Alliance Resource Partners, L.P.

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Alliance Resource Partners, L.P.

1717 S. Boulder Avenue
Suite 600
Tulsa, Oklahoma 74119
U.S.A.
Telephone: (918) 295-7600
Fax: (918) 295-7358
Web site: http://www.arlp.com

Public Company
Founded: 1973 as MAPCO Coal Inc.
Employees: 2,300 Sales: $838.7 million (2005) Stock Exchanges: NASDAQ
Ticker Symbol: ARLP
NAIC: 212111 Bituminous Coal and Lignite Surface Mining

With its headquarters located in Tulsa, Oklahoma, Alliance Resource Partners, L.P. is the coal industry's only publicly traded master limited partnership, its units listed on the NASDAQ. It has greatly benefited from renewed interest in coal as a power-generation fuel, especially in light of rising oil prices. The partnership's operating holding company, Alliance Coal, is the fifth largest producer of coal in the United States, producing more than 20 million tons each year from seven mining complexes in Kentucky, Indiana, Illinois, and Maryland. More than half of Alliance's steam coal is high-sulfur in content, 30 percent is low-sulfur, and about 15 percent is medium-sulfur. The company has significantly more than 500 million tons of coal reserves. Alliance serves industrial customers but mostly eastern U.S. electric utilities, such as the Tennessee Valley Authority, Virginia Power, and Florida's Seminole Power. The company also operates a major coal loading terminal on the Ohio River at Mt. Vernon, Indiana.

ORIGINS DATING TO 1971

Alliance grew out of the coal mines acquired by MAPCO Inc. in 1971. A dozen years earlier, MAPCO had been formed as the Mid-Continent Eastern Pipeline Co. by Skelly Oil Co. with financial backing from Prudential Insurance Company of America. The Tulsa, Oklahoma-based company started out with the idea of delivering propane from Texas to the Northeast, but soon realized there was greater demand for liquefied petroleum gas in the Midwest farm belt and changed course. It took the name MAPCO in 1968 and began expanding into other energy fields, adding an anhydrous ammonia pipeline, the first in the United States and another way to serve the farmers who bought the company's liquefied gas, and eventually becoming involved in refining and marketing. In 1971 MAPCO used 500,000 shares of stock to buy its first coal mine, the underground Dotiki mine in the Illinois Basin section of Kentucky owned by the Webster County Coal Company. This operation, originally opened in 1966, was soon thriving, turning into one of the country's most productive mines. Its success led MAPCO to begin the development of surface mining operations in Martin County, Kentucky, and the formation of MAPCO Coal in 1973. Martin County's Pontiki underground mine commenced operations in 1977. In that same year, MAPCO Coal began operating the underground longwall Mettiki mining complex in Garrett County, Maryland. Then, in 1980, another Illinois Basin underground mine, the Pattiki mine, was opened in White County, Kentucky.

Due to environmental concerns, coal fell out of favor as a source of fuel for power generation in the mid-1970s, putting an end to MAPCO Coal's early growth spurt. In the 1980s MAPCO Coal was just a minor part of MAPCO's business, which included refinery sales, home heating oil, and retail gas, diesel, grocery, and fast food sales. Alliance's longtime chief executive, Joseph W. Craft III, was named president of MAPCO Coal in 1986. With a Bachelor of Science degree in accounting and a law degree, both from the University of Kentucky, Craft worked as an attorney for Falcon Coal Corporation and Diamond Shamrock Coal Corporation before joining MAPCO, where he served as general counsel and chief financial officer. Under Craft's leadership, MAPCO Coal began to add assets to position itself when market conditions for coal improved. In early 1989 the Pontiki mine added reserves by purchasing a nearby inactive mine, and MAPCO Coal also acquired another dormant operation in Kentucky, the Scotts Branch mine, folding it into a subsidiary called MC Mining Inc. Later in the year, the company acquired most of the assets of Baltimore, Maryland-based JNO McCall Coal Company, which included four mining complexes producing a total of 5.8 million tons each year and holding reserves of some 56 million tons of steam and metallurgical coal. As a result, MAPCO Coal emerged as one of the largest coal producers in the eastern United States at the end of the 1980s.

IMPACT OF 1990 CLEAN AIR ACT

The 1990 Clean Air Act required coal-fired utilities to cut back on their emissions, creating strong demand for the kind of low-sulfur coal MAPCO Coal mined at its Martiki complex. In 1994 MAPCO Coal launched a major, $30 million expansion of this surface operation, extending the life of the mine by adding a new 56-cubic-yard shovel and five 240-ton trucks, used to essentially level a mountain piecemeal. Such practices were controversial, of course, and in answer MAPCO Coal was already participating in a reclamation program with Morehead State University to turn a strip-mined mountain top into a farm. Although the project won an award in 1991 for Excellence in Surface Mining and Reclamation from the Interior Department, the farm never made money, and in 1994 MAPCO Coal began shopping the property.

By this time, however, the parent company was considering ways to exit the coal business, which was one of the slower growth segments of its business. In 1996 MAPCO Coal's management, led by Craft, formed Alliance Coal L.L.C., and then with the financial backing of Beacon Group Energy Investment Fund L.P. bought a 75 percent interest in MAPCO Coal for $232.5 million. MAPCO Inc. elected to retain a minority interest, in this way sharing in the growth Alliance expected to achieve as an independent company when it was able to chart its own future, backed by a deep-pocketed investor. Beacon Group Energy was a $658 million investment fund focused on the energy sector, affiliated with the private New York investment firm, the Beacon Group. One of the firm's partners, Preston R. Miller, Jr., explained to Coal Week the attraction of the MAPCO coal assets: "Today's consolidating coal industry holds tremendous opportunities and synergies that can be gained through combinations of existing coal operations. Combined with the utility industry deregulation movement, now is the right time, and MAPCO Coal has the right people on which to build a strong, solid energy company."

COMPANY PERSPECTIVES

Alliance Resource Partners, L.P. (ARLP) is a diversified coal producer and marketer with significant operations in the eastern United States. The company is the coal-producing industry's only publicly traded master limited partnership.

Although Alliance's management said it would pursue an aggressive growth policy, it did not become a significant consolidator. Rather, it grew at a steady pace. Following the buyout, the company reopened the shuttered Scotts Branch mine acquired several years earlier by the MC Mining unit. Next, in January 1998, Alliance paid $7.3 million in cash for Hopkins County Coal, a Kentucky complex in the Illinois Basin that included both underground and surface operations. Alliance also explored the possibility of expanding to the west and actually signed a preliminary agreement to acquire the coal business of the Atlantic Richfield Company, which included mines in Wyoming, Utah, and Colorado. If that deal had been completed, Alliance would have become the second largest coal operator in the United States, but instead the assets were purchased by Arch Coal for more than $1.1 billion. Nevertheless, because of its increased production, Alliance at the end of 1998 became the sixth largest coal producer in the eastern United States, mining more than 15 million tons of coal that year.

IPO: 1999

In 1999 Alliance became a public company, the only one in the coal industry, when in May of that year Alliance Resource Partners, L.P. was formed as a publicly traded master limited partnership. It subsequently acquired Alliance Coal, and in August made an initial public offering (IPO) of units, priced at $19 each, raising $147.3 million. The units then began trading on the NASDAQ. Alliance put some of those proceeds to use in late 1999 by starting to develop a new underground mining complex located in Gibson County, Indiana. The company's seventh mining operation went into production in November 2000.

Conditions were challenging for Alliance during its first full year as a public company. The year began with a warmer than usual winter and high coal inventories, leading to low coal prices, but by the end of the year California had undergone a severe energy crisis, and coal became part of the debate about a new national energy policy. Moreover, the eastern United States experienced record cold weather at the end of the year, boosting immediate coal sales. In 2000 Alliance recorded coal sales of $347.2 million, a modest increase over the $345.9 million of 1999. Total revenues dipped to $363.5 million in 2000 compared with $365.9 million, due to a loss in transportation revenues, but net income more than doubled, from $7.6 million in 1999 to $15.6 million in 2000.

The balance sheet grew even healthier in 2001 and 2002 as revenues jumped to $446.3 million in 2001 and $517.7 million in 2002. The improvement in earnings was even more dramatic, as Alliance netted $17.1 million in 2001 and $36.3 million in 2002-this accomplished in spite of a poor national economy. (Also of note in 2002, Alliance bought out the interests of Beacon Group Funds.) Alliance benefited from increasing gas prices in the previous two years. Furthermore, the Bush administration eased up on environmental codes, providing power plants with an incentive to burn more coal, and resulting in a surge in coal mining activity. For its part, Alliance began extending the Pattiki mine into a nearby coal reserve area and began digging a new mine shaft at the Dotiki mine.

In February 2003, Alliance made another public offering, selling 2.25 million common units priced at $22.51 each, netting more than $48 million. The money was earmarked to purchase Warrior Coal, L.L.C., as well as to provide working capital and cash for general partnership purposes. Warrior Coal operated the underground Cardinal mine, located in Hopkins County, Kentucky, and in operation since 1985. Warrior produced high-sulfur coal, most of which would be sold to Synfuel Solutions Operating, L.L.C., a maker of a synthetic fuel using coal fins and a binder material. In April 2003 Synfuel moved its production facility to Warrior in order to use the coal produced at Cardinal as a feedstock. For the year 2003, Alliance reported more record results. Revenues increased to $542.7 million and net income to $47.9 million.

Alliance continued to increase coal production in 2004, but in February the company had to contend with a fire at the Dotiki mine, which took almost a month to extinguish. Although no one was injured, the mine was put out of operation for several weeks. Insurance at least paid the company $27 million for lost production and damages. At the end of the year, over the Christmas holiday, another fire occurred at MC Mining's Excel mine, resulting in a several-week shutdown of that operation as well. A more positive development in 2004 for Alliance came in October when the company entered into a pair of coal leases that together added 100 million tons of high-sulfur coal reserves. The Elk Creek reserves were located in Hopkins County, while the Tunnel Ridge reserves were spread between West Virginia and Pennsylvania.

KEY DATES

1971:: MAPCO Inc. acquires the Dotiki mine.
1973:: MAPCO Coal Inc. is formed.
1986:: Joseph W. Craft is named president.
1996:: MAPCO Coal becomes Alliance Coal in a management buyout.
1999:: Alliance is taken public as Alliance Resource Partners, L.P.
2003:: A secondary offering is made to finance the purchase of Warrior Coal, L.L.C.

Once again, Alliance posted record results in 2004. Revenues improved to $653.3 million and net income totaled $76.6 million. The company continued to grow in 2005. Through subsidiary Penn Ridge Coal, Alliance added another 25 million tons to its reserves in the Tunnel Ridge area, and demand for coal remained quite high. For the fifth consecutive year Alliance enjoyed record results, as revenues surged to $838.7 million and net income reached $160 million. In 2006 the company added nearly 100 million tons of high sulfur coal reserves in Union County, Kentucky, through the purchase of River View Coal, L.L.C. Strong sales and earnings continued in the first quarter of 2006.

PRINCIPAL SUBSIDIARIES

Alliance Resource Operating Partners, L.P.; Excel Mining, L.L.C.; Gibson County Coal, L.L.C.; Hopkins County Coal L.L.C.; MC Mining, L.L.C.; Mettiki Coal, L.L.C.; Mt. Vernon Transfer Terminal, L.L.C.; Pontiki Coal, L.L.C.; Warrior Coal, L.L.C.; Webster County Coal, L.L.C.; White County Coal, L.L.C.