	$	—	$	9,700

Additional disclosures:
Long-term d