Edgar Filing: Alliance Holdings GP, L.P.

424b4

Index to Financial Statements

Filed Pursuant to Rule 424(b)(4)
Registration No. 333-129883

PROSPECTUS

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12,500,000 Common Units

Representing Limited Partner Interests

We are offering 12,500,000 common units, including 500,000 common units to Joseph W. Craft III, the president, chief executive officer and chairman of the board of directors of our general partner, or an entity controlled by him. This is an initial public offering of our common units. We own a 1.98% general partner interest, the incentive distribution rights and approximately 42.7% of the common units of Alliance Resource Partners, L.P., or ARLP, and a 0.001% managing interest in Alliance Coal, LLC. ARLP is a publicly traded Delaware limited partnership engaged in the production and marketing of coal to major United States utilities and industrial users. Before this offering, there has been no public market for our common units. Our common units have been approved for listing on the Nasdaq National Market under the symbol “AHGP.”

We will pay substantially all of the net proceeds from this offering to entities owned by Joseph W. Craft III and other officers and employees of ARLP as consideration for the contribution to us of their partnership interests in ARLP. Please read “Use of Proceeds.”

Investing in our common units involves risks. See “ Risk Factors” beginning on page 23.


	Per Common Unit		Total
Initial public offering price	$	25.00	$	312,500,000
Underwriting discount(1)	$	1.50	$	18,000,000
Proceeds to us (before expenses)	$	23.50	$	294,500,000

(1)

Excludes structuring fees payable to Lehman Brothers Inc. of $750,000. The underwriters will receive no discount or commission on the sale of 500,000 common units to Joseph W. Craft III or an entity controlled by him. Accordingly, proceeds to us (before expenses) include the full per unit initial public offering price of these units.

We have granted the underwriters a 30-day option to purchase up to an additional 1,875,000 common units on the same terms and conditions as set forth in this prospectus if the underwriters sell more than 12,500,000 common units in this offering.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

Lehman Brothers, on behalf of the underwriters, expects to deliver the common units on or about May 15, 2006.


LEHMAN BROTHERS		CITIGROUP


A.G. EDWARDS		UBS INVESTMENT BANK		WACHOVIA SECURITIES

RAYMOND JAMES

RBC CAPITAL MARKETS

CREDIT SUISSE

STIFEL NICOLAUS

May 9, 2006

Index to Financial Statements

We own and control Alliance Resource Management GP, LLC, the managing general partner of Alliance Resource Partners, L.P. (NASDAQ: ARLP), through which we will own certain general partner interests, the incentive distribution rights and 15,550,628 common units of Alliance Resource Partners, L.P. We do not own any operating assets directly. The map below identifies ARLP’s assets and their location.

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Index to Financial Statements

TABLE OF CONTENTS


Prospectus Summary		1
Alliance Holdings GP, L.P.		1
Pre-offering Structure		5
Post-offering Structure		7
The Offering		9
Our Management		10
Our Principal Executive Offices		10
Alliance Resource Partners, L.P.		11
ARLP’s Business Strategy		11
Recent Developments		12
ARLP’s Principal Executive Offices and Internet Address		15
Comparison of Rights of Holders of Our Common Units and ARLP’s Common Units		15
Summary of Risk Factors		17
Risks Inherent in an Investment in Us		17
Risks Related to Conflicts of Interest		17
Risks Related to ARLP’s Business		17
Tax Risks to Our Unitholders		18
Summary of Conflicts of Interest and Fiduciary Duties		19
Summary Historical and Pro Forma Financial and Operating Data		20
FORWARD-LOOKING STATEMENTS		22
RISK FACTORS		23
Risks Inherent in an Investment in Us		23
Risks Related to Conflicts of Interest		33
Risks Related to Alliance Resource Partners’ Business		37
Tax Risks to Our Common Unitholders		48
USE OF PROCEEDS		52
CAPITALIZATION		53
DILUTION		54
OUR CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS		55
General		55
Our Initial Distribution Rate		57
Estimated Cash Available for Distributions		62
Assumptions and Considerations		65
Our Sources of Distributable Cash		67
SELECTED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA		70


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		73
Overview		73
Alliance Resource Partners, L.P.		76
Overview of Our Operations		76
Analysis of Historical Results of Operations		78
Long-Term Incentive Plan		86
Insurance		86
Unit Split		86
Pattiki Vertical Belt Incident		87
MC Mining Fire Incident		87
Dotiki Fire Incident		89
Coal Supply Agreements		89
Ongoing Acquisition Activities		90
Liquidity and Capital Resources		90
Debt Obligations		92
Critical Accounting Policies		93
Related Party Transactions		94
Accruals of Other Liabilities		97
Pension Plan		97
Inflation		98
New Accounting Standards		98
Quantitative and Qualitative Disclosures about Market Risk		99
BUSINESS OF ALLIANCE HOLDINGS GP, L.P.		101
General		101
How Our Partnership Agreement Terms Differ from those of Other Publicly Traded Partnerships		105
Legal Proceedings		105
BUSINESS OF ALLIANCE RESOURCE PARTNERS, L.P.		106
General		106
ARLP’s Business Strategy		106
Recent Developments		107
Mining Operations		110
Other Operations		115
Coal Marketing and Sales		115
Reliance on Major Customers		116
Competition		116
Transportation		116
Regulation and Laws		117
Employees		125
Coal Reserves		125
Legal Proceedings		128

Index to Financial Statements


MANAGEMENT		131
Alliance Holdings GP, L.P.		131
Alliance Resource Partners, L.P.		136
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT		143
Alliance Holdings GP, L.P.		143
Alliance GP, LLC		143
Alliance Resource Partners, L.P.		143
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS		145
Our Relationship with ARLP		145
The Contribution Agreement		145
Registration Rights		146
Related Party Transactions of ARLP		146
Indemnification of Directors and Officers		149
Our General Partner’s Limited Liability Company Agreement		150
Administrative Services Agreement		150
ARLP Omnibus Agreement		150
CONFLICTS OF INTEREST AND FIDUCIARY DUTIES		151
Conflicts of Interest		151
Fiduciary Duties		154
DESCRIPTION OF OUR COMMON UNITS		157
Transfer Agent and Registrar		157
Transfer of Common Units		157
DESCRIPTION OF OUR PARTNERSHIP AGREEMENT		159
Organization and Duration		159
Purpose		159
Power of Attorney		159
Capital Contributions		159
Limited Liability		160
Voting Rights		160
Issuance of Additional Securities		161
Amendments to Our Partnership Agreement		162
Merger, Sale or Other Disposition of Assets		164
Termination or Dissolution		164
Liquidation and Distribution of Proceeds		165
Withdrawal or Removal of Our General Partner		165
Transfer of General Partner Interest		166
Transfer of Ownership Interests in Our General Partner		166


Change of Management Provisions		166
Limited Call Right		166
Meetings; Voting		167
Status as Limited Partner		167
Non-Citizen Assignees; Redemption		167
Indemnification		168
Reimbursement of Expenses		168
Books and Reports		168
Right to Inspect Our Books and Records		169
Registration Rights		169
ALLIANCE RESOURCE PARTNERS, L.P.’s CASH DISTRIBUTION POLICY		170
Distributions of Available Cash		170
Operating Surplus and Capital Surplus		170
Incentive Distribution Rights		171
Distributions of Available Cash from Operating Surplus		171
Distributions of Available Cash from Capital Surplus		171
Distributions of Cash Upon Liquidation		172
MATERIAL PROVISIONS OF ALLIANCE RESOURCE PARTNERS, L.P.’s PARTNERSHIP AGREEMENT		175
Purpose		175
Power of Attorney		175
Reimbursements of ARLP’s Managing General Partner		175
Issuance of Additional Securities		175
Amendments to ARLP’s Partnership Agreement		176
Liquidation and Distribution of Proceeds		176
Withdrawal or Removal of ARLP’s General Partners; Transfer of the Ownership of the General Partners		176
Change of Management Provisions		177
Limited Call Right		177
Indemnification		177
Registration Rights		178
UNITS ELIGIBLE FOR FUTURE SALE		179
MATERIAL TAX CONSEQUENCES		180
Partnership Status		180
Limited Partner Status		182
Tax Consequences of Unit Ownership		182
Tax Treatment of Operations		187
Disposition of Units		190
Uniformity of Units		192
Tax-Exempt Organizations and Other Investors		193

Index to Financial Statements


Administrative Matters		193
State, Local, Foreign and Other Tax Considerations		195
SELLING UNITHOLDERS		197
INVESTMENT IN US BY EMPLOYEE BENEFIT PLANS		198
UNDERWRITING		199
Commissions and Expenses		199
Option to Purchase Additional Common Units		200
Lock-Up Agreements		200
Offering Price Determination		200
Indemnification		201
Directed Unit Program		201


Stabilization, Short Positions and Penalty Bids		201
Electronic Distribution		202
Nasdaq National Market		202
Discretionary Sales		202
Stamp Taxes		202
Relationships		202
NASD Conduct Rules		202
VALIDITY OF THE UNITS		203
EXPERTS		203
WHERE YOU CAN FIND MORE INFORMATION		203
INDEX TO FINANCIAL STATEMENTS		F-1


Appendix A	Amended and Restated Agreement of Limited Partnership of Alliance Holdings GP, L.P.	A-1
Appendix B	Glossary	B-1

You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized anyone to provide you with information different from that contained in this prospectus. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, offering to sell our common units or seeking offers to buy our common units in any jurisdiction where offers and sales are not permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of the common units offered hereby.

Through and including June 3, 2006 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

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Index to Financial Statements

Prospectus Summary

This summary may not contain all of the information that is important to you. You should read this entire prospectus carefully, including the financial statements and notes to those statements, and the other documents to which we refer for a more complete understanding of this offering. Furthermore, you should carefully read “Summary of Risk Factors” and “Risk Factors” for more information about important factors that you should consider before making a decision to purchase common units in this offering.

Except as otherwise indicated, the information presented in this prospectus assumes that the underwriters do not exercise their option to purchase additional common units. All references in this prospectus to “we,” “us,” “Alliance Holdings GP” and “our” refer to Alliance Holdings GP, L.P. All references in this prospectus to “our general partner” refer to Alliance GP, LLC. All references in this prospectus to “Alliance Resource Partners” or “ARLP” refer to Alliance Resource Partners, L.P. and its wholly-owned subsidiaries and predecessors. All references in this prospectus to ARLP’s number of common units, cash distributions, earnings per unit or unit price give effect to ARLP’s two-for-one unit split on September 15, 2005. All references to our “partnership agreement” refer to the Amended and Restated Agreement of Limited Partnership of Alliance Holdings GP, L.P. to be adopted contemporaneously with the closing of this offering.

Alliance Holdings GP, L.P.

Our cash generating assets consist of our partnership interests in Alliance Resource Partners, L.P. (NASDAQ: ARLP), a publicly traded limited partnership engaged in the production and marketing of coal to major United States utilities and industrial users. Our aggregate partnership interests in ARLP will initially consist of the following:

•

a 1.98% general partner interest in ARLP, which we hold through our 100% ownership interest in Alliance Resource Management GP, LLC, ARLP’s managing general partner;

•

the incentive distribution rights in ARLP, which we hold through our 100% ownership interest in Alliance Resource Management GP, LLC;

•

15,550,628 common units of ARLP, representing approximately 42.7% of the common units of ARLP; and

•

a 0.001% managing interest in Alliance Coal, LLC.

Our incentive distribution rights in ARLP entitle us to receive an increasing percentage of the total cash distributions made by ARLP as it reaches certain target distribution levels. At ARLP’s current quarterly distribution rate of $0.46 per unit, aggregate quarterly cash distributions to us on all our interests in ARLP are approximately $11.4 million, representing approximately 54% of the total cash distributed. Based on this distribution, we expect that our initial quarterly distribution will be $0.185 per unit, or $0.74 per unit on an annualized basis.

Our primary business objective is to increase our cash distributions to our unitholders by actively assisting ARLP in executing its business strategy. ARLP’s business strategy is to create sustainable, capital-efficient growth in distributable cash flow to maximize its distribution to its unitholders by, among other things: (1) expanding its operations by adding and developing mines and coal reserves in existing, adjacent or neighboring properties, (2) developing new mining complexes in locations with attractive market conditions, (3) continuing to make productivity improvements in order to be a safe, low-cost producer in each region in which it operates and (4) strengthening its position with existing and future customers by offering a broad range of coal qualities, transportation alternatives and customized services.

Index to Financial Statements

acquisition of a business or asset or for an internal growth project. We may also provide ARLP with other forms of credit support, such as guarantees related to financing a project or other types of support related to a merger or acquisition transaction.

ARLP is required by its partnership agreement to distribute all of its cash on hand at the end of each quarter after establishing reserves to provide for the proper conduct of its business or to provide for future distributions. Historically, these reserves have represented a substantial portion of the cash ARLP generates from its operations and have been used in funding organic growth projects of ARLP. While maintaining these reserves, ARLP has successfully increased its distributions to its unitholders. On February 14, 2006, ARLP paid a quarterly distribution of $0.46 per unit (or $1.84 per unit on an annualized basis) for the quarter ended December 31, 2005. On April 26, 2006, ARLP declared a quarterly distribution of $0.46 per unit for the quarter ended March 31, 2006 to be paid on May 15, 2006. ARLP has increased its quarterly distribution by 84.0% since its initial public offering in 1999 and has increased its quarterly distribution in six of the last 10 quarters.

While we, like ARLP, are structured as a limited partnership, our capital structure and cash distribution policy differ materially from those of ARLP. Most notably, our general partner does not have an economic interest in us and is not entitled to receive any distributions from us and our capital structure does not include incentive distribution rights. Therefore all our distributions are made to our common unitholders.

Our ownership of ARLP’s incentive distribution rights entitle us to receive the following percentages of cash distributed by ARLP as the following target cash distribution levels are reached:

•

13.0% of all cash distributed in a quarter after $0.275 has been distributed in respect of each common unit of ARLP for that quarter;

•

23.0% of all cash distributed after $0.3125 has been distributed in respect of each common unit of ARLP for that quarter; and

•

48.0% of all cash distributed after $0.375 has been distributed in respect of each common unit of ARLP for that quarter.

Because the incentive distribution rights currently participate at the maximum 48% target cash distribution level, future growth in distributions we receive from ARLP will not result from an increase in the target cash distribution level associated with the incentive distribution rights.

Index to Financial Statements

The graph set forth below shows hypothetical cash distributions payable in respect of our partnership interests, including the incentive distribution rights in ARLP, across an illustrative range of annualized cash distributions per unit made by ARLP. This information is based upon:

•

ARLP’s 36,426,306 common units outstanding; and

•

our ownership of (1) a 1.98% general partner interest in ARLP, (2) the incentive distribution rights in ARLP, (3) 15,550,628 common units of ARLP and (4) a 0.001% managing interest in Alliance Coal, LLC.

The graph illustrates the impact to us of ARLP’s raising or lowering its per unit distribution from its most recent quarterly distribution of $0.46 per unit, or $1.84 per unit on an annualized basis. This information is presented for illustrative purposes only, is not intended to be a prediction of future performance and does not attempt to illustrate the impact of changes in our or ARLP’s business, including changes that may result from changes in interest rates, changes in coal prices, changes in general economic conditions, the impact of any future acquisitions or expansion projects or the issuance of additional units.

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Index to Financial Statements

Based upon ARLP’s current quarterly distribution, the number of our units outstanding and our anticipated expenses, we expect that our initial quarterly distribution will be $0.185 per unit, or $0.74 per unit on an annualized basis. The table below shows (1) the results of operations of ARLP for the three months ended December 31, 2005, (2) our cash distributions from ARLP for the three months ended December 31, 2005, and (3) our anticipated cash distributions to you.


	Three Months Ended December 31, 2005
	(in thousands, except per unit amounts)
Net income	$	45,658
Depreciation, depletion and amortization		14,815
Interest expense		2,131
Income taxes		426

EBITDA(1)		63,030
Interest expense		(2,131	)
Estimated maintenance capital expenditures(2)		(14,175	)
Income tax expense		(426	)

ARLP cash available for distribution before reserves	$	46,298

ARLP actual cash distributions	$	21,057

ARLP coverage ratio(3)		2.2x

Distributions on our partnership interests in ARLP:
Common units	$	7,153
1.98% general partner interest		418
Incentive distribution rights		3,879

Total distributions to us		11,450
Estimated public company expenses		(375	)

Our cash available for distribution	$	11,075

Our anticipated cash distributions	$	11,075

Our common units outstanding		59,863
Our anticipated distribution per unit	$	0.185

(1)

ARLP defines EBITDA as net income before net interest expense, income taxes and depreciation, depletion and amortization. Please read footnote 1 to the table on page 103 for an explanation of the term EBITDA and a reconciliation of EBITDA to cash provided by operating activities, the most directly comparable financial measure calculated and presented in accordance with U.S. generally accepted accounting principles, or GAAP.

(2)	ARLP’s maintenance capital expenditures, as defined under the terms of ARLP’s partnership agreement, are those capital expenditures required to maintain, over the long term, the operating capacity of ARLP’s capital assets.

(3)	ARLP refers to the ratio of cash available for distribution before reserves to actual cash distributions as the “coverage ratio.”

As shown in the table above, ARLP’s managing general partner, which is owned by us, reserves a significant portion of ARLP’s cash from operations to fund organic growth projects and to ensure stability in distributions, which might otherwise be impacted by fluctuations in coal prices. ARLP’s coverage ratio for the most recent quarterly period was 2.2x, which we believe to be among the highest of publicly traded limited partnerships. Due to our ownership of ARLP’s incentive distribution rights, our cash flows are impacted by changes in ARLP’s distributions to a greater extent than those of ARLP’s common unitholders.

Index to Financial Statements

ARLP increases distributions to its unitholders, including us, we would expect to increase distributions to our unitholders, although the timing and amount of such increased distributions, if any, will not necessarily be comparable to the timing and amount of the increase in distributions made by ARLP. In addition, the level of distributions we receive from ARLP may be affected by the various risks associated with the underlying business of ARLP. The level of distributions our unitholders receive from us will also be affected by the various risks associated with the underlying business of ARLP. Please read “Risk Factors.”

Pre-offering Structure

Prior to the closing of this offering, the partnership interests we will own in ARLP, including the 1.98% general partner interest, the incentive distribution rights and 15,550,628 common units, are owned, directly and indirectly, by Alliance Management Holdings, LLC, AMH II, LLC and Alliance Resource GP, LLC, which is a wholly-owned subsidiary of Alliance Resource Holdings II, Inc. Alliance Management Holdings, LLC, AMH II, LLC and Alliance Resource Holdings II, Inc. are referred to as the “management investors” in this prospectus and are owned by Joseph W. Craft III and other officers and employees of ARLP. Mr. Craft owns approximately 32.2% of Alliance Management Holdings, LLC, approximately 57.3% of AMH II, LLC and approximately 57.3% of Alliance Resource Holdings II, Inc. Mr. Craft is the President, Chief Executive Officer and the Chairman of the board of directors of our general partner. Alliance Resource Holdings II, Inc. owns 100% of the outstanding interests of ARLP’s special general partner, Alliance Resource GP, LLC, and prior to the closing of this offering, Alliance Management Holdings, LLC and AMH II, LLC owned a 25.9% interest and a 74.1% interest, respectively, in ARLP’s managing general partner, Alliance Resource Management GP, LLC.

In connection with this offering, we and the management investors have entered into a Contribution Agreement pursuant to which, at closing, the 1.98% general partner interest, incentive distribution rights and 15,550,628 common units, each representing partnership interests in ARLP, and a 0.001% managing interest in Alliance Coal, LLC will be contributed to us. As consideration for this contribution and in accordance with the terms of the Contribution Agreement, we will distribute to the management investors substantially all of the proceeds we receive from this offering as well as 47,363,000 of our common units. The terms of the Contribution Agreement were determined by the management investors and were not the result of arm’s-length negotiations. The Contribution Agreement also provides for the dissolution of Alliance Management Holdings, LLC and AMH II, LLC within 30 days of the closing of this offering. As a result of this dissolution, the owners of the dissolving entities will receive a portion of the cash and common units held by those entities. Prior to the completion of the transactions contemplated by this Contribution Agreement, all of our limited partner interests and our general partner are owned by C-Holdings, LLC, an entity wholly owned by Mr. Craft.

The following chart depicts the organization and ownership of Alliance Holdings GP, L.P. and ARLP and its subsidiaries before this offering. The ownership percentages reflected in the organization chart for ARLP on the following page represent the approximate ownership interests in ARLP on an individual entity basis and not, as elsewhere in this prospectus, on a combined basis with Alliance Resource Operating Partners, L.P.

Index to Financial Statements

Alliance Holdings GP, L.P.’s Ownership and

Organizational Chart

Before This Offering

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Index to Financial Statements

Post-offering Structure

We were formed in November 2005 as a Delaware limited partnership. After giving effect to this offering and the transactions described under “—Pre-offering Structure” above:

•

our general partner will own a non-economic general partner interest in us; and

•

our public unitholders will own 12,000,000 common units representing a 20.0% limited partner interest in us, and the management investors and Mr. Craft will own 47,863,000 common units representing an 80.0% limited partner interest in us.

In addition, as a result of transactions effected pursuant to the Contribution Agreement described above, our assets will consist of:

•

15,550,628 common units of ARLP representing approximately 42.7% of the common units of ARLP;

•

a 100% ownership interest in Alliance Resource Management GP, LLC, the managing general partner of ARLP, which owns a 1.98% general partner interest in ARLP and the incentive distribution rights in ARLP; and

•

a 0.001% managing interest in Alliance Coal, LLC.

The following chart depicts the organization and ownership of Alliance Holdings GP, L.P. and ARLP and its subsidiaries after giving effect to this offering. The ownership percentages reflected in the organization chart for ARLP on the following page represent the approximate ownership interests in ARLP on an individual entity basis and not, as elsewhere in this prospectus, on a combined basis with Alliance Resource Operating Partners, L.P.

Index to Financial Statements

Alliance Holdings GP, L.P.’s Ownership and

Organizational Chart

After This Offering


Public Common Unitholders		20.0%
Management Investors and Joseph W. Craft III		80.0%

		100.0%

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Index to Financial Statements

The Offering

Common units offered by Alliance Holdings GP, L.P.

12,500,000 common units, including 500,000 common units offered to Joseph W. Craft III or an entity controlled by him, or 14,375,000 common units if the underwriters exercise their option to purchase additional common units in full.

Common units outstanding after this offering

59,863,000 common units.

Use of proceeds

We expect to receive approximately $289.1 million from the sale of our common units, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. The net proceeds from this offering will be paid to the management investors as consideration for the contribution to us of their partnership interests in ARLP, as more fully described under “Use of Proceeds.”

The net proceeds from any exercise of the underwriters’ option to purchase additional common units will be used to redeem an equal number of common units from the management investors and Mr. Craft. Please read “Security Ownership of Certain Beneficial Owners and Management” and “Selling Unitholders.”

Cash distributions

We expect to make an initial quarterly distribution of $0.185 per common unit to the extent we have sufficient cash from operations after establishment of cash reserves and payment of fees and expenses. Please read “Our Cash Distribution Policy and Restrictions on Distributions.” We do not have subordinated units and our general partner is not entitled to any distributions. Please read “Description of Our Units” and “Description of Our Partnership Agreement.”

We expect to pay you a prorated distribution for the first quarter during which we are a publicly traded partnership. We will pay you a prorated distribution for the period from the first day our common units are publicly traded to and including June 30, 2006. We expect to pay this cash distribution in August 2006. However, we cannot assure you that we will declare or pay any distributions.

Limited call right

If at any time our affiliates own more than 85% of our outstanding common units, our general partner has the right, but not the obligation, to purchase all of the remaining common units at a price not less than the then current market price of the common units. At the completion of this offering, the management investors and Mr. Craft will own approximately 80.0% of our common units.

Limited voting rights

Our general partner will manage and operate us. Unlike the holders of common stock in a corporation, you will have only limited voting rights on matters affecting our business. You will have no right to elect our general partner or its officers or directors. Our general

Index to Financial Statements

partner may not be removed except by a vote of the holders of at least 66²/3% of the outstanding units, including units owned by our general partner and its affiliates, voting together as a single class. Upon completion of this offering, the management investors and Mr. Craft will own approximately 80.0% of our common units. This ownership level will enable our general partner and these affiliates to prevent our general partner’s involuntary removal. Please read “Description of Our Partnership Agreement—Withdrawal or Removal of Our General Partner.”

Estimated ratio of taxable income to distributions

We estimate that if you own the common units you purchase in this offering through the record date for distributions for the period ending December 31, 2007, you will be allocated, on a cumulative basis, an amount of federal taxable income for that period that will be less than 50% of the cash distributed with respect to that period. For example, if you receive an annual distribution of $0.74 per unit, we estimate that your average allocable federal taxable income per year will be no more than $0.37 per unit. For the basis of this estimate, please read “Material Tax Consequences—Tax Consequences of Unit Ownership—Ratio of Taxable Income to Distributions.”

Exchange listing

Our common units have been approved for listing on the Nasdaq National Market under the symbol “AHGP.”

Our Management

Our general partner, Alliance GP, LLC, will manage our operations and activities. Mr. Craft indirectly owns 100% of our general partner. Three of the executive officers of ARLP’s managing general partner also serve as executive officers of our general partner. Some of the non-independent directors of our general partner also serve as directors of ARLP’s managing general partner. Please read “Management.” Our general partner will be entitled to reimbursement for all direct and indirect expenses incurred on our behalf.

Our Principal Executive Offices

Our principal executive offices are located at 1717 South Boulder Avenue, Tulsa, Oklahoma 74119, and our telephone number at that location is (918) 295-1415.

Index to Financial Statements

Alliance Resource Partners, L.P.

ARLP is a diversified producer and marketer of coal to major United States utilities and industrial users. ARLP began mining operations in 1971 and, since then, has grown through acquisitions and internal development to become what management believes to be the fifth largest coal producer in the eastern United States. ARLP completed its initial public offering in August 1999. At December 31, 2005, ARLP had approximately 549.0 million tons of proven and probable coal reserves in Illinois, Indiana, Kentucky, Maryland, Pennsylvania and West Virginia. In 2005, ARLP produced 22.3 million tons of coal and sold 22.8 million tons of coal.

ARLP currently operates seven underground mining complexes in Illinois, Indiana, Kentucky and Maryland. ARLP’s surface mine located in Kentucky depleted its active reserve area in December 2005, and its production eventually will be replaced by an underground mine that is expected to emerge from mine development during the second quarter of 2006. ARLP is also currently developing an additional underground mine in West Virginia that will replace production from ARLP’s underground mine in Maryland, which is expected to deplete its reserves in November 2006. Its mining activities are conducted in three geographic regions commonly referred to in the coal industry as the Illinois Basin, Central Appalachia and Northern Appalachia regions. ARLP has grown historically, and expects to grow in the future, through expansion of its operations by adding and developing mines and coal reserves in existing, adjacent or neighboring properties. At ARLP’s Warrior Coal, LLC, or Warrior, mining complex located in the Illinois Basin region, ARLP hosts and operates a coal synfuel facility, supplies the facility with coal feedstock, assists with the marketing of coal synfuel and provides other services to the owner of the synfuel facility. In January 2005, ARLP entered into several agreements to provide similar services for a synfuel facility to be located at ARLP’s Gibson mining complex in the Illinois Basin region and in August 2005 entered into an agreement to provide coal feedstock to a synfuel facility located at the power plant of the primary customer of the Mettiki Coal LLC, or Mettiki, mine that is located in the Northern Appalachia region.

ARLP’s Business Strategy

ARLP’s business strategy is to create sustainable, capital-efficient growth in distributable cash flow to maximize its distributions to its unitholders by:

•

expanding its operations by adding and developing mines and coal reserves in existing, adjacent or neighboring properties;

•

developing new mining complexes in locations with attractive market conditions;

•

extending the lives of its mines through the development of currently undeveloped coal reserves using its existing infrastructure;

•

engaging in strategic acquisitions of mining operations and reserves;

•

continuing to make productivity improvements in order to be a safe, low-cost producer in each region in which it operates;

•

strengthening its position with existing and future customers by offering a broad range of coal qualities, transportation alternatives and customized services; and

•

developing strategic relationships to take advantage of opportunities created by the significant changes that have occurred in a number of industries, including the electric utility industry.

To date, ARLP has executed its growth strategy primarily by developing additional coal mines in its core areas of operations and by expanding the production capacity and scope of its existing mining operations. ARLP management believes this focus on organic opportunities provides the most capital-efficient means of achieving

Index to Financial Statements

ARLP’s growth objectives due to: (1) the absence of an acquisition premium typically associated with a competitive bidding process involving multiple parties; and (2) the ability to realize cost savings and revenue enhancements by operating the newly developed mines in conjunction with the expansion of ARLP’s existing operations.

Together with this focus on organic growth, ARLP is continually evaluating potential strategic acquisitions of properties and businesses. ARLP has made and may continue to make acquisitions from unaffiliated third parties or from related parties, including its general partners and their affiliates, which are controlled by ARLP’s management. Consistent with its acquisition strategy, ARLP is continuously pursuing strategic acquisitions that it expects to be accretive to its cash available for distribution. ARLP may also pursue acquisitions which are not accretive to its cash available for distribution at the time of the acquisition but are expected to be accretive in the long-term. ARLP’s reasons for pursuing such non-accretive acquisitions are as follows:

•

anticipated long-term benefits, such as new customer relationships or cost-savings; and

•

to enter into new geographic areas or new lines of business.

The price to be paid and other terms of any acquisitions ARLP makes from related parties will be approved by the conflicts committee of the board of directors of ARLP’s managing general partner.

Recent Developments

ARLP Financial and Operating Results for the Three Months Ended March 31, 2006 Compared to the Three Months Ended March 31, 2005. On April 24, 2006, ARLP announced financial and operating results for the three months ended March 31, 2006. Net income for the three months ended March 31, 2006 increased approximately 23% to $48.2 million as compared to $39.1 million for the three months ended March 31, 2005. The following chart sets forth ARLP’s summarized results for the periods indicated:


	Three Months Ended March 31,
	2005		2006
	(In thousands, except per ton amounts)
Tons sold		5,631		6,102
Tons produced		5,729		6,248
Coal sales price per ton(1)	$	31.76	$	35.76

Total revenues	$	195,627	$	238,320
Total operating expenses		155,943		189,695

Income from operations		39,684		48,625
Other income		105		271

Income before income taxes and cumulative effect of accounting change		39,789		48,896
Income tax expense		710		759

Income before cumulative effect of accounting change		39,079		48,137
Cumulative effect of accounting change		—		112

Net income	$	39,079	$	48,249

(1)	Sales price per ton is defined as total coal sales divided by total tons sold.

Index to Financial Statements

was primarily attributable to higher sales from the Excel No. 3 mine, which resumed operations following the MC Mining Fire Incident on February 21, 2005. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—MC Mining Fire Incident.”

Total average coal sales prices for the three months ended March 31, 2006 increased approximately 13% to $35.76 per ton sold, compared to $31.76 for the three months ended March 31, 2005. As a result of new coal sales agreements and the re-pricing of several existing coal sales contracts at higher prices, average coal sales prices in the Illinois Basin and Central Appalachian regions increased approximately 10% and 11%, respectively. Average sales prices realized in the Northern Appalachian region decreased approximately 12% primarily due to fewer tons sold into the higher priced export market during the three months ended March 31, 2006.

Revenues for the three months ended March 31, 2006 increased 22% to $238.3 million, compared to revenues of $195.6 million for the three months ended March 31, 2005. This increase was primarily due to increased coal sales volumes and higher average coal sales prices realized during the three months ended March 31, 2006. Coal production for the three months ended March 31, 2006 increased 9% to 6.2 million tons, as compared to 5.7 million tons for the three months ended March 31, 2005.

Operating expenses for the three months ended March 31, 2006 rose to $152.0 million compared to $119.4 million for the three months ended March 31, 2005 primarily as a result of increased production, as well as higher coal sales volumes and sales related expenses. Operating expenses for the three months ended March 31, 2006 were also impacted by continuing pressures on labor-related costs, insurance expense, maintenance expense, and materials and supply costs (particularly steel, power and fuel). In addition to these cost pressures, expenses also increased as a result of lower productivity at the Pattiki and Gibson County mines, primarily due to changing mining conditions experienced during the three months ended March 31, 2006 as compared to the same period last year.

General and administrative expenses for the three months ended March 31, 2006 increased to $7.2 million as compared to $5.7 million for the three months ended March 31, 2005. This increase was primarily attributable to higher unit-based incentive compensation expense.

Suspension of Coal Synfuel Facility Operation at Warrior. On April 19, 2006, ARLP received a letter from the managing member of Synfuel Solutions Operating, LLC, or SSO, which stated that effective April 23, 2006, due to the increase in the wellhead price of domestic crude oil, SSO has elected to exercise its contractual right to suspend until further notice operation of its coal synfuel production facility located at ARLP’s Warrior Coal, LLC, or Warrior, mining complex in Hopkins County, Kentucky. ARLP receives fees from coal sales, rental, marketing and other services provided to SSO pursuant to various long-term agreements associated with the coal synfuel facility located at Warrior. These agreements, which expire on December 31, 2007, are dependent on the ability of SSO to use certain qualifying federal income tax credits available to the coal synfuel facility and are subject to early cancellation if the synfuel tax credits become unavailable to SSO due to a rise in the price of crude oil or otherwise. SSO has advised ARLP that resumption of operations of the synfuel facility is dependent on the price of crude oil in the future. In anticipation of the suspension of operations at the SSO coal synfuel production facility, ARLP will sell coal directly to SSO’s synfuel customers under “back up” coal supply agreements, which automatically provide for the sale of ARLP’s coal in the event these customers do not purchase coal synfuel from SSO. ARLP has also entered into agreements with the owners of two other coal synfuel production facilities—PC Indiana Synthetic Fuel #2, L.L.C., or PCIN, related to its coal synfuel facility located at ARLP’s Gibson County Coal, LLC mining complex in Gibson County, Indiana and Mt. Storm Coal Supply, LLC, or Mt. Storm Coal Supply, related to its coal synfuel facility located at Virginia Electric and Power Company’s Mt. Storm power station, which is adjacent to ARLP’s Mettiki Coal, LLC mining complex in Garrett County, Maryland. The PCIN and Mt. Storm Coal Supply synfuel facilities currently remain in operation; however, the continued operation of these facilities cannot be assured as the operators of these facilities have

Index to Financial Statements

similar contractual rights to suspend production due to higher oil prices. For 2006, the incremental net income benefit to ARLP from all of its coal synfuel-related agreements is expected to be in the range of approximately $26.0 million to $28.0 million, assuming that coal pricing would not increase without the availability of synfuel. Approximately $19.8 million of the 2006 estimated incremental net income benefit was attributable to the SSO facility, of which approximately $8.0 million was realized by ARLP prior to SSO’s anticipated suspension of operations at Warrior. Pursuant to its agreement with SSO, ARLP is not obligated to make retroactive adjustments or reimbursements if SSO’s synfuel tax credits are disallowed.

River View Coal Reserves. On April 12, 2006, ARLP announced that Alliance Coal, LLC, its wholly-owned subsidiary, acquired the rights to approximately 99.3 million tons of high sulfur coal reserves in Union County, located in western Kentucky. As a result of the purchase of all of the members’ interests of River View Coal, LLC, or River View, ARLP gained control of approximately 89.7 million tons of coal by lease and approximately 9.6 million tons of coal through direct ownership in the Kentucky No. 7, No. 9 and No. 11 coal seams, along with related surface properties and other assets. The acquisition of the River View reserves increases ARLP’s total coal reserve holdings by approximately 18% to approximately 642 million tons. The River View reserve area encompasses approximately 24,600 acres located in Union County, Kentucky. ARLP intends to develop the River View mine as an underground mining complex utilizing continuous mining units employing room-and-pillar mining techniques. ARLP estimates the River View mining complex will be designed to produce annually up to 3.5 million tons of coal. Total capital expenditures required to develop the River View reserves are currently estimated to be in the range of $110 to $130 million over a four-year period. It is currently anticipated that the River View complex will begin production in the 2008-2009 time frame and employ as many as 300 workers. Definitive development commitment for River View is dependent upon final approval of the board of directors of ARLP’s managing general partner.

Allegheny Coal Lease and Coal Sales Agreement. On December 29, 2005, ARLP announced that its newly formed subsidiary, Penn Ridge Coal, LLC, or Penn Ridge, had entered into a coal lease and sales agreement with affiliates of Allegheny Energy, Inc., or Allegheny, to pursue development of Allegheny’s Buffalo coal reserve in Washington County, Pennsylvania. Under this coal lease and sales agreement, an affiliate of Allegheny has agreed to lease to Penn Ridge the Buffalo coal reserve in exchange for lease payments consisting of fixed production royalties on coal sales proceeds. The lease term is fifteen years, and it commenced on December 28, 2005. The Buffalo coal reserve lease encompasses approximately 19,800 acres and is estimated to include approximately 55 million tons of coal in the Pittsburgh No. 8 seam and 300 acres of surface land located near Avella, Pennsylvania. ARLP anticipates that the Penn Ridge operation will be capable of producing annually up to 5.0 million tons of coal and may employ as many as 270 persons. ARLP is estimating total capital expenditures required to develop Penn Ridge to be approximately $165.0 million over a five-year period. ARLP has begun the development process for the Penn Ridge mine, which includes obtaining the necessary permits. ARLP anticipates production from Penn Ridge commencing between 2009 and 2010. In conjunction with the Buffalo coal reserve lease, Penn Ridge also entered into a ten-year, 20 million ton coal sales agreement with affiliates of Allegheny at market based prices. Upon commencement of initial production, Penn Ridge will supply annually up to two million tons of coal produced from the Buffalo coal reserve for use in Allegheny’s power plants. The Buffalo coal reserve area is north of and contiguous to the ARLP’s Tunnel Ridge reserve area, which is located in Washington County, Pennsylvania and Ohio County, West Virginia. When combined with ARLP’s Tunnel Ridge reserves, ARLP controls an estimated 125 million tons of coal in the Pittsburgh No. 8 seam. Definitive development commitment for Allegheny’s Buffalo coal reserve and the Tunnel Ridge reserves is dependent upon final approval of the board of directors of ARLP’s managing general partner.

Index to Financial Statements

Under the new agreement, beginning January 1, 2006, Alliance Coal, LLC will ship annually up to 4.0 million tons of coal directly to LG&E or as feedstock for synfuel produced for the benefit of LG&E. Since 2001, Alliance Coal, LLC and its affiliates have supplied annually approximately 2.4 million tons of Illinois Basin coal to LG&E, either directly or as synfuel feedstock, under existing coal supply agreements. The new agreement represents an increase of approximately 1.6 million tons over coal shipments historically supplied by Alliance Coal LLC’s subsidiaries, Hopkins County Coal, LLC, Webster County Coal, LLC, and Warrior Coal, LLC.

New Mine Safety Rules. As a result of recent coal mining accidents in West Virginia and Kentucky, the U.S Department of Labor’s Mine Safety and Health Administration as well as West Virginia and several other states, including Kentucky, Pennsylvania and Illinois, have imposed or are considering imposing, stringent new mine safety and accident reporting requirements and increased civil and criminal penalties for violations of mine safety laws. Please read “Business of Alliance Resource Partners, L.P.—Regulation and Laws—Mine Health and Safety Laws.”

ARLP’s Principal Executive Offices and Internet Address

ARLP’s executive offices are located at 1717 South Boulder Avenue, Tulsa, Oklahoma 74119, and its telephone number at that location is (918) 295-7600. ARLP maintains a website at www.arlp.com that provides information about its business and operations. Information contained on this website, however, is not incorporated into or otherwise a part of this prospectus. ARLP also files annual, quarterly and current reports and other information with the Securities and Exchange Commission, or Commission. ARLP’s Commission filings are available to the public at the Commission’s website at www.sec.gov. You may also read and copy any document ARLP files at the Commission’s public reference room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Commission’s public reference room by calling the Commission at 1-800-SEC-0330.

Comparison of Rights of Holders of Our Common Units and ARLP’s Common Units

Our common units and ARLP’s common units are unlikely to trade in simple relation or proportion to one another. Instead, while the trading prices of our common units and ARLP’s common units are likely to follow generally similar broad trends, the trading prices may diverge because, among other things:

•

with respect to ARLP’s distributions, ARLP’s common unitholders have a priority over our incentive distribution rights in ARLP;

•

we participate in ARLP’s general partner’s distributions and the incentive distribution rights, and ARLP’s common unitholders do not; and

•

we may in the future enter into other businesses separate from ARLP or any of its affiliates.

The following table compares certain features of ARLP’s common units and our common units.


	ARLP’s Common Units	Our Common Units

Taxation of Entity and Entity Owners	ARLP is a flow-through entity that is not subject to an entity-level federal income tax.	Similarly, we are a flow-through entity that is not subject to an entity-level federal income tax.

	ARLP expects that holders of its common units will benefit for a period of time from tax basis adjustments and remedial allocations of deductions.	We also expect that holders of our common units will benefit for a period of time from tax basis adjustments and remedial allocations of deductions as a result of our

Index to Financial Statements


	ARLP’s Common Units	Our Common Units

		ownership of common units of ARLP. However, incentive distribution rights do not benefit from such adjustments and allocations. Therefore, we expect the ratio of our taxable income to the distributions you will receive to be higher than the ratio of taxable income to the distributions received by the common unitholders of ARLP. Moreover, if ARLP is successful in increasing its distributable cash flow over time, we expect the ratio of our taxable income to distributions will increase.

	ARLP common unitholders will receive Schedule K-1s from ARLP reflecting the unitholders’ share of ARLP’s items of income, gain, loss and deduction at the end of each fiscal year.	Our common unitholders also will receive Schedule K-1s from us reflecting the unitholders’ share of our items of income, gain, loss and deduction at the end of each fiscal year.

Distributions and Incentive Distribution Rights	ARLP pays its limited partners and general partners quarterly distributions equal to the cash it receives from its operations, less certain reserves for expenses and other uses of cash. ARLP’s managing general partner owns the incentive distribution rights in ARLP.	We expect to pay our limited partners quarterly distributions equal to the cash we receive from ARLP, less certain reserves for expenses and other uses of cash. Our general partner is not entitled to any distributions.

Sources of Cash Flow	ARLP currently generates its cash flow from the production and marketing of coal.	Our cash-generating assets consist of our partnership interests in ARLP, and we currently have no independent operations. Accordingly, our financial performance and our ability to pay cash distributions to our unitholders is currently completely dependent upon the performance of ARLP.

Limitation on Issuance of Additional Units	ARLP may issue an unlimited number of additional partnership interests and other equity securities without obtaining unitholder approval.	Similarly, we may issue an unlimited number of additional partnership interests and other equity securities without obtaining unitholder approval.

Index to Financial Statements

Summary of Risk Factors

An investment in our units involves risks associated with us and ARLP as well as the tax characteristics associated with interests in publicly traded partnerships. You should consider carefully all the risk factors together with all of the other information included in this prospectus before you invest in our units. The risks related to an investment in us, conflicts of interest, ARLP’s business and tax consequences to our unitholders are described under the caption “Risk Factors.” These risks include, but are not limited to, those described below:

Risks Inherent in an Investment in Us

•

Our only assets are our partnership interests in ARLP, and therefore our operating cash flow initially will be completely dependent upon the ability of ARLP to make distributions to its partners.

•

In the future, we may not have sufficient cash to pay distributions at our estimated initial quarterly distribution level or to increase distributions.

•

Our unitholders do not elect our general partner or vote on our general partner’s officers or directors. Following the completion of this offering, the management investors and Joseph W. Craft III will own 80.0% of our units, a sufficient number to block any attempt to remove our general partner.

•

You will experience immediate and substantial dilution of $21.83 per unit.

•

The market price of our common units could be adversely affected by sales of substantial amounts of our common units in the public markets, including sales by our existing unitholders.

•

The control of our general partner and the limited liability company that holds a majority of the incentive distribution rights in ARLP may be transferred to a third party without unitholder consent.

•

We are dependent on the leadership and involvement of Joseph W. Craft III and other key personnel for the success of our and ARLP’s business.

•

ARLP may issue additional ARLP units, which may increase the risk that ARLP will not have sufficient available cash to maintain or increase its per unit distribution level.

Risks Related to Conflicts of Interest

•

Although we control ARLP through our ownership of its managing general partner, ARLP’s managing general partner owes fiduciary duties to ARLP and ARLP’s unitholders, which may conflict with our interests.

•

If we are presented with certain business opportunities, ARLP will have the first right to pursue such opportunities.

•

Our partnership agreement limits our general partner’s fiduciary duties to us and our unitholders and restricts the remedies available to our unitholders for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty.

Risks Related to ARLP’s Business

•

A substantial or extended decline in coal prices could negatively impact ARLP’s results of operations.

•

A material amount of ARLP’s net income and cash flow is dependent on its continued ability to realize direct or indirect benefits from state and federal tax credits such as non-conventional source fuel tax credits. If the benefit to ARLP from any of these tax credits is materially reduced, it could negatively impact ARLP’s results of operations and reduce ARLP’s cash available for distribution.

Index to Financial Statements

•

From time to time conditions in the coal industry may make it more difficult for ARLP to extend existing or enter into new long-term contracts. This could affect the stability and profitability of ARLP’s operations.

•

ARLP depends on a few customers for a significant portion of its revenues, and the loss of one or more significant customers could impact ARLP’s ability to maintain the sales volume and price of the coal it produces.

•

ARLP’s profitability may decline due to unanticipated mine operating conditions and other factors that are not within its control.

•

A shortage of skilled labor may make it difficult for ARLP to maintain labor productivity and competitive costs and could adversely affect ARLP’s profitability.

•

Expansions of existing mines that ARLP has completed since its formation, as well as mine expansions that it may undertake in the future, involve a number of risks, any of which could cause ARLP not to realize the anticipated benefits.

•

The unavailability of an adequate supply of coal reserves that can be mined at competitive costs could cause ARLP’s profitability to decline.

•

The estimates of ARLP’s reserves may prove inaccurate, and unitholders should not place undue reliance on these estimates.

•

Mining in certain areas in which ARLP operates is more difficult and involves more regulatory constraints than mining in other areas of the United States, which could affect the mining operations and cost structures of these areas.

•

Unexpected increases in raw material costs could significantly impair ARLP’s operating profitability.

•

Cash distributions are not guaranteed and may fluctuate with ARLP’s performance. In addition, ARLP’s managing general partner’s discretion in establishing cash reserves may negatively impact our receipt of cash distributions.

Tax Risks to Our Unitholders

•

If we or ARLP were to become subject to entity-level taxation for federal or state tax purposes, then our cash available for distribution to you would be substantially reduced.

•

A successful IRS contest of the federal income tax positions we or ARLP take may adversely impact the market for our common units or ARLP’s common units, and the costs of any contest will reduce cash available for distribution to our unitholders.

•

Even if you do not receive any cash distributions from us, you will be required to pay taxes on your share of our taxable income.

Index to Financial Statements

Summary of Conflicts of Interest and Fiduciary Duties

Conflicts of interest exist and may arise in the future as a result of the relationships among us, ARLP and our and their respective general partners and affiliates. Similarly, our general partner is controlled by C-Holdings, LLC, which is wholly owned by Joseph W. Craft III, the President, Chief Executive Officer and Chairman of the board of directors of our general partner. Accordingly, Mr. Craft has the ability to elect, remove and replace the directors and officers of our general partner. Similarly, through his indirect control of the managing general partner of ARLP, Mr. Craft has the ability to elect, remove and replace the directors and officers of the general partner of ARLP.

Our general partner and its directors and officers have fiduciary duties to manage our business in a manner beneficial to us and our partners. At the same time, ARLP’s managing general partner and its directors and officers have fiduciary duties to manage ARLP’s business in a manner beneficial to ARLP and its partners, including us. Certain of the executive officers and non-independent directors of our general partner also serve as executive officers and directors of the managing general partner of ARLP. Consequently, these directors and officers may encounter situations in which their fiduciary obligations to ARLP, on the one hand, and us, on the other hand, are in conflict.

The board of directors of ARLP’s managing general partner or its conflicts committee will resolve any conflict between us and ARLP. The board of directors of our general partner or its conflicts committee will resolve any conflict between us and the owners of our general partner and their affiliates. The resolution of these conflicts may not always be in our best interest or that of our unitholders. For a more detailed description of the conflicts of interest involving us and the resolution of these conflicts, please read “Conflicts of Interest and Fiduciary Duties.”

Our partnership agreement limits the liability and reduces the fiduciary duties of our general partner to our unitholders. Our partnership agreement also restricts the remedies available to unitholders for actions that might otherwise constitute a breach of our general partner’s fiduciary duties owed to unitholders. By purchasing our units, you are treated as having consented to various actions contemplated in the partnership agreement and conflicts of interest that might otherwise constitute a breach of fiduciary or other duties under applicable state law. Please read “Conflicts of Interest and Fiduciary Duties—Fiduciary Duties” for a description of the fiduciary duties imposed on our general partner by Delaware law, the material modifications of these duties contained in our partnership agreement and certain legal rights and remedies available to unitholders.

Upon completion of this offering, we will become party to an existing omnibus agreement currently among ARLP, its general partners and Alliance Resource Holdings, Inc., which governs potential competition among ARLP and the other parties to the agreement. Pursuant to the terms of the amended omnibus agreement, we will agree, and will cause our controlled affiliates to agree, to certain business opportunity and non-competition arrangements to address potential conflicts that may arise between us and our general partner on one hand, and ARLP and its subsidiaries on the other. If a business opportunity in respect of any coal mining, marketing or transportation assets is presented to us, our general partner or ARLP or its general partners, then ARLP will have the first right to acquire such assets. Please read “Certain Relationships and Related Party Transactions—ARLP Omnibus Agreement” and “Conflicts of Interest and Fiduciary Duties.”

For a description of our other relationships with our affiliates, please read “Certain Relationships and Related Party Transactions.”

Index to Financial Statements

Summary Historical and Pro Forma Financial and Operating Data

We were formed in November 2005 and therefore do not have any historical financial statements. Since we will own and control Alliance Resource Management GP, LLC, the managing general partner of ARLP, the historical financial statements presented below are of Alliance Resource Management GP, LLC on a consolidated basis, including ARLP. We refer to Alliance Resource Management GP, LLC as ARM GP throughout this prospectus.

The historical financial data of ARM GP were derived from its audited consolidated financial statements as of and for the years ended December 31, 2003, 2004 and 2005. ARLP acquired Warrior Coal, LLC from ARH Warrior Holdings, Inc., a subsidiary of Alliance Resource Holdings, Inc., the owner of the special general partner of ARLP, in February 2003. Because the Warrior acquisition was between entities under common control, it is accounted for at historical cost in a manner similar to that used in a pooling of interests.

ARM GP has not had any operating activities apart from those conducted by ARLP. ARM GP’s cash flows currently consist of distributions from ARLP on the partnership interests, including incentive distribution rights, that it owns. Accordingly, the summary historical consolidated financial data set forth in the table on the following page primarily reflect the operating activities and results of operations of ARLP.

The limited partner interests in ARLP not owned by ARM GP are reflected as a liability on the balance sheet and the non-controlling partners’ share of income from ARLP is reported as a deduction from income before non-controlling interest in determining net income (loss) for historical presentation purposes. For pro forma presentation purposes, the limited partner interests in ARLP owned by ARLP’s special general partner and its affiliates are reclassified from a liability on our balance sheet to equity and its share of ARLP’s income is included in our income.

Our summary unaudited pro forma financial information gives effect to the following transactions:

•

the sale of 12,500,000 common units in this offering and related use of proceeds;

•

the issuance of 20,641,168 of our common units to Alliance Resource GP, LLC, the special general partner of ARLP, in exchange for 15,310,622 ARLP common units; and

•

the issuance of 26,721,832 of our common units to Alliance Management Holdings, LLC and AMH II, LLC, the current members of ARM GP, in exchange for their interests in ARM GP, 240,006 ARLP common units and AMH II, LLC’s interest in ARM GP Holdings, Inc.

The pro forma balance sheet data below as of December 31, 2005 are derived from the unaudited pro forma financial statements and assumes that the offering and the related transactions occurred as of December 31, 2005. The pro forma financial and operating data below for the year ended December 31, 2005 are derived from our unaudited pro forma financial statements and assumes this offering and the related transactions occurred on January 1, 2005.

We derived the data in the following table from, and it should be read together with and is qualified in its entirety by reference to, the historical and pro forma consolidated financial statements and the accompanying notes included in this prospectus. The table should also be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Index to Financial Statements


										Pro Forma
	Year Ended December 31,									Year Ended December 31, 2005
	2003			2004			2005			Year Ended December 31, 2005
				(audited)						(unaudited)
	(in millions, except per ton data)
Statements of Income:
Sales and operating revenues:
Coal sales	$	501.6		$	599.4		$	768.9		$	768.9
Transportation revenues		19.5			29.8			39.1			39.1
Other sales and operating revenues		21.6			24.1			30.7			30.7

Total revenues		542.7			653.3			838.7			838.7

Expenses:
Operating expenses		368.8			436.4			521.5			521.5
Transportation expenses		19.5			29.8			39.1			39.1
Outside purchases		8.5			9.9			15.1			15.1
General and administrative		28.3			45.4			33.5			33.5
Depreciation, depletion and amortization		52.5			53.7			55.6			55.6
Interest expense		16.0			15.0			11.8			11.8
Net gain from insurance settlement(1)		—			(15.2	)		—			—

Total expenses		493.6			575.0			676.6			676.6

Income from operations		49.1			78.3			162.1			162.1
Other income		1.4			1.1			0.6			0.6

Income before income taxes and non-controlling interest		50.5			79.4			162.7			162.7
Income tax expense		2.6			2.7			2.7			2.7

Income before non-controlling interest		47.9			76.7			160.0			160.0
Affiliate non-controlling interest in consolidated partnership’s net income		(21.1	)		(31.8	)		(63.3	)		(0.1	)
Non-affiliate non-controlling interest in consolidated partnership’s net income		(26.5	)		(41.5	)		(84.3	)		(84.3	)

Net income	$	0.3		$	3.4		$	12.4		$	75.6


Balance Sheet Data:
Working capital	$	16.4		$	54.2		$	76.1		$	76.1
Total assets		336.6			412.9			532.8			532.8
Long-term debt		180.0			162.0			144.0			144.0
Total liabilities		323.9			357.6			376.9			376.9
Total non-controlling interest		18.4			60.6			158.0			(33.7	)
Members’ capital (deficiency in capital)		(5.8	)		(5.3	)		(2.2	)		189.6

Other Operating Data:
Tons sold		19.5			20.8			22.8			22.8
Tons produced		19.2			20.4			22.3			22.3
Revenues per ton sold(2)	$	26.83		$	29.98		$	35.07		$	35.07
Cost per ton sold(3)	$	20.80		$	23.64		$	25.00		$	25.00

Other Financial Data:
Net cash provided by operating activities	$	110.3		$	145.2		$	193.6
Net cash used in investing activities		(77.8	)		(77.6	)		(110.2	)
Net cash used in financing activities		(31.5	)		(46.5	)		(82.6	)
Maintenance capital expenditures(4)		30.0			31.6			56.7			56.7

(1)

Represents the net gain from the final settlement with ARLP’s insurance underwriters for claims relating to the Dotiki Fire Incident. Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Dotiki Mine Fire Incident” for a description of the accounting treatment of expenses and insurance proceeds associated with the Dotiki Fire Incident.

(2)	Revenues per ton sold are based on the total of coal sales and other sales and operating revenues divided by tons sold.

(3)	Cost per ton sold is based on the total of operating expenses, outside purchases and general and administrative expenses divided by tons sold.

(4)	ARLP’s maintenance capital expenditures, as defined under the terms of ARLP’s partnership agreement, are those capital expenditures required to maintain, over the long-term, the operating capacity of ARLP’s capital assets.

Index to Financial Statements

FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. These statements are based on our beliefs as well as assumptions made by, and information currently available to, us. When used in this document, the words “anticipate,” “believe,” “continue,” “estimate,” “expect,” “forecast,” “may,” “project,” “will,” and similar expressions identify forward-looking statements. These statements reflect our current views with respect to future events and are subject to various risks, uncertainties and assumptions. Specific factors which could cause actual results to differ from those in the forward-looking statements include:

•

increased competition in coal markets and ARLP’s ability to respond to the competition;

•

fluctuations in coal prices, which could adversely affect ARLP’s operating results and cash flows;

•

risks associated with the expansion of ARLP’s operations and properties;

•

deregulation of the electric utility industry or the effects of any adverse change in the domestic coal industry, electric utility industry, or general economic conditions;

•

dependence on significant customer contracts, including renewing customer contracts upon expiration of existing contracts;

•

customer bankruptcies and/or cancellations or breaches of existing contracts;

•

customer delays or defaults in making payments;

•

fluctuations in coal demand, prices and availability due to labor and transportation costs and disruptions, equipment availability, governmental regulations and other factors;

•

ARLP’s productivity levels and margins that ARLP earns on its coal sales;

•

greater than expected increases in raw material costs;

•

greater than expected shortage of skilled labor;

•

any unanticipated increases in labor costs, adverse changes in work rules, or unexpected cash payments associated with post-mine reclamation and workers’ compensation claims;

•

any unanticipated increases in transportation costs and risk of transportation delays or interruptions;

•

greater than expected environmental regulation, costs and liabilities;

•

a variety of operational, geologic, permitting, labor and weather-related factors;

•

risks associated with major mine-related accidents, such as mine fires or other interruptions;

•

results of litigation;

•

difficulty maintaining ARLP’s surety bonds for mine reclamation as well as workers’ compensation and black lung benefits;

•

difficulty obtaining commercial property insurance, and risks associated with ARLP’s participation (excluding any applicable deductible) in ARLP’s commercial insurance property program; and

•

a loss or reduction of the direct or indirect benefit from certain state and federal tax credits, including non-conventional source fuel tax credits.

If one or more of these or other risks or uncertainties materialize, or should underlying assumptions prove incorrect, our actual results may differ materially from those described in any forward-looking statement. When considering forward-looking statements, you should also keep in mind the risk factors described in “Risk Factors” below. The risk factors could also cause our actual results to differ materially from those contained in any forward-looking statement. We disclaim any obligation to update the above list or to announce publicly the result of any revisions to any of the forward-looking statements to reflect future events or developments.

Index to Financial Statements

RISK FACTORS

Limited partner interests are inherently different from capital stock of a corporation, although many of the business risks to which we are subject are similar to those that would be faced by a corporation engaged in a similar business. You should consider carefully the following risk factors together with all of the other information included in this prospectus in evaluating an investment in our common units.

The following risks could materially and adversely affect our business, financial condition or results of operations. In that case, we might not be able to pay the minimum quarterly distribution on our common units, the trading price of our common units could decline and you could lose all or part of your investment.

Risks Inherent in an Investment in Us

Our only assets are our partnership interests in ARLP and therefore our operating cash flow initially will be completely dependent upon the ability of ARLP to make distributions to its partners.

The amount of cash that ARLP can distribute to its partners, including us, each quarter principally depends upon the amount of cash it generates from its operations, which will fluctuate from quarter to quarter based on, among other things:

•

the amount of coal ARLP is able to produce from its properties;

•

the price at which ARLP is able to sell coal, which is affected by the supply of and demand for domestic and foreign coal;

•

the level of ARLP’s operating costs;

•

weather conditions;

•

the proximity to and capacity of transportation facilities;

•

domestic and foreign governmental regulations and taxes;

•

the price and availability of alternative fuels;

•

the effect of worldwide energy conservation measures; and

•

prevailing economic conditions.

In addition, the actual amount of cash that ARLP will have available for distribution will depend on other factors, including:

•

the level of capital expenditures it makes;

•

the sources of cash used to fund its acquisitions;

•

its debt service requirements and restrictions on distributions contained in its current or future debt agreements;

•

fluctuations in its working capital needs;

•

the ability of ARLP to borrow under its credit agreement to make distributions to its unitholders; and

•

the amount of cash reserves established by Alliance Resource Management GP, LLC for the proper conduct of ARLP’s business.

Because of these factors, ARLP may not have sufficient available cash each quarter to continue paying distributions at their current level or at all. Furthermore, the amount of cash that ARLP has available for distribution depends primarily upon its cash flow, including cash flow from financial reserves and working capital borrowings, and is not solely a function of profitability, which will be affected by non-cash items. As a result, ARLP may be

Index to Financial Statements

able to make cash distributions during periods when it records losses and may be unable to make cash distributions during periods when it records net income. Please read “—Risks Related to Alliance Resource Partners’ Business” for a discussion of further risks affecting ARLP’s ability to generate distributable cash flow.

In the future, we may not have sufficient cash to pay distributions at our estimated initial quarterly distribution level or to increase distributions.

The source of our earnings and cash flow will initially consist exclusively of cash distributions from ARLP. Therefore, the amount of distributions we are able to make to our unitholders may fluctuate based on the level of distributions ARLP makes to its partners. ARLP may not continue to make quarterly distributions at its current level or may not increase its quarterly distributions in the future. In addition, while we would expect to increase or decrease distributions to our unitholders if ARLP increases or decreases distributions to us, the timing and amount of such increased or decreased distributions, if any, will not necessarily be comparable to the timing and amount of the increase or decrease in distributions made by ARLP to us.

Our ability to distribute cash received from ARLP to our unitholders is limited by a number of factors, including:

•

interest expense and principal payments on our indebtedness;

•

restrictions on distributions contained in any current or future debt agreements;

•

our general and administrative expenses, including expenses we will incur as a result of being a public company;

•

expenses of our subsidiaries other than ARLP, including tax liabilities of our corporate subsidiaries, if any;

•

reserves necessary for us to make the necessary capital contributions to maintain our 1.98% general partner interest in ARLP as required by the partnership agreement of ARLP upon the issuance of additional partnership securities by ARLP; and

•

reserves our general partner believes prudent for us to maintain for the proper conduct of our business or to provide for future distributions.

In the future, we may not be able to pay distributions or any distributions we do make may not be at or above our estimated initial quarterly distribution. The actual amount of cash that is available for distribution to our unitholders will depend on numerous factors, many of which are beyond our control or the control of our general partner. Our estimated cash available to pay distributions for the twelve months ending March 31, 2007 approximately equals the amount of cash we need to pay our expected distribution of $0.74 per unit annually. Therefore, a reduction in the amount of cash distributed by ARLP per unit or on the incentive distribution rights, or an increase in our expenses may result in our not being able to pay the expected distribution of $0.74 per unit. We do not have any subordinated units, which would have their distributions reduced before distributions to the common units are reduced.

Our ability to meet our financial needs may be adversely affected by our cash distribution policy and our lack of operational assets.

Our cash distribution policy, which is consistent with our partnership agreement, requires us to distribute all of our available cash quarterly. Our only cash generating assets are partnership interests in ARLP, and we currently have no independent operations separate from those of ARLP. Moreover, as discussed below, a reduction in ARLP’s distributions will disproportionately affect the amount of cash distributions we receive. Given that our cash distribution policy is to distribute available cash and not retain it and that our only cash generating assets are partnership interests in ARLP, we may not have enough cash to meet our needs if any of the following events occur:

•

an increase in our operating expenses;

Index to Financial Statements

•

an increase in general and administrative expenses;

•

an increase in principal and interest payments on our outstanding debt;

•

an increase in working capital requirements; or

•

an increase in cash needs of ARLP or its subsidiaries that reduces ARLP’s distributions.

There is no guarantee that our unitholders will receive quarterly distributions from us.

While our cash distribution policy, which is consistent with the terms of our partnership agreement, requires that we distribute all of our available cash quarterly, our cash distribution policy is subject to the following restrictions and limitations and may be changed at any time, including in the following ways:

•

We may lack sufficient cash to pay distributions to our unitholders due to a number of factors, including decreases in the amount of coal we produce, decreases in the price at which we are able to sell coal, loss of the benefit of non-conventional source fuel tax credits or state tax credits, increases in our general and administrative expenses, principal and interest payments on debt we may incur, tax expenses, working capital requirements and anticipated cash needs of us or ARLP and its subsidiaries.

•

Our cash distribution policy will be, and ARLP’s cash distribution policy is, subject to restrictions on distributions under our anticipated new credit facility and ARLP’s credit agreements, respectively, such as material financial tests and covenants and limitations on paying distributions during an event of default.

•

Our general partner’s board of directors will have the authority under our partnership agreement to establish reserves for the prudent conduct of our business and for future cash distributions to our unitholders, and the board of directors of ARLP’s managing general partner has the authority under ARLP’s partnership agreement to establish reserves for the prudent conduct of ARLP’s business and for future cash distributions to ARLP’s unitholders. The establishment of those reserves could result in a reduction in cash distributions to you from levels we currently anticipate pursuant to our stated cash distribution policy.

•

Our partnership agreement, including our cash distribution policy contained therein, may be amended by a vote of the holders of a majority of our common units.

•

Even if our cash distribution policy is not amended, modified or revoked, the amount of distributions we pay under our cash distribution policy and the decision to make any distribution is determined by our general partner, taking into consideration the terms of our partnership agreement, and the amount of distributions paid under ARLP’s cash distribution policy and the decision to make any distribution to its unitholders is at the discretion of ARLP’s managing general partner, taking into consideration the terms of its partnership agreement.

•

Under Section 17-607 of the Delaware Revised Uniform Limited Partnership Act, ARLP may not make a distribution to its partners if the distribution would cause its liabilities to exceed the fair value of its assets, and we may not make a distribution to you if the distribution would cause our liabilities to exceed the fair value of our assets.

Because of these restrictions and limitations on our cash distribution policy and our ability to change our cash distribution policy, we may not have available cash to distribute to our unitholders, and there is no guarantee that our unitholders will receive quarterly distributions from us.

ARLP’s general partner, with our consent, may limit or modify the incentive distributions we are entitled to receive in order to facilitate ARLP’s growth strategy. Our general partner’s board of directors can give this consent without a vote of our unitholders.

We own ARLP’s managing general partner, which owns the incentive distribution rights in ARLP that entitle us to receive increasing percentages, up to a maximum of 48% of any cash distributed to ARLP as certain

Index to Financial Statements

target distribution levels are reached in excess of $0.275 per ARLP unit in any quarter. A substantial portion of the cash flow we receive from ARLP is provided by these incentive distribution rights. Because of the high percentage of ARLP’s incremental cash flow that is distributed to the incentive distribution rights, certain potential acquisitions might not increase cash available for distribution per ARLP common unit. In order to facilitate acquisitions by ARLP, the board of directors of the managing general partner of ARLP may elect to reduce the incentive distribution rights payable to us with our consent, which we may provide without the approval of our unitholders if our general partner determines that such reduction does not adversely affect our limited partners in any material respect. These reductions may be permanent reductions in the incentive distribution rights or may be reductions with respect to cash flows from the potential acquisition. If distributions on the incentive distribution rights were reduced for the benefit of the ARLP common units, the total amount of cash distributions we would receive from ARLP, and therefore the amount of cash distributions we could pay to our unitholders, would be reduced.

A reduction in ARLP’s distributions will disproportionately affect the amount of cash distributions to which we are currently entitled.

Our ownership of the incentive distribution rights in ARLP, through our ownership of equity interests in Alliance Resource Management GP, LLC, the holder of the incentive distribution rights, entitles us to receive our pro rata share of specified percentages of total cash distributions made by ARLP with respect to any particular quarter only in the event that ARLP distributes more than $0.275 per unit for such quarter. As a result, the holders of ARLP’s common units have a priority over the holders of ARLP’s incentive distribution rights to the extent of cash distributions by ARLP up to and including $0.275 per unit for any quarter.

Our incentive distribution rights entitle us to receive increasing percentages, up to 48%, of all cash distributed by ARLP. Because the incentive distribution rights currently participate at the maximum 48% target cash distribution level in all distributions made by ARLP above the current distribution level, future growth in distributions we receive from ARLP will not result from an increase in the target cash distribution level associated with the incentive distribution rights.

Furthermore, a decrease in the amount of distributions by ARLP to less than $0.375 per common unit per quarter would reduce Alliance Resource Management GP LLC’s percentage of the incremental cash distributions above $0.3125 per common unit per quarter from 48% to 23%. As a result, any such reduction in quarterly cash distributions from ARLP would have the effect of disproportionately reducing the amount of all distributions that we receive from ARLP based on our ownership interest in the incentive distribution rights in ARLP as compared to cash distributions we receive from ARLP on our 1.98% general partner interest in ARLP and our ARLP common units.

If distributions on our common units are not paid with respect to any fiscal quarter, including those at the anticipated initial distribution rate, our unitholders will not be entitled to receive such payments in the future.

Our distributions to our unitholders will not be cumulative. Consequently, if distributions on our common units are not paid with respect to any fiscal quarter, including those at the anticipated initial distribution rate, our unitholders will not be entitled to receive such payments in the future. Any distributions received by us from ARLP related to periods prior to the closing of this offering will be distributed entirely to the management investors. In August 2006, we expect to pay a distribution to our unitholders equal to the initial quarterly distribution prorated for the portion of the quarter ending June 30, 2006 that we are public.

Our cash distribution policy limits our ability to grow.

Because we distribute all of our available cash, our growth may not be as fast as businesses that reinvest their available cash to expand ongoing operations. In fact, our growth initially will be completely dependent upon ARLP’s ability to increase its quarterly distribution per unit because currently our only cash-generating assets are

Index to Financial Statements

partnership interests in ARLP, including incentive distribution rights. If we issue additional units or incur debt to fund acquisitions and growth capital expenditures, the payment of distributions on those additional units or interest on that debt could increase the risk that we will be unable to maintain or increase our per unit distribution level.

Consistent with the terms of its partnership agreement, ARLP distributes to its partners its available cash each quarter. In determining the amount of cash available for distribution, ARLP sets aside cash reserves, which it uses to fund its growth capital expenditures. Additionally, it has relied upon external financing sources, including commercial borrowings and other debt and equity issuances, to fund its acquisition capital expenditures. Accordingly, to the extent ARLP does not have sufficient cash reserves or is unable to finance growth externally, its cash distribution policy will significantly impair its ability to grow. In addition, to the extent ARLP issues additional units in connection with any acquisitions or growth capital expenditures, the payment of distributions on those additional units may increase the risk that ARLP will be unable to maintain or increase its per unit distribution level, which in turn may impact the available cash that we have to distribute to our unitholders. The incurrence of additional debt to finance its growth strategy would result in increased interest expense to ARLP, which in turn may impact the available cash that we have to distribute to our unitholders.

We anticipate we will enter into a credit facility at the closing of this offering, and restrictions in our credit facility could limit our ability to make distributions to our unitholders, borrow additional funds or capitalize on business opportunities.

We anticipate we will enter into a credit facility at the closing of this offering with C-Holdings, LLC, an entity controlled by Mr. Joseph W. Craft III, that will contain various operating and financial restrictions and covenants. Our ability to comply with these restrictions and covenants may be affected by events beyond our control, including prevailing economic, financial and industry conditions. If we are unable to comply with these restrictions and covenants, a significant portion of any future indebtedness under this proposed credit facility may become immediately due and payable, and our lenders’ commitment to make further loans to us under this proposed credit facility may terminate. We might not have, or be able to obtain, sufficient funds to make these accelerated payments. In addition, our obligations under our proposed credit facility may be secured by substantially all of our assets, and if we are unable to repay any future indebtedness under this proposed credit facility, the lenders could seek to foreclose on such assets.

Our payment of principal and interest on any future indebtedness will reduce our cash available for distribution on our units. We anticipate that any credit facility will limit our ability to pay distributions to our unitholders during an event of default or if an event of default would result from the distribution.

In addition, any future levels of indebtedness may:

•

adversely affect our ability to obtain additional financing for future operations or capital needs;

•

limit our ability to pursue acquisitions and other business opportunities; or

•

make our results of operations more susceptible to adverse economic or operating conditions.

Various limitations in our proposed credit facility and any future financing agreements may reduce our ability to incur additional indebtedness, to engage in some transactions or to capitalize on business opportunities.

For more information regarding our credit facility, please read “Management’s Discussion and Analysis of Financial Conditions and Results of Operations—Debt Obligations—Alliance Holdings GP, L.P.”

While we or ARLP may incur debt to pay distributions to our and its unitholders, respectively, a credit facility governing such debt may restrict or limit the distributions we pay to our unitholders.

While we or ARLP may incur debt to pay distributions to our and its unitholders, respectively, our or ARLP’s payment of principal and interest on any future indebtedness will reduce our cash available for

Index to Financial Statements

distribution on our unitholders. We anticipate that any credit facility will limit our ability to pay distributions to our unitholders during an event of default or if an event of default would result from the distributions.

In addition, any future levels of indebtedness may:

•

adversely affect our ability to obtain additional financing for future operations or capital needs;

•

limit our ability to pursue acquisitions and other business opportunities; or

•

make our results of operations more susceptible to adverse economic or operating conditions.

Unlike the holders of common stock in a corporation, our unitholders have only limited voting rights on matters affecting our business and, therefore, limited ability to influence management’s decisions regarding our business. Our unitholders do not have the ability to elect our general partner or the officers or directors of our general partner. The board of directors of our general partner, including our independent directors, is chosen by the members of our general partner.

Furthermore, if our unitholders are dissatisfied with the performance of our general partner, they will have little ability to remove our general partner. Our general partner may not be removed except upon the vote of the holders of at least 66²/3% of our outstanding units. Because the management investors and Mr. Craft own 47,863,000 of our outstanding units, it will be particularly difficult for our general partner to be removed without the consent of such affiliates. As a result, the price at which our units will trade may be lower because of the absence or reduction of a takeover premium in the trading price.

You will experience immediate and substantial dilution of $21.83 per unit.

The initial public offering price of $25.00 per unit exceeds our pro forma net tangible book value of $3.17 per unit after the offering. You will incur immediate and substantial dilution of $21.83 per unit. This dilution results primarily because the assets contributed by our owners are recorded at their historical cost in accordance with GAAP and not at their fair value. Please read “Dilution.”

We may issue an unlimited number of limited partner interests without the consent of our unitholders, which will dilute your ownership interest in us and may increase the risk that we will not have sufficient available cash to maintain or increase our per unit distribution level.

At any time we may issue an unlimited number of limited partner interests of any type without the approval of our unitholders on terms and conditions established by our general partner. The issuance by us of additional common units or other equity securities of equal or senior rank will have the following effects:

•

our unitholders’ proportionate ownership interest in us will decrease;

•

the amount of cash available for distribution on each unit may decrease;

•

the relative voting strength of each previously outstanding unit may be diminished;

•

the ratio of taxable income to distributions may increase; and

•

the market price of the common units may decline.

Please read “Description of Our Partnership Agreement—Issuance of Additional Securities.”

Index to Financial Statements

The market price of our common units could be adversely affected by sales of substantial amounts of our common units in the public markets, including sales by our existing unitholders.

Sales by any of our existing unitholders of a substantial number of our common units in the public markets following this offering, including for example, as a result of charitable donations, in accordance with a 10b(5)-1 plans or following the vesting of units pursuant to an equity incentive plan using our common units, or the perception that such sales might occur, could have a material adverse effect on the price of our common units or could impair our ability to obtain capital through an offering of equity securities. We do not know whether any such sales would be made in the public market or in private placements, nor do we know what impact such potential or actual sales would have on our unit price in the future. Please read “Units Eligible for Future Sale.”

The control of our general partner and the limited liability company that holds a majority of the incentive distribution rights in ARLP may be transferred to a third party without unitholder consent.

Our general partner may transfer its general partner interest in us to a third party in a merger or in a sale of its equity securities without the consent of our unitholders. Furthermore, there is no restriction in the partnership agreement on the ability of the members of our general partner to sell or transfer all or part of their ownership interest in our general partner to a third party. The new owner or owners of our general partner would then be in a position to replace the directors and officers of our general partner and control the decisions made and actions taken by the board of directors and officers.

In addition, the owners of our general partner control the limited partnership that holds a majority of the incentive distribution rights in ARLP. This limited partnership can likewise be transferred to a third party without unitholder consent.

ARLP’s unitholders have the right to remove ARLP’s general partner with the approval of the holders of 66²/3% of all units, which would cause us to lose our general partner interest and incentive distribution rights in ARLP and the ability to manage ARLP.

We currently manage ARLP through Alliance Resource Management GP, LLC, ARLP’s managing general partner and our indirect, wholly-owned subsidiary. ARLP’s partnership agreement, however, gives unitholders of ARLP the right to remove the managing general partner of ARLP upon the affirmative vote of holders of 66²/3% of ARLP’s outstanding units. If Alliance Resource Management GP, LLC were removed as general partner of ARLP, it would receive cash or common units in exchange for its 1.98% general partner interest and the incentive distribution rights and would lose its ability to manage ARLP. While the common units or cash we would receive are intended under the terms of ARLP’s partnership agreement to fully compensate us in the event such an exchange is required, the value of these common units or investments we make with the cash over time may not be equivalent to the value of the general partner interest and the incentive distribution rights had we retained them.

Our ability to sell our partnership interests in ARLP may be limited by securities law restrictions and liquidity constraints.

Of the 15,550,628 common units of ARLP that we own, 6,422,532 common units are unregistered, restricted securities within the meaning of Rule 144 under the Securities Act of 1933. Unless we exercise our registration rights with respect to these common units, we are limited to selling into the market in any three-month period an amount of ARLP common units that does not exceed the greater of 1% of the total number of common units outstanding or the average weekly reported trading volume of the common units for the four calendar weeks prior to the sale. We face contractual limitations on our ability to sell our general partner interest and incentive distribution rights and the market for such interests is illiquid.

Index to Financial Statements

We depend on the leadership and involvement of Joseph W. Craft III and other key personnel for the success of our and ARLP’s business.

We depend on the leadership and involvement of Mr. Craft, the President and Chief Executive Officer of our general partner. Mr. Craft has been integral to the success of ARLP and Alliance Holdings GP, L.P. due in part to his ability to identify and develop internal growth projects and accretive acquisitions, make strategic decisions and attract and retain key personnel. The loss of his leadership and involvement or the services of any members of our or ARLP’s senior management team could have a material adverse effect on the business, financial condition and results of operations of us and ARLP.

Several key personnel, including Messrs. Joseph W. Craft III, Thomas L. Pearson, Charles R. Wesley, Gary J. Rathburn and Thomas M. Wynne, will be receiving substantial amounts of the proceeds of this offering. As a result of these cash payments, there is an increased risk that some or all of these key personnel will retire or resign following this offering.

Your liability as a limited partner may not be limited, and our unitholders may have to repay distributions or make additional contributions to us under certain circumstances.

As a limited partner in a partnership organized under Delaware law, you could be held liable for our obligations to the same extent as a general partner if you participate in the “control” of our business. Our general partner generally has unlimited liability for the obligations of the partnership, except for those contractual obligations of the partnership that are expressly made without recourse to our general partner. Additionally, the limitations on the liability of holders of limited partner interests for the obligations of a limited partnership have not been clearly established in many jurisdictions. Please read “Description of Our Partnership Agreement—Limited Liability.”

Under certain circumstances, our unitholders may have to repay amounts wrongfully distributed to them. Under Section 17-607 of the Delaware Revised Uniform Limited Partnership Act, neither we nor ARLP may make a distribution to our unitholders if the distribution would cause our or ARLP’s respective liabilities to exceed the fair value of our respective assets. Delaware law provides that for a period of three years from the date of the impermissible distribution, partners who received the distribution and who knew at the time of the distribution that it violated Delaware law will be liable to the partnership for the distribution amount. Liabilities to partners on account of their partnership interest and liabilities that are non-recourse to the partnership are not counted for purposes of determining whether a distribution is permitted.

An increase in interest rates may cause the market price of our common units to decline.

Like all equity investments, an investment in our common units is subject to certain risks. In exchange for accepting these risks, investors may expect to receive a higher rate of return than would otherwise be obtainable from lower-risk investments. Accordingly, as interest rates rise, the ability of investors to obtain higher risk-adjusted rates of return by purchasing government-backed debt securities may cause a corresponding decline in demand for riskier investments generally, including yield-based equity investments such as publicly traded limited partnership interests. Reduced demand for our common units resulting from investors seeking other more favorable investment opportunities may cause the trading price of our common units to decline.

If in the future we cease to manage and control ARLP, we may be deemed to be an investment company under the Investment Company Act of 1940.

If we cease to manage and control ARLP and are deemed to be an investment company under the Investment Company Act of 1940 because of our ownership of ARLP partnership interests, we would either have to register as an investment company under the Investment Company Act, obtain exemptive relief from the Commission or modify our organizational structure or our contract rights to fall outside the definition of an

Index to Financial Statements

investment company. Registering as an investment company could, among other things, materially limit our ability to engage in transactions with affiliates, including the purchase and sale of certain securities or other property to or from our affiliates, restrict our ability to borrow funds or engage in other transactions involving leverage and require us to add additional directors who are independent of us or our affiliates.

The price of our common units may be volatile, and a trading market that will provide you with adequate liquidity may not develop.

Prior to this offering there has been no public market for our common units. An active market for our common units may not develop or may not be sustained after this offering. The initial public offering price of our common units was determined by negotiations between us and the underwriters, based on several factors that we discuss in the “Underwriting” section of this prospectus. This price may not be indicative of the market price for our common units after this initial public offering. The market price of our common units could be subject to significant fluctuations after this offering, and may decline below the initial public offering price. You may be unable to resell your common units at or above the initial public offering price. The following factors could affect our common unit price:

•

ARLP’s operating and financial performance and prospects;

•

quarterly variations in the rate of growth of our financial indicators, such as distributable cash flow per unit, net income and revenues;

•

changes in revenue or earnings estimates or publication of research reports by analysts;

•

speculation by the press or investment community;

•

sales of our common units by our unitholders;

•

announcements by ARLP or its competitors of significant contracts, acquisitions, strategic partnerships, joint ventures, securities offerings or capital commitments;

•

general market conditions; and

•

domestic and international economic, legal and regulatory factors related to ARLP’s performance.

The equity markets in general have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common units. In addition, potential investors may be deterred from investing in our common units for various reasons, including the very limited number of publicly traded entities whose assets consist almost exclusively of partnership interests in a publicly traded partnership. The lack of liquidity may also contribute to significant fluctuations in the market price of our common units and limit the number of investors who are able to buy our common units.

Our common units and ARLP’s common units may not trade in simple relation or proportion to one another. Instead, while the trading prices of our common units and ARLP’s common units are likely to follow generally similar broad trends, the trading prices may diverge because, among other things:

•

ARLP’s cash distributions to its common unitholders have a priority over distributions on its incentive distribution rights;

•

we participate in the distributions on ARLP’s managing general partners general partner interest in ARLP and the incentive distribution rights in ARLP while ARLP’s common unitholders do not; and

•

we may enter into other businesses separate and apart from ARLP or any of its affiliates.

We will incur increased costs as a result of being a public company, including costs related to compliance with Section 404 of the Sarbanes-Oxley Act of 2002.

Prior to this offering, we have been a private company and have not filed reports with the Commission. Following this offering, we will become subject to the public reporting requirements of the Securities Exchange

Index to Financial Statements

Act of 1934, as amended. Although we produce our financial statements in accordance with GAAP, our internal accounting controls may not currently meet all standards applicable to companies with publicly traded securities. For example, as we become subject to the requirements of Section 404 of Sarbanes-Oxley for the fiscal year ended December 31, 2007, our auditors may identify material weaknesses or deficiencies in the operational effectiveness of our internal controls and procedures and may advise us that these material weaknesses or deficiencies could collectively constitute a significant deficiency that may rise to the level of a reportable condition under Section 404. Similarly, ARLP is subject to Section 404 with the filing of its annual reports on Form 10-K, and its auditors may identify significant deficiencies in its internal controls and procedures. In addition, the amount of cash distributions from ARLP that will be available for distribution to our unitholders will be reduced by the costs associated with our becoming a public company.

In 2005, a material weakness was identified in ARLP’s internal controls over financial reporting, and our auditors may identify significant deficiencies in our internal controls over financial reporting.

A material weakness or combination of significant deficiencies in ARLP’s system of internal control over financial reporting could result in our consolidated financial statements not being prepared in accordance with generally accepted accounting principles.

In August 2005, ARLP restated its financial statements for the year ended December 31, 2004 and the three months ended March 31, 2005. The restatements related to (a) the failure to apply the provisions of Emerging Issues Task Force 03-6, Participating Securities and the Two-Class Method under SFAS No. 128 in the computation of basic and diluted net income per limited partner unit and (b) the incorrect presentation of the pro forma information required under Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, an Amendment of SFAS No. 123.

As a result of the restatements, ARLP management reevaluated its assessment of the effectiveness of ARLP’s internal control over financial reporting as of December 31, 2004, in which ARLP management had originally concluded that ARLP’s internal control over financial reporting was effective. In the reevaluation, management concluded that the misstatements described above resulted from a control deficiency that represented a material weakness. Consequently, management concluded that ARLP did not maintain effective internal control over financial reporting as of December 31, 2004.

During the fourth quarter of 2005, ARLP management undertook several steps to remediate the control deficiency over financial reporting. The remediation steps included:

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The addition of a staff professional in the financial reporting department. The additional staff professional has extensive financial reporting experience;

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A comprehensive review of accounting literature, including renewed emphasis on the completion of check lists designed to insure compliance with accounting pronouncement and SEC regulations;

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Networking with other financial reporting personnel, including continuing education for member’s of the financial reporting staff;

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Canvassing members of the publicly traded partnership, or PTP, industry group concerning the emergence of accounting issues unique to PTPs;

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Subscribing to an accounting research tool provided by one of the major accounting firms, other than its independent registered public accounting firm; and

•

Enhanced documentation of certain accounting policies and/or decisions.

ARLP management believes the additional procedures performed during the fourth quarter of 2005 and continuing in 2006 in conjunction with the preparation of the financial statements for the year ended December 31, 2005 have remediated the internal controls weakness associated with the restatements.

Index to Financial Statements

Our partnership agreement restricts the rights of unitholders owning 20% or more of our units.

Our unitholders’ voting rights are restricted by the provision in our partnership agreement generally providing that any units held by a person that owns 20% or more of any class of units then outstanding, other than our general partner, its affiliates, their transferees and persons who acquired such units with the prior approval of the board of directors of the general partner, cannot be voted on any matter. In addition, our partnership agreement contains provisions limiting the ability of our unitholders to call meetings or to acquire information about our operations, as well as other provisions limiting our unitholders’ ability to influence the manner or direction of our management. As a result, the price at which our common units will trade may be lower because of the absence or reduction of a takeover premium in the trading price.

ARLP may issue additional units, which may increase the risk that ARLP will not have sufficient available cash to maintain or increase its per unit distribution level.

ARLP has wide latitude to issue additional units on terms and conditions established by its general partner, including units that rank senior to the ARLP common units and the incentive distribution rights as to quarterly cash distributions. The payment of distributions on those additional units may increase the risk that ARLP may not have sufficient cash available to maintain or increase its per unit distribution level, which in turn may impact the available cash that we have to distribute to our unitholders. To the extent these units are senior to the common units or the incentive distribution rights, there is an increased risk that we will not receive the same level or increased distributions on the common units and incentive distribution rights. Neither the common units nor the incentive distribution rights are entitled to any arrearages from prior quarters.

If ARLP’s general partner is not fully reimbursed or indemnified for obligations and liabilities it incurs in managing the business and affairs of ARLP, its value, and therefore the value of our common units, could decline.

Alliance Resource Management GP, LLC, the managing general partner of ARLP, may make expenditures on behalf of ARLP for which it will seek reimbursement from ARLP. In addition, under Delaware partnership law, Alliance Resource Management GP, LLC, in its capacity as the general partner of ARLP, has unlimited liability for the obligations of ARLP, such as its debts and environmental liabilities, except for those contractual obligations of ARLP that are expressly made without recourse to Alliance Resource Management GP, LLC. To the extent Alliance Resource Management GP, LLC incurs obligations on behalf of ARLP, it is entitled to be reimbursed or indemnified by ARLP. If ARLP is unable or unwilling to reimburse or indemnify its general partner, Alliance Resource Management GP, LLC may be unable to satisfy these liabilities or obligations, which would reduce its value and therefore the value of our common units.

Risks Related to Conflicts of Interest

Conflicts of interest exist and may arise in the future among us, ARLP and our respective general partners and affiliates. Future conflicts of interest may arise among us and the entities affiliated with any general partner interests we acquire or among ARLP and such entities. For a further discussion of conflicts of interest that may arise, please read “Conflicts of Interest and Fiduciary Duties.”

Conflicts of interest exist and may arise in the future as a result of the relationships between us and our affiliates, including Alliance Resource Management GP, LLC, ARLP’s managing general partner, on the one hand, and ARLP and its limited partners, on the other hand. The directors and officers of ARLP’s managing general partner have fiduciary duties to manage ARLP in a manner beneficial to us, its owner. At the same time, ARLP’s managing general partner has a fiduciary duty to manage ARLP in a manner beneficial to ARLP and its limited partners. The board of directors of ARLP’s managing general partner or its conflicts committee will

Index to Financial Statements

resolve any such conflict and has broad latitude to consider the interests of all parties to the conflict. The resolution of these conflicts may not always be in our best interest or that of our unitholders.

For example, conflicts of interest may arise in the following situations:

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the allocation of shared overhead expenses to ARLP and us;

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the interpretation and enforcement of contractual obligations between us and our affiliates, on the one hand, and ARLP, on the other hand;

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the determination and timing of the amount of cash to be distributed to ARLP’s partners and the amount of cash to be reserved for the future conduct of ARLP’s business;

•

the decision as to whether ARLP should make acquisitions, and on what terms;

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the determination of whether ARLP should use cash on hand, borrow or issue equity to raise cash to finance acquisition or expansion capital projects, repay indebtedness, meet working capital needs, pay distributions to ARLP’s partners or otherwise; and

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any decision we make in the future to engage in business activities independent of, or in competition with, ARLP.

The fiduciary duties of our general partner’s officers and directors may conflict with those of ARLP’s general partner’s officers and directors.

Our general partner’s officers and directors have fiduciary duties to manage our business in a manner beneficial to us and our partners. However, all of our general partner’s executive officers and non-independent directors also serve as executive officers and directors of ARLP’s managing general partner, and, as a result, have fiduciary duties to manage the business of ARLP in a manner beneficial to ARLP and its partners. Consequently, these directors and officers may encounter situations in which their fiduciary obligations to ARLP, on one hand, and us, on the other hand, are in conflict. The resolution of these conflicts may not always be in our best interest or that of our unitholders. For a more detailed description of the conflicts of interest involving our general partner, please read “Conflicts of Interest and Fiduciary Duties.”

If we are presented with certain business opportunities, ARLP will have the first right to pursue such opportunities.

Upon completion of this offering, we will become party to an existing omnibus agreement currently among ARLP, its general partners and Alliance Resource Holdings, Inc., which governs potential competition among ARLP and the other parties to the agreement. Pursuant to the terms of the amended omnibus agreement, we will agree, and will cause our controlled affiliates to agree, to certain business opportunity and non-competition arrangements to address potential conflicts that may arise between us and our general partner on one hand, and ARLP and its subsidiaries on the other. If a business opportunity in respect of any coal mining, marketing or transportation assets is presented to us, our general partner or ARLP or its general partners, then ARLP will have the first right to acquire such assets. The omnibus agreement provides, among other things, that ARLP will be presumed to desire to acquire the assets until such time as it advises us that it has abandoned the pursuit of such business opportunity, and we may not pursue the acquisition of such assets prior to that time. Please read “Certain Relationships and Related Party Transactions—ARLP Omnibus Agreement” and “Conflicts of Interest and Fiduciary Duties.”

ARLP and affiliates of our general partner are not limited in their ability to compete with us, which could cause conflicts of interest and limit our ability to acquire additional assets or businesses which in turn could adversely affect our results of operations and cash available for distribution to our unitholders.

Neither our partnership agreement nor the ARLP omnibus agreement will prohibit ARLP or affiliates of our general partner from owning assets or engaging in businesses that compete directly or indirectly with us or one

Index to Financial Statements

another. In addition, ARLP and its affiliates or affiliates of our general partner, may acquire, construct or dispose of additional assets related to the mining, marketing and transportation of coal or other assets in the future, without any obligation to offer us the opportunity to purchase or construct any of those assets. As a result, competition among these entities could adversely impact ARLP’s or our results of operations and cash available for distribution. Please read “Conflicts of Interest and Fiduciary Duties.”

Potential conflicts of interest may arise among our general partner, its affiliates and us. Our general partner and its affiliates have limited fiduciary duties to us and our unitholders, which may permit them to favor their own interests to the detriment of us and our unitholders.

Following this offering, conflicts of interest may arise among our general partner and its affiliates, on the one hand, and us and our unitholders, on the other hand. As a result of these conflicts, our general partner may favor its own interests and the interests of its affiliates over the interests of our unitholders. These conflicts include, among others, the following:

•

Our general partner is allowed to take into account the interests of parties other than us, including ARLP and its affiliates and any other businesses acquired in the future, in resolving conflicts of interest, which has the effect of limiting its fiduciary duty to our unitholders.

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Our general partner has limited its liability and reduced its fiduciary duties under the terms of our partnership agreement, while also restricting the remedies available to our unitholders for actions that, without these limitations, might constitute breaches of fiduciary duties. As a result of purchasing our units, unitholders consent to various actions and conflicts of interest that might otherwise constitute a breach of fiduciary or other duties under applicable state law.

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Our general partner determines the amount and timing of our investment transactions, borrowings, issuances of additional partnership securities and reserves, each of which can affect the amount of cash that is available for distribution to our unitholders.

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Our general partner determines which costs incurred by it and its affiliates are reimbursable by us.

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Our partnership agreement does not restrict our general partner from causing us to pay it or its affiliates for any services rendered, or from entering into additional contractual arrangements with any of these entities on our behalf, so long as the terms of any such payments or additional contractual arrangements are fair and reasonable to us.

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Our general partner controls the enforcement of obligations owed to us by it and its affiliates.

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Our general partner decides whether to retain separate counsel, accountants or others to perform services for us.

Please read “Certain Relationships and Related Party Transactions” and “Conflicts of Interest and Fiduciary Duties.”

The president and chief executive officer of both our general partner and ARLP’s managing general partner effectively controls us and ARLP through his control of our general partner and ARLP’s managing general partner.

Joseph W. Craft III, the President and Chief Executive Officer of both our general partner and ARLP’s managing general partner, controls ARLP’s managing general partner, owns a majority of the outstanding interests of the parent of ARLP’s special general partner and owns or controls 43.8% of ARLP’s common units. Mr. Craft also controls our general partner and, as of the closing of this offering and giving effect to the 500,000 common units he will purchase therein, will own or control 80.0% of our common units. Control over these interests will give Mr. Craft substantial control over our and ARLP’s business and operations and the ability to control the outcome of many matters that require unitholder approval. Mr. Craft is not restricted from disposing

Index to Financial Statements

of all or a part of his equity interests in our general partner, in ARLP’s managing general partner or in the indirect parent of ARLP’s special general partner.

Our partnership agreement contains provisions that reduce the standards to which our general partner would otherwise be held by state fiduciary duty law. For example, our partnership agreement:

•

permits our general partner to make a number of decisions in its individual capacity, as opposed to in its capacity as our general partner. This entitles our general partner to consider only the interests and factors that it desires, and it has no duty or obligation to give any consideration to any interest of, or factors affecting, us, our affiliates or any limited partner. Examples include the exercise of its limited call right, its rights to vote and transfer the units it owns and its registration rights;

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requires the prior consent of our general partner for any merger, consolidation or conversion of us and the general partner has no duty or obligation to consent to any merger, consolidation or conversion of us to the maximum extent permitted by law and may decline to do so free of any fiduciary duty whatsoever to us and our unitholders and in declining to consent to a merger, consolidation or conversion will not be required to act in good faith or pursuant to any other standard imposed by our partnership agreement or under law.

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provides that our general partner will not have any liability to us or our unitholders for decisions made in its capacity as a general partner so long as it acted in good faith, meaning it believed the decisions were in the best interests of our partnership;

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generally provides that affiliated transactions and resolutions of conflicts of interest not approved by the audit and conflicts committee of the board of directors of our general partner and not involving a vote of unitholders must be on terms no less favorable to us than those generally being provided to or available from unrelated third parties or be “fair and reasonable” to us and that, in determining whether a transaction or resolution is “fair and reasonable,” our general partner may consider the totality of the relationships among the parties involved, including other transactions that may be particularly advantageous or beneficial to us;

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provides that in resolving conflicts of interest, it will be presumed that in making its decision the general partner acted in good faith, and in any proceeding brought by or on behalf of any limited partner or us, the person bringing or prosecuting such proceeding will have the burden of overcoming such presumption; and

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provides that our general partner and its officers and directors will not be liable for monetary damages to us, our limited partners or assignees for any acts or omissions unless there has been a final and non-appealable judgment entered by a court of competent jurisdiction determining that the general partner or those other persons acted in bad faith or engaged in fraud or willful misconduct or, in the case of a criminal matter, acted with knowledge that such person’s conduct was criminal.

In order to become a limited partner of our partnership, our unitholders are required to agree to be bound by the provisions in the partnership agreement, including the provisions discussed above. Please read “Conflicts of Interest and Fiduciary Duties—Fiduciary Duties.”

Our general partner may mortgage, pledge or grant a security interest in all or substantially all of our assets without prior approval of our unitholders.

Our general partner may mortgage, pledge or grant a security interest in all or substantially all of our assets without prior approval of our unitholders. If our general partner secures its obligations or indebtedness by all or

Index to Financial Statements

substantially all of our assets and if our general partner is unable to satisfy such obligations or repay such indebtedness, the lenders could seek to foreclose on our assets. The lenders may also sell all or substantially all of our assets under such foreclosure or other realization upon those encumbrances without prior approval of our unitholders, which would adversely affect the price of our common units.

Our general partner has a limited call right that may require you to sell your units at an undesirable time or price.

If at any time our general partner and its affiliates own more than 85% of our outstanding units, our general partner will have the right, but not the obligation, which it may assign to any of its affiliates or to us, to acquire all, but not less than all, of the units held by unaffiliated persons at a price not less than their then-current market price. As a result, you may be required to sell your units at an undesirable time or price and may not receive any return on your investment. You may also incur a tax liability upon a sale of your units. At the completion of this offering, the management investors and Joseph W. Craft III will own approximately 80.0% of our units. Please read “Description of Our Partnership Agreement—Limited Call Right.”

Risks Related to Alliance Resource Partners’ Business

Because our cash flow will initially consist exclusively of distributions from ARLP, risks to ARLP’s business are also risks to us. We have set forth below many of the risks to ARLP’s business or results of operations, the occurrence of which could negatively impact ARLP’s financial performance and decrease the amount of cash it is able to distribute to us, thereby decreasing the amount of cash we have available for distribution to our unitholders.

A substantial or extended decline in coal prices could negatively impact ARLP’s results of operations.

The prices ARLP receives for its production depend upon factors beyond its control, including:

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the supply of and demand for domestic and foreign coal;

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weather conditions;

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the proximity to, and capacity of, transportation facilities;

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worldwide economic conditions;

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domestic and foreign governmental regulations and taxes;

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the price and availability of alternative fuels; and

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the effect of worldwide energy conservation measures.

A substantial or extended decline in coal prices could materially and adversely affect ARLP by decreasing its revenues to the extent ARLP is not otherwise protected pursuant to the specific terms of its sales contracts.

A material amount of ARLP’s net income and cash flow is dependent on its continued ability to realize direct or indirect benefits from federal income tax credits such as non-conventional source fuel tax credits. If the benefit to ARLP from any of these tax credits is materially reduced, it could negatively impact ARLP’s results of operations and reduce ARLP’s cash available for distributions.

In 2005, ARLP derived a material amount of its net income under long-term agreements with Synfuel Solutions Operating, LLC, or SSO. These agreements are dependent on the ability of the synfuel facility’s owner to use certain qualifying federal income tax credits available to the facility and are subject to early cancellation in certain circumstances, including in the event that these synfuel tax credits become unavailable to the owner. In 2005, the benefit of this synfuel tax credit to ARLP was approximately $24.1 million. If, because of budgetary

Index to Financial Statements

shortfalls or any other reason, the federal government was to significantly reduce or eliminate these credits, it could negatively impact ARLP’s results of operations and reduce ARLP’s cash available for distributions.

Non-conventional source fuel tax credits are subject to a pro-rata phase-out or reduction if the annual average wellhead price per barrel for all domestic crude oil (the reference price) as determined by the Secretary of the Treasury exceeds certain levels. The reference price is not subject to regulation by the United States Government. The reference price for a calendar year is typically published in April of the following year. For qualified fuel sold during the 2004 calendar year, the reference price was $36.75. The pro-rata reduction of non-conventional source fuel tax credits for 2004 would have begun if the reference price was approximately $51.00 per barrel, with a complete phase-out or reduction of non-conventional synfuel tax credits if the reference price reached approximately $64.00 per barrel. The reference price for 2005 was $50.26. ARLP could experience a reduction of revenues associated with non-conventional source fuel facilities in the future if non-conventional source fuel tax credits become unavailable to the owners of the non-conventional source fuel facilities ARLP services as a result of the rise in the wellhead price per barrel of crude oil above specified levels. This non-conventional synfuel tax credit is scheduled to expire on December 31, 2007.

On April 19, 2006, ARLP received a letter from the managing member of Synfuel Solutions Operating, LLC, or SSO, which stated that effective April 23, 2006, due to the increase in the wellhead price of domestic crude oil, SSO has elected to exercise its contractual right to suspend until further notice operation of its coal synfuel production facility located at ARLP’s Warrior Coal, LLC, or Warrior, mining complex in Hopkins County, Kentucky. ARLP receives fees from coal sales, rental, marketing and other services provided to SSO pursuant to various long-term agreements associated with the coal synfuel facility located at Warrior. SSO has advised ARLP that resumption of operations of the synfuel facility is dependent on the price of crude oil in the future. Please read “Prospectus Summary—Recent Developments—Suspension of Coal Synfuel Facility Operation at Warrior.”

A loss of the benefit from state tax credits may adversely affect ARLP’s ability to pay its quarterly distribution.

Several states in which ARLP operates or ARLP’s utility customers reside have established a statutory framework for tax credits against income, franchise, or severance taxes, which have benefited, directly or indirectly, coal operators or customers purchasing coal mine production from within the applicable state. The state statutes authorizing these tax credits are scheduled to expire in accordance with their term provisions. Furthermore, these state statutes or ARLP’s ability to benefit, directly or indirectly, from them may be subject to challenge by third parties. Maryland, in which ARLP operates, has established a statutory framework for tax credits against income or franchise taxes, that have benefited, directly or indirectly, coal operators or customers purchasing coal produced from mines within the state. In 2005, the indirect benefit of this state tax credit to us was approximately $8.3 million. Legislation has passed both houses of the Maryland Legislature and is expected to become law by May 30, 2006, which will significantly limit the use of this state tax credit beginning in 2007 and will eliminate it by 2020. If any of the state statutes expire or any challenges are successful, ARLP would lose the benefits of these credits. Therefore, if ARLP’s operations do not produce increased cash flow sufficient to replace any lost benefits, ARLP may not be able to pay the current quarterly distribution on its outstanding common units.

Competition within the coal industry may adversely affect ARLP’s ability to sell coal, and excess production capacity in the industry could put downward pressure on coal prices.

ARLP competes with other large coal producers and hundreds of small coal producers in various regions of the United States for domestic sales. The industry has undergone significant consolidation over the last decade. This consolidation has led to several competitors having significantly larger financial and operating resources than ARLP does. In addition, ARLP competes to some extent with western surface coal mining operations that have a much lower cost of production and produce lower sulfur coal. Over the last 20 years, growth in production

Index to Financial Statements

from western coal mines has substantially exceeded growth in production from the east. Declining prices would reduce ARLP’s revenues and would adversely affect ARLP’s ability to make distributions to its unitholders.

Any change in consumption patterns by utilities away from the use of coal could affect ARLP’s ability to sell the coal it produces.

Some power plants are fueled by natural gas because of the cheaper construction costs compared to coal-fired plants and because natural gas is a cleaner burning fuel. The domestic electric utility industry accounts for approximately 90% of domestic coal consumption. The amount of coal consumed by the domestic electric utility industry is affected primarily by the overall demand for electricity, the price and availability of competing fuels for power plants such as nuclear, natural gas and fuel oil as well as hydroelectric power, and environmental and other governmental regulations.

A substantial decrease in the amount of coal sold by ARLP pursuant to long-term contracts would reduce the certainty of the price and amounts of coal sold by ARLP and subject ARLP’s revenue stream to increased volatility. If that were to happen, changes in spot market coal prices below the contract price would have a greater impact on ARLP’s results, and any decreases in the spot market price for coal could adversely affect ARLP’s profitability and cash flow. In 2005, ARLP sold approximately 86.0% of its sales tonnage under contracts having a term of one year or greater. We refer to these contracts as long-term contracts. Long-term sales contracts have historically provided a relatively secure market for the amount of production committed under the terms of the contract. From time to time industry conditions, however, may make it more difficult for ARLP to enter into long-term contracts with ARLP’s electric utility customers in the future. In the future, if supply exceeds demand in the coal industry, electric utilities may become less willing to lock in price or quantity commitments for an extended period of time. Accordingly, ARLP may not be able to continue to obtain long-term sales contracts with reliable customers as existing contracts expire.

Some of ARLP long-term contracts contain provisions allowing for the renegotiation of prices and, in some instances, the termination of the contract or the suspension of purchases by customers.

Some of ARLP’s long-term contracts contain provisions which allow for the purchase price to be renegotiated at periodic intervals. These price reopener provisions may automatically set a new price based on the prevailing market price or, in some instances, require the parties to the contract to agree on a new price. Any adjustment or renegotiation leading to a significantly lower contract price could adversely affect ARLP’s operating profit margins. Accordingly, long-term contracts may provide only limited protection during adverse market conditions. In some circumstances, failure of the parties to agree on a price under a reopener can also lead to early termination of a contract.

Several of ARLP’s long-term contracts also contain provisions that allow the customer to suspend or terminate performance under the contract upon the occurrence or continuation of some specified events. These events are called “force majeure” events. Some of these events that are specific to the coal industry include:

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ARLP’s inability to deliver the quantities or qualities of coal specified;

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changes in the Clean Air Act rendering use of ARLP’s coal inconsistent with the customer’s pollution control strategies; and

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the occurrence of events beyond the reasonable control of the affected party, including labor disputes, mechanical malfunctions and changes in government regulations.

In addition, certain contracts are terminable as a result of events that are beyond ARLP’s control. For example, ARLP has entered into agreements with several coal synfuel facilities to provide coal feedstock and other

Index to Financial Statements

services. Each of these agreements provides for early cancellation in the event federal synfuel tax credits become unavailable or upon the termination of associated coal synfuel sales contracts between the facility and its customers. In the event of early termination of any of ARLP’s long-term contracts, if ARLP is unable to enter into new contracts on similar terms, ARLP’s business, financial condition and results of operations could be adversely affected.

Extensive environmental laws and regulations affect coal consumers, which have corresponding effects on the demand for ARLP’s coal as a fuel source.

Federal, state and local laws and regulations extensively regulate the amount of sulfur dioxide, particulate matter, nitrogen oxides, mercury and other compounds emitted into the air from electric power plants, which are the ultimate consumers of our coal. These laws and regulations can require significant emission control expenditures for many coal-fired power plants, and various new and proposed laws and regulations may require further emission reductions and associated emission control expenditures. A substantial portion of ARLP’s coal has a high sulfur content, which may result in increased sulfur dioxide emissions when combusted. Accordingly, these laws and regulations may affect demand and prices for ARLP’s low- and high-sulfur coal. There is also continuing pressure on state and federal regulators to impose limits on carbon dioxide emissions from electric power plants, particularly coal-fired power plants. As a result of these current and proposed laws, regulations and trends, electricity generators may elect to switch to other fuels that generate less of these emissions, possibly further reducing demand for ARLP’s coal. Please read “Business of Alliance Resource Partners—Regulation and Laws—Air Emissions.”

ARLP depends on a few customers for a significant portion of its revenues, and the loss of one or more significant customers could affect ARLP’s ability to maintain the sales volume and price of the coal it produces.

During 2005, ARLP derived approximately 36.4% of its total revenues from three customers, which individually accounted for 10% or more of its 2005 total revenues. If ARLP were to lose any of these customers without finding replacement customers willing to purchase an equivalent amount of coal on similar terms, or if these customers were to change the amounts of coal purchased or the terms, including pricing terms, on which they buy coal from ARLP, it could have a material adverse effect on ARLP’s business, financial condition and results of operations.

Litigation relating to disputes with ARLP’s customers may result in substantial costs, liabilities and loss of revenues.

From time to time ARLP has disputes with its customers over the provisions of long-term coal supply contracts relating to, among other things, coal pricing, quality, quantity and the existence of specified conditions beyond ARLP’s control that suspend performance obligations under the particular contract. Disputes may occur in the future and ARLP may not be able to resolve those disputes in a satisfactory manner.

ARLP’s profitability may decline due to unanticipated mine operating conditions and other factors that are not within its control.

ARLP’s mining operations are influenced by changing conditions that can affect production levels and costs at particular mines for varying lengths of time and as a result can diminish ARLP’s profitability.

These conditions include, among others:

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weather conditions,

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equipment availability, replacement or repair,

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prices for fuel, steel, explosives and other supplies,

Index to Financial Statements

•

fires,

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variations in thickness of the layer, or seam, of coal,

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amounts of overburden, partings, rock and other natural materials,

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accidental mine water discharges and other geological conditions,

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shortage of skilled labor, or

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fluctuations in transportation costs and the availability or reliability of transportation.

These conditions have had, and can be expected in the future to have, a significant impact on ARLP’s operating results. For example, during the past two years, three loss incidents have occurred at ARLP’s mine complexes. For details on these incidents and their negative effect on our results of operations, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Pattiki Vertical Belt Incident,” “—MC Mining Fire Incident” and “—Dotiki Fire Incident.” Prolonged disruption of production at any of ARLP’s mines would result in a decrease in its revenues and profitability, which could be material. Decreases in ARLP’s profitability as a result of the factors described above could materially adversely impact ARLP’s quarterly or annual results. These risks may not be covered by ARLP’s insurance policies.

Coal mining is subject to inherent risks that are beyond ARLP’s control, and these risks may not be fully covered under ARLP’s insurance policies.

ARLP’s mines are subject to conditions or events beyond ARLP’s control that could disrupt operations and affect the cost of mining at particular mines for varying lengths of time. These risks include:

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fires and explosions from methane;

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natural disasters, such as heavy rains and flooding;

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mining and processing equipment failures and unexpected maintenance problems;

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mine flooding due to the failure of subsurface water seals or water removal equipment;

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changes or variations in geologic conditions, such as the thickness of the coal deposits and the amount of rock and soil overlying the coal deposits;

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inability to acquire mining rights or permits;

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employee injuries or fatalities; and

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labor-related interruptions.

During the past two years, three loss incidents have occurred at ARLP’s mine complexes. On June 14, 2005, ARLP’s White County Coal, LLC’s, or White County Coal, Pattiki mining complex was temporarily idled for a period of 36 calendar days by the failure of the vertical conveyor belt system used in conveying raw coal out of the mine. Please read “Management’s Discussion and Analysis of Financial Conditions and Results of Operations—Pattiki Vertical Belt Incident.” On December 26, 2004, ARLP’s MC Mining, LLC’s, or MC Mining, Excel No. 3 mine was temporarily idled for a period of 57 calendar days following the occurrence of a mine fire. Production continues to be adversely impacted by inefficiencies attributable to or associated with this mine fire. Please read “Management’s Discussion and Analysis of Financial Conditions and Results of Operations—MC Mining Fire Incident.” On February 11, 2004, ARLP’s Webster County Coal, LLC’s, or Webster County Coal, Dotiki mining complex was temporarily idled for a period of 27 calendar days following the occurrence of a mine fire that originated with a diesel supply tractor. Please read “Management’s Discussion and Analysis of Financial Conditions and Results of Operations—Dotiki Fire Incident.” For details on how these incidents adversely affected ARLP’s financial condition and results of operations, please read “Management’s Discussion and Analysis of Financial Conditions and Results of Operations—Analysis of Historical Results of

Index to Financial Statements

Operations.” Loss incidents such as these are likely to increase the cost of mining and delay or halt production at particular mines for varying lengths of time. ARLP does carry commercial (including business interruption and extra expense) property insurance policies; however, these risks may not be fully covered by these insurance policies.

A shortage of skilled labor may make it difficult for ARLP to maintain labor productivity and competitive costs and could adversely affect ARLP’s profitability.

Efficient coal mining using modern techniques and equipment requires skilled laborers, preferably with at least one year of experience and proficiency in multiple mining tasks. In recent years, a shortage of trained coal miners has caused ARLP to operate certain mining units without full staff, which decreases ARLP’s productivity and increases its costs. This shortage of trained coal miners is the result of a significant percentage of experienced coal miners reaching the age for retirement, combined with the difficulty of attracting new workers to the coal industry. Thus, this shortage of skilled labor could continue over an extended period. If the shortage of experienced labor continues or worsens, it could have an adverse impact on ARLP’s labor productivity and costs and its ability to expand production in the event there is an increase in the demand for ARLP’s coal, which could adversely affect its profitability.

Although none of ARLP’s employees are members of unions, ARLP’s work force may not remain union-free in the future.

None of ARLP’s employees are represented under collective bargaining agreements. However, all of ARLP’s work force may not remain union-free in the future. If some or all of ARLP’s currently union-free operations were to become unionized, it could adversely affect ARLP’s productivity and increase the risk of work stoppages at ARLP’s mining complexes. In addition, even if ARLP remains union-free, ARLP’s operations may still be adversely affected by work stoppages at unionized companies, particularly if union workers were to orchestrate boycotts against ARLP’s operations.

ARLP may be unable to obtain and renew permits necessary for its operations, which could reduce its production, cash flow and profitability.

Mining companies must obtain numerous permits that impose strict conditions and obligations relating to various environmental and safety matters in connection with coal mining. The permitting rules are complex and can change over time. The public has the right to comment on permit applications and otherwise participate in the permitting process, including through court intervention. Accordingly, permits required by ARLP to conduct its operations may not be issued, maintained or renewed, or may not be issued or renewed in a timely fashion, or may involve requirements that restrict ARLP’s ability to economically conduct its mining operations. Limitations on ARLP’s ability to conduct its mining operations due to the inability to obtain or renew necessary permits could reduce its production, cash flow and profitability. Please read “Business of Alliance Resource Partners—Regulations and Laws—Mining Permits and Approvals.”

Recent federal district court decisions in West Virginia, and related litigation filed in federal district court in Kentucky, have created uncertainty regarding the future ability to obtain certain general permits authorizing the construction of valley fills for the disposal of overburden from mining operations. A July 2004 decision by the Southern District of West Virginia in Ohio Valley Environmental Coalition v. Bulen enjoined the Huntington District of the U.S. Army Corps of Engineers from issuing further permits pursuant to Nationwide Permit 21, which is a general permit issued by the U.S. Army Corps of Engineers to streamline the process for obtaining permits under Section 404 of the Clean Water Act. The Fourth Circuit Court of Appeals issued a decision on November 23, 2005, vacating the district court decision in Bulen and remanding the case to the lower court for further argument. A similar lawsuit has been filed in federal district court in Kentucky that seeks to enjoin the issuance of permits pursuant to Nationwide Permit 21 by the Louisville District of the U.S. Army Corps of Engineers. ARLP does not operate any mines located within the Southern District of West Virginia, and currently

Index to Financial Statements

only utilizes Nationwide Permit 21 at one location in Indiana. In the event current or future litigation contesting the use of Nationwide Permit 21 is successful, ARLP may be required to apply for individual discharge permits pursuant to Section 404 of the Clean Water Act in areas where it would have otherwise utilized Nationwide Permit 21. Such a change could result in delays in obtaining required mining permits to conduct operations, which could in turn result in reduced production, cash flow and profitability.

Fluctuations in transportation costs and the availability or reliability of transportation could reduce revenues by causing ARLP to reduce its production or by impairing its ability to supply coal to its customers.

Transportation costs represent a significant portion of the total cost of coal for ARLP’s customers and, as a result, the cost of transportation is a critical factor in a customer’s purchasing decision. Increases in transportation costs could make coal a less competitive source of energy or could make ARLP’s coal production less competitive than coal produced from other sources.

On the other hand, significant decreases in transportation costs could result in increased competition from coal producers in other parts of the country. For instance, difficulty in coordinating the many eastern loading facilities, the large number of small shipments, the steeper average grades of the terrain and a more unionized workforce are all issues that combine to make shipments originating in the eastern United States inherently more expensive on a per-mile basis than shipments originating in the western United States. Historically, high coal transportation rates from the western coal producing areas into certain eastern markets limited the use of western coal in those markets. Lower or higher rail rates from the western coal producing areas to markets served by eastern U.S. producers have created major competitive challenges, as well as opportunities for eastern producers. In the event of lower transportation costs, the increased competition could have a material adverse effect on ARLP’s business, financial condition and results of operations.

Some of ARLP’s mines depend on a single transportation carrier or a single mode of transportation. Disruption of any of these transportation services due to weather-related problems, flooding, drought, accidents, mechanical difficulties, strikes, lockouts, bottlenecks, and other events could temporarily impair ARLP’s ability to supply coal to its customers. ARLP’s transportation providers may face difficulties in the future that may impair ARLP’s ability to supply coal to its customers, resulting in decreased revenues.

If there are disruptions of the transportation services provided by ARLP’s primary rail or barge carriers that transport its produced coal and ARLP is unable to find alternative transportation providers to ship its coal, ARLP’s business could be adversely affected.

The states of Kentucky and West Virginia have recently increased enforcement of weight limits on coal trucks on their public roads. It is possible that other states in which our coal is transported by truck will modify their laws to limit truck weight limits. Such legislation could result in shipment delays and increased costs. An increase in transportation costs could have an adverse effect on ARLP’s ability to increase or to maintain production and could adversely affect revenues.

Since ARLP’s formation and the acquisition of its predecessor in August 1999, it has expanded its operations by adding and developing mines and coal reserves in existing, adjacent and neighboring properties. ARLP continually seeks to expand its operations and coal reserves. If ARLP is unable to successfully integrate the companies, businesses or properties it is able to acquire through this expansion, its profitability may decline

Index to Financial Statements

and ARLP could experience a material adverse effect on its business, financial condition, or results of operations. Expansion transactions involve various inherent risks, including:

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uncertainties in assessing the value, strengths, and potential profitability of, and identifying the extent of all weaknesses, risks, contingent and other liabilities (including environmental or mine safety liabilities) of, expansion candidates;

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the ability to achieve identified operating and financial synergies anticipated to result from an expansion;

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problems that could arise from the integration of the new operations; and

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unanticipated changes in business, industry or general economic conditions that affect the assumptions underlying ARLP’s rationale for pursuing the expansion opportunity.

Any one or more of these factors could cause ARLP not to realize the benefits anticipated to result from an expansion. Any expansion opportunities ARLP pursues could materially affect its liquidity and capital resources and may require ARLP to incur indebtedness, seek equity capital or both. In addition, future expansions could result in ARLP assuming more long-term liabilities relative to the value of the acquired assets than ARLP has assumed in its previous expansions.

ARLP may not be able to successfully grow through future acquisitions, and ARLP may not be able to effectively integrate the various businesses or properties it acquires.

Historically, a portion of ARLP’s growth and operating results have been from acquisitions. ARLP’s future growth could be limited if it is unable to continue to make acquisitions, or if ARLP is unable to successfully integrate the companies, businesses or properties it acquires. ARLP may not be successful in consummating any acquisitions and the consequences of these acquisitions is unknown. Moreover, any acquisition could be dilutive to earnings and distributions to unitholders and any additional debt incurred to finance an acquisition could affect ARLP’s ability to make distributions to unitholders. ARLP’s ability to make acquisitions in the future could be limited by restrictions under its existing or future debt agreements, competition from other coal companies for attractive properties or the lack of suitable acquisition candidates.

The unavailability of an adequate supply of coal reserves that can be mined at competitive costs could cause ARLP’s profitability to decline.

ARLP’s profitability depends substantially on its ability to mine coal reserves that have the geological characteristics that enable them to be mined at competitive costs and to meet the quality needed by its customers. Because ARLP’s reserves decline as it mines its coal, its future success and growth depend, in part, upon ARLP’s ability to acquire additional coal reserves that are economically recoverable. Replacement reserves may not be available when required or, if available, may not be capable of being mined at costs comparable to those characteristic of the depleting mines. ARLP may not be able to accurately assess the geological characteristics of any reserves that it acquires, which may adversely affect its profitability and financial condition. Exhaustion of reserves at particular mines also may have an adverse effect on ARLP’s operating results that is disproportionate to the percentage of overall production represented by such mines. ARLP’s ability to obtain other reserves in the future could be limited by restrictions under its existing or future debt agreements, competition from other coal companies for attractive properties, the lack of suitable acquisition candidates or the inability to acquire coal properties on commercially reasonable terms.

ARLP’s business depends, in part, upon its ability to find, develop or acquire additional coal reserves that ARLP can recover economically. ARLP’s existing reserves will decline as they are depleted. ARLP’s planned development projects and acquisition activities may not increase its reserves significantly and it may not have continued success expanding existing and developing additional mines. ARLP believes that there are substantial reserves on certain adjacent or neighboring properties that are unleased and otherwise available. However, ARLP

Index to Financial Statements

may not be able to negotiate leases with the landowners on acceptable terms. An inability to expand ARLP’s operations into adjacent or neighboring reserves under this strategy could have a material adverse effect on ARLP’s business, financial condition or results of operations.

The estimates of ARLP’s coal reserves may prove inaccurate, and you should not place undue reliance on these estimates.

The estimates of ARLP’s coal reserves may vary substantially from actual amounts of coal ARLP is able to economically recover. The reserve data set forth in this prospectus represent ARLP’s engineering estimates. All of the reserves presented in this prospectus constitute proven and probable reserves. There are numerous uncertainties inherent in estimating quantities of reserves, including many factors beyond ARLP’s control. Estimates of coal reserves necessarily depend upon a number of variables and assumptions, any one of which may vary considerably from actual results. These factors and assumptions relate to:

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geological and mining conditions, which may not be fully identified by available exploration data and/or differ from ARLP’s experiences in areas where ARLP currently mines;

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the percentage of coal in the ground ultimately recoverable;

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historical production from the area compared with production from other producing areas;

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the assumed effects of regulation by governmental agencies; and

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assumptions concerning future coal prices, operating costs, capital expenditures, severance and excise taxes and development and reclamation costs.

For these reasons, estimates of the recoverable quantities of coal attributable to any particular group of properties, classifications of reserves based on risk of recovery and estimates of future net cash flows expected from these properties as prepared by different engineers or by the same engineers at different times, may vary substantially. Actual production, revenue and expenditures with respect to ARLP’s reserves will likely vary from estimates, and these variations may be material. As a result, you should not place undue reliance on the coal reserve data included herein.

The geological characteristics of some of ARLP’s coal reserves, such as depth of overburden and coal seam thickness, make them difficult and costly to mine. As mines become depleted, replacement reserves may not be available when required or, if available, may not be capable of being mined at costs comparable to those characteristic of the depleting mines. In addition, permitting, licensing and other environmental and regulatory requirements associated with certain of ARLP’s mining operations are more costly and time-consuming to satisfy. These factors could materially adversely affect the mining operations and cost structures of, and ARLP’s customers’ ability to use coal produced by, ARLP’s mines.

Unexpected increases in raw material costs could significantly impair ARLP’s operating profitability.

ARLP’s coal mining operations use significant amounts of steel, petroleum products and other raw materials in various pieces of mining equipment, supplies and materials, including the roof bolts required by the room and pillar method of mining described below in “Business of Alliance Resource Partners—Mining Operations.” Steel prices have risen significantly in recent years, and historically, the prices of scrap steel, natural gas and coking coal consumed in the production of iron and steel have fluctuated. Recently ARLP has experienced cost increases for various commodities and services influenced by the recent steep increases in the price of crude oil and natural gas. Costs of diesel fuel, explosives, and coal trucking have all escalated as a direct result of supply chain

Index to Financial Statements

problems related to the effect of recent hurricanes along the U.S. Gulf Coast. There may be other acts of nature or terrorist attacks or threats that could also increase the costs of raw materials. If the price of steel, petroleum products or other raw materials increase, ARLP’s operational expenses will increase, which could have a significant negative impact on its profitability.

Cash distributions are not guaranteed and may fluctuate with ARLP’s performance. In addition, ARLP’s managing general partner’s discretion in establishing reserves may negatively impact our receipt of cash distributions.

Because distributions on the common units are dependent on the amount of cash generated through ARLP’s coal sales, distributions may fluctuate based on the amount of coal ARLP is able to produce and the price at which ARLP is able to sell it. Therefore, the current quarterly distribution or any distribution may not be paid each quarter. The actual amount of cash that is available to be distributed each quarter will depend upon numerous factors, some of which are beyond ARLP’s control and the control of ARLP’s managing general partner. Cash distributions are dependent primarily on cash flow, including cash flow from financial reserves and working capital borrowings, and not solely on profitability, which is affected by non-cash items. Therefore, cash distributions might be made during periods when ARLP records losses and might not be made during periods when ARLP records profits.

The partnership agreement gives ARLP’s managing general partner broad discretion in establishing financial reserves for the proper conduct of ARLP’s business. These reserves also will affect the amount of cash available for distribution. In addition, the partnership agreement requires the managing general partner to deduct from operating surplus each year estimated maintenance capital expenditures as opposed to actual expenditures in order to reduce wide disparities in operating surplus caused by fluctuating maintenance capital expenditure levels. If estimated maintenance capital expenditures in a year are higher than actual maintenance capital expenditures, then the amount of cash available for distribution to unitholders will be lower than if actual maintenance capital expenditures were deducted from operating surplus.

ARLP’s indebtedness may limit ARLP’s ability to borrow additional funds, make distributions to unitholders or capitalize on business opportunities.

ARLP has long-term indebtedness, consisting of its outstanding 8.31% senior unsecured notes. At December 31, 2005, ARLP’s total indebtedness outstanding was $162.0 million. ARLP’s leverage may:

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adversely affect its ability to finance future operations and capital needs;

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limit its ability to pursue acquisitions and other business opportunities;

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make its results of operations more susceptible to adverse economic or operating conditions; and

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make it more difficult to self-insure for ARLP’s workers’ compensation obligations.

In addition, ARLP has unused borrowing capacity under its senior credit facility. Future borrowings, under its credit facilities or otherwise, could result in a significant increase in ARLP’s leverage.

ARLP’s payment of principal and interest on any indebtedness will reduce the cash available for distribution on its units. ARLP will be prohibited from making cash distributions:

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during an event of default under any of its indebtedness; or

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if either before or after such distribution, it fails to meet a coverage test based on the ratio of its consolidated debt to its consolidated cash flow.

Various limitations in ARLP’s debt agreements may reduce ARLP’s ability to incur additional indebtedness, to engage in some transactions and to capitalize on business opportunities. Any subsequent refinancing of ARLP’s current indebtedness or any new indebtedness could have similar or greater restrictions.

Index to Financial Statements

Federal and state laws require bonds to secure ARLP’s obligations related to the statutory requirement that ARLP return mined property to its approximate original condition and workers’ compensation and black lung benefits. ARLP’s inability to acquire or failure to maintain surety bonds that are required by state and federal law would have a material adverse effect on ARLP.

Federal and state laws require ARLP to place and maintain bonds to secure ARLP’s obligations to repair and return property to its approximate original state after it has been mined (often referred to as “reclaim” or “reclamation”), to pay federal and state workers’ compensation and pneumoconiosis, or black lung, benefits and to satisfy other miscellaneous obligations. These bonds provide assurance that ARLP will perform its statutorily required obligations and are referred to in this prospectus as “surety” bonds. These bonds are typically renewable on a yearly basis. The failure to maintain or the inability to acquire sufficient surety bonds, as required by state and federal laws, could subject ARLP to fines and penalties as well as the loss of its mining permits. Such failure could result from a variety of factors, including:

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lack of availability, higher expense or unreasonable terms of new surety bonds;

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the ability of current and future surety bond issuers to increase required collateral, or limitations on availability of collateral for surety bond issuers due to the terms of ARLP’s credit agreements; and

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the exercise by third-party surety bond holders of their right to refuse to renew the surety.

ARLP has outstanding surety bonds with third parties for reclamation expenses and for federal and state workers’ compensation obligations and other miscellaneous obligations. ARLP may have difficulty maintaining its surety bonds for mine reclamation as well as workers’ compensation and black lung benefits. ARLP’s inability to acquire or failure to maintain these bonds would have a material adverse effect on ARLP.

ARLP’s mining operations are subject to extensive and costly laws and regulations, and such current and future laws and regulations could increase current operating costs or limit ARLP’s ability to produce coal.

ARLP is subject to numerous and detailed federal, state and local laws and regulations affecting the coal mining industry, including laws and regulations pertaining to employee health and safety, permitting and licensing requirements, air quality standards, water pollution, plant and wildlife protection, reclamation and restoration of mining properties after mining is completed, the discharge of materials into the environment, surface subsidence from underground mining and the effects that mining has on groundwater quality and availability. Numerous governmental permits and approvals are required for mining operations. ARLP is required to prepare and present to federal, state or local authorities data pertaining to the effect or impact that any proposed exploration for or production of coal may have upon the environment. The costs, liabilities and requirements associated with these regulations may be costly and time-consuming and may delay commencement or continuation of exploration or production operations. The possibility exists that new laws or regulations (or judicial interpretations of existing laws and regulations) may be adopted in the future that could materially affect ARLP’s mining operations, cash flow, and profitability, either through direct impacts such as new requirements impacting ARLP’s existing mining operations, or indirect impacts such as new laws and regulations that discourage or limit ARLP’s customers’ use of coal. Please read “Business of Alliance Resource Partners—Regulation and Laws.”

Index to Financial Statements

and Health Administration (MSHA) announced the promulgation of new emergency rules on mine safety. These rules address mine safety equipment, training, and emergency reporting requirements. Unlike most MSHA rules, these emergency rules became effective immediately upon their publication in the Federal Register on March 9, 2006. Implementing and complying with these new laws and regulations could adversely affect ARLP’s results of operation and financial position.

Some of ARLP’s operating subsidiaries lease a portion of the surface properties upon which their mining facilities are located.

ARLP’s operating subsidiaries do not, in all instances, own all of the surface properties upon which their mining facilities have been constructed. Certain of the operating companies have constructed and now operate all or some portion of their facilities on properties owned by unrelated third parties with whom the applicable company has entered into a long-term lease. We have no reason to believe that there exists any risk of loss of these leasehold rights given the terms and provisions of the subject leases and the nature and identity of the third party lessors; however, in the unlikely event of any loss of these leasehold rights, operations could be disrupted or otherwise adversely impacted as a result of increased costs associated with retaining the necessary land use.

The sale or exchange of 50% or more of ARLP’s capital and profits interests within a 12-month period will result in the termination of ARLP’s partnership for federal income tax purposes.

ARLP will be considered to have terminated its partnership for federal income tax purposes if there is a sale or exchange of 50% or more of the total interests in ARLP’s capital and profits within a 12-month period. The transactions surrounding this offering represent a sale or exchange of approximately 42.3% of the total interests in ARLP’s capital and profits interests. We believe, and will take the position, that the transactions surrounding this offering, together with all other common units sold within the prior 12-month period, represent a sale or exchange of 50% or more of the total interests in ARLP’s capital and profits interests. ARLP’s termination will, among other things, result in the closing of its taxable year for all unitholders and could result in a deferral of depreciation deductions allowable in computing its taxable income for the year in which the termination occurs. The impact of this termination to you is reflected in the amount of taxable income we expect to be allocated to you as a result of an investment in our common units. Although the amount of increase cannot be estimated because it depends upon numerous factors including the timing of the termination, the amount could be material. A termination of ARLP as a result of the transactions surrounding this offering currently would not affect ARLP’s continued classification as a partnership for federal income tax purposes, but instead, it will be treated as a new partnership for tax purposes. If ARLP is treated as a new partnership, ARLP must make new tax elections and could be subject to penalties if it is unable to determine that a termination occurred. See “Material Tax Consequences—Tax Consequences of Unit Ownership—Ratio of Taxable Income to Distributions.”

Tax Risks to Our Common Unitholders

You should read “Material Tax Consequences” for a more complete discussion of the expected material federal income tax consequences of owning and disposing of our units.

If we or ARLP were to become subject to entity-level taxation for federal or state tax purposes, then our cash available for distribution to you would be substantially reduced.

The anticipated after-tax benefit of an investment in our units depends largely on our being treated as a partnership for federal income tax purposes. We have not requested, and do not plan to request, a ruling from the IRS on this matter. The value of our investment in ARLP depends largely on ARLP being treated as a partnership for federal income tax purposes.

If we were treated as a corporation for federal income tax purposes, we would pay federal income tax on our taxable income at the corporate tax rate, which is currently a maximum of 35%. Distributions to you would

Index to Financial Statements

generally be taxed again as corporate distributions, and no income, gains, losses, deductions or credits would flow through to you. Because a tax would be imposed upon us as a corporation, our cash available for distribution to you would be substantially reduced. Thus, treatment of us as a corporation would result in a material reduction in our anticipated cash flow and after-tax return to you, likely causing a substantial reduction in the value of our units.

If ARLP were treated as a corporation for federal income tax purposes, it would pay federal income tax on its taxable income at the corporate tax rate. Distributions to us would generally be taxed again as corporate distributions, and no income, gains, losses, deduction or credits would flow through to us. As a result, there would be a material reduction in our anticipated cash flow, likely causing a substantial reduction in the value of our units.

Current law may change, causing us or ARLP to be treated as a corporation for federal income tax purposes or otherwise subjecting us or ARLP to entity level taxation. For example, because of widespread state budget deficits, several states are evaluating ways to subject partnerships to entity level taxation through the imposition of state income, franchise or other forms of taxation. If any state were to impose a tax upon us or ARLP as an entity, the cash available for distribution to you would be reduced.

A successful IRS contest of the federal income tax positions we or ARLP takes may adversely impact the market for our common units or ARLP common units, and the costs of any contest will reduce cash available for distribution to our unitholders.

The IRS may adopt positions that differ from the positions that we or ARLP take, even positions taken with the advice of counsel. It may be necessary to resort to administrative or court proceedings to sustain some or all of the positions we or ARLP take. A court may not agree with some or all of the positions we or ARLP take. Any contest with the IRS may materially and adversely impact the market for our common units or ARLP’s common units and the prices at which they trade. In addition, the costs of any contest with the IRS will be borne by ARLP and therefore indirectly by us, as a unitholder and as the owner of the general partner of ARLP. Moreover, the costs of any contest between us and the IRS will result in a reduction in cash available for distribution to our unitholders and thus will be borne indirectly by our unitholders.

Even if you do not receive any cash distributions from us, you will be required to pay taxes on your share of our taxable income.

You will be required to pay federal income taxes and, in some cases, state and local income taxes on your share of our taxable income, whether or not you receive cash distributions from us. You may not receive cash distributions from us equal to your share of our taxable income or even equal to the actual tax liability that results from your share of our taxable income.

Tax gain or loss on the disposition of our units could be different than expected.

If you sell your units, you will recognize gain or loss equal to the difference between the amount realized and your tax basis in those units. Prior distributions to you in excess of the total net taxable income you were allocated for a unit, which decreased your tax basis in that unit, will, in effect, become taxable income to you if the unit is sold at a price greater than your tax basis in that unit, even if the price you receive is less than your original cost. A substantial portion of the amount realized, whether or not representing gain, may be ordinary income to you.

Tax-exempt entities and foreign persons face unique tax issues from owning units that may result in adverse tax consequences to them.

Investment in units by tax-exempt entities, such as individual retirement accounts (known as IRAs) and non-U.S. persons raises issues unique to them. For example, virtually all of our income allocated to organizations

Index to Financial Statements

exempt from federal income tax, including individual retirement accounts and other retirement plans, will be unrelated business taxable income and will be taxable to them. Distributions to non-U.S. persons will be reduced by withholding taxes at the highest applicable effective tax rate, and non-U.S. persons will be required to file United States federal income tax returns and pay tax on their share of our taxable income.

We will treat each purchaser of our units as having the same tax benefits without regard to the units purchased. The IRS may challenge this treatment, which could adversely affect the value of our units.

Because we cannot match transferors and transferees of units, we will adopt depreciation and amortization positions that may not conform with all aspects of existing Treasury regulations. A successful IRS challenge to those positions could adversely affect the amount of tax benefits available to you. It also could affect the timing of these tax benefits or the amount of gain from your sale of units and could have a negative impact on the value of our units or result in audit adjustments to your tax returns. Please read “Material Tax Consequences—Uniformity of Units” for a further discussion of the effect of the depreciation and amortization positions we will adopt.

You will likely be subject to state and local taxes and return filing requirements as a result of investing in our units.

In addition to federal income taxes, you will likely be subject to other taxes, such as state and local income taxes, unincorporated business taxes and estate, inheritance or intangible taxes that are imposed by the various jurisdictions in which we or ARLP do business or own property. You will likely be required to file state and local income tax returns and pay state and local income taxes in some or all of these various jurisdictions. Further, you may be subject to penalties for failure to comply with those requirements. We or ARLP may own property or conduct business in other states in the future. It is your responsibility to file all federal, state and local tax returns. Our counsel has not rendered an opinion on the state and local tax consequences of an investment in our units.

The sale or exchange of 50% or more of our capital and profits interests within a 12-month period will result in the termination of our partnership for federal income tax purposes.

We will be considered to have terminated our partnership for federal income tax purposes if there is a sale or exchange of 50% or more of the total interests in our capital and profits within a 12-month period. Likewise, ARLP will be considered to have terminated its partnership for federal income tax purposes if there is a sale or exchange of 50% or more of the total interests in ARLP’s capital and profits within a 12-month period. A termination would, among other things, result in the closing of our or ARLP’s taxable year for all unitholders and could result in a deferral of depreciation deductions allowable in computing our taxable income for the year in which the termination occurs. Thus, if this occurs you will be allocated an increased amount of federal taxable income for the year in which we are considered to be terminated as a percentage of the cash distributed to you with respect to that period. Although the amount of increase cannot be estimated because it depends upon numerous factors including the timing of the termination, the amount could be material. Our termination, or the termination of ARLP, currently would not affect our classification, or the classification of ARLP, as a partnership for federal income tax purposes, but instead, we or ARLP would be treated as a new partnership for tax purposes. If treated as a new partnership, we must make new tax elections and could be subject to penalties if we are unable to determine that a termination occurred. Please read “Material Tax Consequences—Disposition of Units—Constructive Termination” for a discussion of the consequences of our termination for federal income taxes purposes.

Our ratio of taxable income to cash distributions will be much greater than the ratio applicable to holders of common units in ARLP.

Our ratio of taxable income to cash distributions will be much greater than the ratio applicable to holders of common units in ARLP. Other holders of common units in ARLP will receive remedial allocations of deductions from ARLP. Although we will receive remedial allocations of deductions from ARLP, remedial allocations of

Index to Financial Statements

deductions to us will be very limited. In addition, our ownership of ARLP incentive distribution rights will cause more taxable income to be allocated to us from ARLP than will be allocated to holders who hold only common units in ARLP. If ARLP is successful in increasing its distributions over time, our income allocations from our ARLP incentive distribution rights will increase, and, therefore, our ratio of taxable income to cash distributions will increase. Because our ratio of taxable income to cash distributions will be greater than the ratio applicable to holders of common units in ARLP, your allocable taxable income will be significantly greater than that of a holder of common units in ARLP who receives cash distributions from ARLP equal to the cash distributions you receive from us.

Index to Financial Statements

USE OF PROCEEDS

We expect to receive net proceeds of approximately $289.1 million from the sale of the 12,500,000 common units we are offering, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. The underwriters will not receive any discount or commission on the 500,000 common units offered to Joseph W. Craft III, the President, Chief Executive Officer and Chairman of the board of directors of our general partner, or an entity controlled by him. If the underwriters exercise their option to purchase additional common units in full, we expect to receive net proceeds of approximately $333.1 million.

The net proceeds from this offering will be paid to the management investors as consideration for the contribution to us of their partnership interests in ARLP, as more fully described under “Prospectus Summary—Alliance Holdings GP, L.P.—Pre-offering Structure.” If the underwriters exercise all or any portion of their option to purchase additional common units, we will use all of the net proceeds from the sale of our common units sold pursuant to the exercise of that option to fund the redemption of an equal number of common units from the management investors and Mr. Craft. The redemption price per common unit will be equal to the price per common unit (net of underwriting discounts) sold to the underwriters upon exercise of their option to purchase additional common units. Please read “Security Ownership of Certain Beneficial Owners and Management” and “Selling Unitholders.”

Index to Financial Statements

CAPITALIZATION

The following table sets forth our cash and cash equivalents and our capitalization as of December 31, 2005:

•

on a consolidated historical basis for Alliance Resource Management GP, LLC;

•

as adjusted to give effect to the following assumptions:

•

the sale of 12,500,000 common units in this offering and related use of proceeds;

•

the issuance of 20,641,168 of our common units to Alliance Resource GP, LLC, the special general partner of ARLP, in exchange for 15,310,622 ARLP common units; and

•

the issuance of 26,721,832 of our common units to Alliance Management Holdings, LLC and AMH II, LLC, the current members of ARM GP, in exchange for their interests in ARM GP and 240,006 ARLP common units.

The historical financial data of Alliance Resource Management GP, LLC presented in the table below is derived from and should be read in conjunction with Alliance Resource Management GP, LLC’s historical financial statements, including the accompanying notes, included elsewhere in this prospectus.


	As of December 31, 2005
	Historical			As Adjusted
	(in thousands)
Cash and cash equivalents	$	32,071		$	32,071

Long-term debt, including current portion:
ARLP’s revolving credit facility		—			—
ARLP’s 8.31% senior notes due 2014		162,000			162,000

Total principal amount of debt obligations		162,000			162,000


Non-controlling interest in consolidated partnership		158,040			(33,749	)


Equity
Members’ equity of Alliance Resource Management GP, LLC		4,834			—
Partners’ equity of Alliance Holdings GP, L.P.
Limited Partners		—			196,623
General Partner		—			—
Unrealized loss on marketable securities		(68	)		(68	)
Minimum pension liability		(6,953	)		(6,953	)

Total equity		(2,187	)		189,602

Total capitalization	$	349,924		$	349,924

Index to Financial Statements

DILUTION

Dilution is the amount by which the offering price paid by purchasers of common units sold in this offering will exceed the net tangible book value per common unit after the offering. Based on an initial public offering price of $25.00 per common unit, on a pro forma as adjusted basis as of December 31, 2005, after giving effect to the offering of 12,500,000 common units, our net tangible book value was $189.6 million, or $3.17 per common unit, assuming the full exercise by the underwriters of their option to purchase additional common units. Purchasers of common units in this offering will experience immediate and substantial dilution in net tangible book value per common unit for financial accounting purposes, as illustrated in the following table.


Initial public offering price per common unit				$	25.00
Net tangible book value per common unit before this offering(1)	$	4.05
Decrease in net tangible book value per common unit attributable to new investors		(0.88	)

Less: Pro forma net tangible book value per common unit after this offering(2)					3.17

Immediate dilution in net tangible book value per common unit to new investors				$	21.83

(1)

Determined by dividing the total number of units (47,363,000) to be issued to the management investors for their contribution of assets to us into the sum of (a) the net tangible book value of the assets contributed to us by the management investors of $191.8 million and (b) the historical basis of the unrealized loss on marketable securities and the minimum pension liability.

(2)	Determined by dividing the total number of units (59,863,000) to be outstanding after the offering into our pro forma net tangible book value of $189.6 million, after giving effect to the application of the net proceeds of the offering.

The following table sets forth the number of units that we will issue and the total consideration contributed to us by the management investors in respect of their common units and by the purchasers of units in this offering upon consummation of the transactions contemplated by this prospectus.


	Units Acquired			Total Consideration
	Number	Percent		Amount			Percent
Management investors(1)	47,363,000	79.1	%	$	(97,336,000	)	(45.2	)%
Joseph W. Craft III	500,000	0.9	%		12,500,000		5.8	%
New investors	12,000,000	20.0	%		300,000,000		139.4	%

Total	59,863,000	100.0	%	$	215,164,000		100.0	%

(1)

Upon the consummation of this offering, an aggregate 47,863,000 units will be issued to the management investors and Mr. Craft. The assets contributed by the management investors were recorded at historical cost in accordance with GAAP. Book value of the consideration provided by the management investors is as follows:


Management investors	$	191,789,000
Less: Payments to management investors from the net proceeds of this offering		(289,125,000	)

Total consideration	$	(97,336,000	)

Index to Financial Statements

OUR CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS

You should read the following discussion of our cash distribution policy in conjunction with the specific assumptions included in this section. For more detailed information regarding the factors and assumptions upon which our cash distribution policy is based, please read “—Assumptions and Considerations” below. In addition, you should read “Forward-Looking Statements” and “Risk Factors” for information regarding statements that do not relate strictly to historical or current facts and certain risks inherent in our and ARLP’s business. Unless otherwise stated, the information presented in this section assumes that the underwriters will exercise their option to purchase additional units in full. Because the proceeds of any exercise of the underwriters’ option will be used to redeem a number of common units equal to the number of common units issued pursuant to the exercise of that option, the number of our common units will not change upon the exercise of the option but the relative percentages of common units owned by the public and our affiliates will change.

When discussing our operating results, we are referring to the operating results of ARM GP, our wholly-owned subsidiary, which are presented on a consolidated basis including ARLP. For additional information regarding our historical operating results, you should refer to our historical financial statements for the years ended December 31, 2003, 2004 and 2005 and our unaudited pro forma financial statements for the year ended December 31, 2005, included elsewhere in this prospectus.

General

Rationale for Our Cash Distribution Policy. Our cash distribution policy reflects a basic judgment that our unitholders will be better served by our distributing our available cash rather than retaining it. It is important that you understand that currently our only cash-generating assets are partnership interests in ARLP, including incentive distribution rights, from which we receive quarterly distributions. We currently have no independent operations separate from those of ARLP. Because we believe we will have relatively low cash requirements for operating expenses and that we will principally finance any material capital investments from external financing sources, we believe that our investors are best served by distributing all of our available cash as described below. Because we are not subject to an entity-level federal income tax, we have more cash to distribute to you than would be the case were we subject to tax. Our cash distribution policy is consistent with the terms of our partnership agreement, which requires that we distribute all of our available cash quarterly.

Restrictions and Limitations on Cash Distributions and Our Ability to Change Our Cash Distribution Policy. There is no guarantee that unitholders will receive quarterly distributions from us. Our cash distribution policy is subject to certain restrictions and may be changed at any time, including:

•

Our cash distribution policy will be subject to restrictions on distributions under our anticipated new credit facility. Specifically, our new credit facility will contain material financial tests and covenants that we must satisfy. Should we be unable to satisfy these restrictions under our new credit facility, or if we are otherwise in default under our new credit facility, we would be prohibited from making cash distributions to you notwithstanding our stated cash distribution policy.

•

ARLP’s cash distribution policy is subject to restrictions on distributions under its credit agreements. Specifically, ARLP’s credit agreements contain material financial tests and covenants that it must satisfy. These financial tests and covenants are described in this prospectus under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Debt Obligations—Alliance Resource Partners.” Should ARLP be unable to satisfy these restrictions under its credit agreements, ARLP would be prohibited from making cash distributions to us, which in turn would prevent us from making cash distributions to you notwithstanding our stated cash distribution policy.

•

Index to Financial Statements

unitholders, and the establishment of those reserves could result in a reduction in cash distributions to you from levels we currently anticipate pursuant to our stated cash distribution policy.

•

The board of directors of ARLP’s managing general partner has the authority under ARLP’s partnership agreement to establish reserves for the prudent conduct of ARLP’s business and for future cash distributions to ARLP’s unitholders, and the establishment of those reserves could result in a reduction in cash distributions we would otherwise anticipate receiving from ARLP, which in turn could result in a reduction in cash distributions to you from levels we currently anticipate pursuant to our stated cash distribution policy.

•

While our partnership agreement requires us to distribute all of our available cash, our partnership agreement, including our cash distribution policy contained therein, may be amended by a vote of the holders of a majority of our common units. Following completion of this offering and assuming the full exercise of the underwriters’ option to purchase additional common units, the management investors and Joseph W. Craft III will own approximately 76.8% of our outstanding common units and will have the ability to amend our partnership agreement without the approval of any other unitholders. Some of these owners are our officers and members of the board of directors of our general partner, as well as officers and directors of the managing general partner of ARLP.

•

The amount of distributions paid under ARLP’s cash distribution policy and the decision to make any distribution to its unitholders is at the discretion of ARLP’s managing general partner, taking into consideration the terms of its partnership agreement.

•

Under Section 17-607 of the Delaware Revised Uniform Limited Partnership Act, ARLP may not make a distribution to its partners if the distribution would cause its liabilities to exceed the fair value of its assets and we may not make a distribution to you if the distribution would cause our liabilities to exceed the fair value of our assets.

•

We may lack sufficient cash to pay distributions to our unitholders due to a number of factors, including increases in our general and administrative expenses, principal and interest payments on our outstanding debt, tax expenses, working capital requirements and anticipated cash needs of us or ARLP and its subsidiaries. Please read “Risk Factors” for a discussion of these factors.

Our Cash Distribution Policy Limits Our Ability to Grow. Because we distribute all of our available cash, our growth may not be as fast as businesses that reinvest their available cash to expand ongoing operations. In fact, since currently our only cash-generating assets are partnership interests in ARLP, including incentive distribution rights, our growth initially will be completely dependent upon ARLP’s ability to increase its quarterly distribution per unit. If we issue additional units or incur debt to fund acquisitions and growth capital expenditures, the payment of distributions on those additional units or interest on that debt could increase the risk that we will be unable to maintain or increase our per unit distribution level.

ARLP’s Ability to Grow is Dependent on its Ability to Access External Growth Capital. Consistent with the terms of its partnership agreement, ARLP distributes to its partners its available cash each quarter. In determining the amount of cash available for distribution, ARLP sets aside cash reserves, which it uses to fund its growth capital expenditures. Additionally, it has relied upon external financing sources, including commercial borrowings and other debt and equity issuances, to fund its acquisition capital expenditures. Accordingly, to the extent ARLP does not have sufficient cash reserves or is unable to finance growth externally, its cash distribution policy will significantly impair its ability to grow. In addition, to the extent ARLP issues additional units in connection with any acquisitions or growth capital expenditures, the payment of distributions on those additional units may increase the risk that ARLP will be unable to maintain or increase its per unit distribution level, which in turn may impact the available cash that we have to distribute to our unitholders. The incurrence of additional

Index to Financial Statements

commercial or other debt to finance its growth strategy would result in increased interest expense to ARLP, which in turn may impact the available cash that we have to distribute to our unitholders.

Our Initial Distribution Rate

Our Cash Distribution Policy. Upon completion of this offering, the board of directors of our general partner will adopt a cash distribution policy pursuant to which we will declare an initial distribution of $0.185 per unit per quarter, or $0.74 per unit per year, to be paid no later than 50 days after the end of each fiscal quarter. This equates to an aggregate cash distribution of approximately $11.1 million per quarter, or $44.3 million per year, based on the common units outstanding immediately after completion of this offering, including the common units issuable upon exercise of the underwriters’ option to purchase additional common units.

The following table sets forth the assumed number of outstanding common units upon the closing of this offering, assuming the full exercise of the underwriters’ option to purchase additional common units, and the estimated aggregate distribution amounts payable on such common units during the year following the closing of this offering at our initial distribution rate of $0.185 per common unit per quarter ($0.74 per common unit on an annualized basis).


	Distributions on Our Common Units
	Number of Common Units	One Quarter		Four Quarters
Estimated distributions on publicly held common units	13,875,000	$	2,566,875	$	10,267,500
Estimated distributions on common units held by the management investors and Joseph W. Craft III	45,988,000		8,507,780		34,031,120

Total	59,863,000	$	11,074,655	$	44,298,620

These distributions will not be cumulative. Consequently, if distributions on our common units are not paid with respect to any fiscal quarter at the anticipated initial distribution rate, our unitholders will not be entitled to receive such payments in the future. We will pay our distributions on or about the 20th of each of February, May, August and November to holders of record on or about the 13th day of each such month. If the distribution date does not fall on a business day, we will make the distribution on the business day immediately preceding the indicated distribution date. Any distributions received by us from ARLP related to periods prior to the closing of this offering will be distributed entirely to the management investors. In August 2006, we expect to pay a distribution to our unitholders equal to the initial quarterly distribution prorated for the portion of the quarter ending June 30, 2006 that we are public.

Our cash distribution policy is consistent with the terms of our partnership agreement, which requires that we distribute all of our available cash quarterly. Under our partnership agreement, available cash is defined to generally mean, for each fiscal quarter, cash generated from our business in excess of the amount of cash reserves established by our general partner to, among other things:

•

provide for the proper conduct of our business;

•

comply with applicable law, any of our debt instruments or other agreements; or

•

provide funds for distributions to our unitholders for any one or more of the next four quarters.

ARLP’s Cash Distribution Policy. Like us, ARLP has adopted a cash distribution policy that requires it to distribute its available cash to its unitholders on a quarterly basis. Under ARLP’s partnership agreement, available cash is defined to generally mean, for each fiscal quarter, cash generated from ARLP’s business in excess of the amount its general partner determines is necessary or appropriate to provide for the conduct of its business, comply with applicable law, any of its debt instruments or other agreements or provide for future distributions to its unitholders for any one or more of the next four quarters. ARLP’s determination of available

Index to Financial Statements

cash takes into account the possibility of establishing cash reserves in some quarterly periods that it may use to pay cash distributions in other quarterly periods, thereby enabling it to maintain relatively consistent cash distribution levels even if its business experiences fluctuations in its cash from operations due to seasonal and cyclical factors. ARLP’s determination of available cash also allows it to maintain reserves to provide funding for its growth opportunities. ARLP makes its quarterly distributions from cash generated from its operations, and those distributions have grown over time as its business has grown, primarily as a result of internal growth projects and acquisitions.

The following table sets forth the amount of quarterly cash distributions ARLP paid on the interests and for the quarter indicated in the table. The actual cash distributions (i.e., payments to the partners of ARLP) occur within 45 days after the end of such quarter. ARLP and its predecessor have an established historical record of paying quarterly cash distributions to their partners.


	Cash Distribution History
	Distributions on L.P. Units				Distributions on General Partner Interests(2)		Distributions on Incentive Distribution Rights		Total Cash Distributions from ARLP
	Per Unit(1)		Total		Distributions on General Partner Interests(2)		Distributions on Incentive Distribution Rights		Total Cash Distributions from ARLP
	(in thousands, except per unit)
2003
1st Quarter	$	0.26250	$	9,399	$	192		—	$	9,591
2nd Quarter	$	0.26250	$	9,399	$	192		—	$	9,591
3rd Quarter	$	0.26250	$	9,399	$	192		—	$	9,591
4th Quarter	$	0.28125	$	10,071	$	206	$	34	$	10,311

2004
1st Quarter	$	0.31250	$	11,190	$	233	$	205	$	11,628
2nd Quarter	$	0.32500	$	11,637	$	244	$	344	$	12,225
3rd Quarter	$	0.32500	$	11,637	$	244	$	344	$	12,225
4th Quarter	$	0.37500	$	13,598	$	296	$	903	$	14,797

2005
1st Quarter	$	0.37500	$	13,598	$	296	$	903	$	14,797
2nd Quarter	$	0.41250	$	14,958	$	350	$	2,208	$	17,516
3rd Quarter	$	0.41250	$	15,026	$	352	$	2,218	$	17,596
4th Quarter	$	0.46000	$	16,756	$	422	$	3,879	$	21,057

(1)	All per unit distribution amounts have been adjusted retroactively to reflect to ARLP’s two-for-one split on September 15, 2005.

(2)	Includes distributions on the 0.02% general partner interest in ARLP held by Alliance Resource GP, LLC.

In the sections that follow, we present in detail the basis for our belief that we will be able to fully fund our initial distribution rate of $0.185 per common unit per quarter. In those sections, we present two tables, including:

•

Our “Unaudited Pro Forma Consolidated Available Cash,” in which we present the amount of pro forma available cash that we would have had available for distribution to our unitholders with respect to the year ended December 31, 2005, are derived from our unaudited pro forma financial statements that are included in this prospectus and that are based on our audited financial statements for the year ended December 31, 2005. These pro forma financial statements give pro forma effect to:

•

the sale of 12,500,000 common units in this offering and related use of proceeds;

•

the issuance of 20,641,168 of our common units to Alliance Resource GP, LLC, the special general partner of ARLP, in exchange for 15,310,622 ARLP common units;

Index to Financial Statements

•

our ownership of a 0.001% managing interest in Alliance Coal, LLC.

•

Our “Estimated Cash Available To Pay Distributions” in which we present our estimate of how we calculate the estimated minimum consolidated Adjusted EBITDA necessary for us to have sufficient cash available for distribution to pay the full quarterly distributions at the initial distribution rate on all the outstanding common units for each quarter through March 31, 2007. In “Assumptions and Considerations” below, we also present our assumptions underlying our belief that we will generate sufficient Adjusted EBITDA to pay the minimum quarterly distribution on all common units for each quarter through March 31, 2007.

We do not as a matter of course make public projections as to future sales, earnings, or other results. However, we have prepared the prospective financial information set forth below to present the tables entitled “Unaudited Pro Forma Consolidated Available Cash” and “Estimated Cash Available to Pay Distributions.” The accompanying prospective financial information was not prepared with a view toward complying with the guidelines established by the American Institute of Certified Public Accountants with respect to prospective financial information, but, in our view, was prepared on a reasonable basis, reflects the best currently available estimates and judgments, and presents, to the best of management’s knowledge and belief, the assumptions on which we base our belief that we can generate the minimum Adjusted EBITDA necessary for us to have sufficient cash available for distribution to pay the full quarterly distribution at the initial distribution rate. However, this information is not fact and should not be relied upon as being necessarily indicative of future results, and readers of this prospectus are cautioned not to place undue reliance on the prospective financial information.

Neither our independent auditors, nor any other independent accountants, have compiled, examined, or performed any procedures with respect to the prospective financial information contained herein, nor have they expressed any opinion or any other form of assurance on such information or its achievability, and assume no responsibility for, and disclaim any association with, the prospective financial information.

Our pro forma available cash for fiscal 2005 would have been sufficient to pay the initial quarterly distribution of $0.185 per unit on all units to be outstanding following the completion of this offering. If we had completed the transactions contemplated in this prospectus on January 1, 2005, our pro forma available cash for the year ended December 31, 2005 would have been approximately $101.0 million. This amount would have been sufficient to pay the full initial distribution amount of $44.3 million on all our common units for this twelve-month period.

Pro forma cash available for distribution includes estimated incremental general and administrative expenses we will incur as a result of being a publicly traded limited partnership, such as costs associated with annual and quarterly reports to unitholders, tax return and Schedule K-1 preparation and distribution, investor relations, registrar and transfer agent fees, director compensation and incremental insurance costs, including director and officer liability and business interruption insurance. We expect these incremental general and administrative expenses initially to total approximately $1.5 million per year.

The pro forma financial statements, upon which pro forma cash available for distribution is based, do not purport to present our results of operations had the transactions contemplated in this prospectus actually been completed as of the dates indicated. Furthermore, cash available for distribution is a cash accounting concept, while our pro forma financial statements have been prepared on an accrual basis. We derived the amounts of pro forma cash available for distribution shown above in the manner described in the table below. As a result, the amount of pro forma cash available for distribution should only be viewed as a general indication of the amount of cash available for distribution that we might have generated had we been formed in earlier periods.

Index to Financial Statements

The following table illustrates, on a pro forma basis, for the year ended December 31, 2005, the amount of available cash that would have been available for distributions to our unitholders, assuming in each case that this offering had been consummated at the beginning of such period. Each of the pro forma adjustments presented below is explained in the footnotes to such adjustments.

Alliance Holdings GP, L.P.

Unaudited Pro Forma Consolidated Available Cash


	Year Ended December 31,
	2005
	(in thousands except per unit data)
Net Cash Provided by Operating Activities	$	193,626
Plus:
Interest expense (net of interest income)		11,811
Income tax expense(1)		2,682
Net changes in operating accounts(2)		22,026

Adjusted EBITDA(3)		230,145
Less: Additional expense of being a public company(4)		(1,500	)

Pro Forma Adjusted EBITDA		228,645
Less:
Interest expense (net of interest income)		(11,811	)
Income tax expense(1)		(2,682	)
Maintenance capital expenditures(5)		(56,700	)
Growth capital expenditures(6)		(63,181	)
Principal payments on debt(7)		(18,000	)
Distributions to non-affiliated owners of ARLP(8)		(38,411	)
Plus:
Borrowings under ARLP credit facilities for growth capital expenditures		—
Borrowings for refinance of principal repayments on debt		—
Use of cash reserves for growth capital expenditures(9)		63,181

Pro Forma Consolidated Available Cash of Alliance Holdings GP, L.P.(10)	$	101,041

Expected Cash Distributions:
Expected distribution per AHGP unit	$	0.74

Distributions to our public common unitholders(11)	$	10,268
Distributions to common units held by our management investors and Joseph W. Craft III(11)		34,031

Total distributions(11)	$	44,299

Excess(12)	$	56,742

Debt Covenant Ratios:
Alliance Resource Partners, L.P.
Consolidated Net Debt / Consolidated Cash Flow(13)		0.67x
Consolidated Cash Flow / Consolidated Interest Expense(13)		16.30x

(1)

Our cash income taxes are attributable to federal and state income tax obligations of Alliance Service, Inc., an indirectly wholly-owned subsidiary that provides certain services to a coal synfuel producer. As a partnership, ARLP is not a taxable entity for federal or state income tax purposes; the tax effect of its activities accrues to the unitholders.

Index to Financial Statements

(2)

Primarily reflects changes in operating accounts due to the timing of cash receipts from sales and cash payments for purchases and other operating expenses near the end of each period. ARLP is able to use its cash reserves and available credit to satisfy its working capital needs. Consequently, we do not reflect any adjustments to cash available for distribution as a result of components of operating accounts.

(3)	We define Adjusted EBITDA as net income before net interest expense, income taxes, depreciation, depletion and amortization and affiliate and non-affiliate non-controlling interest in consolidated partnership’s net income.

(4)

Reflects an adjustment to our Adjusted EBITDA for $1.5 million in estimated incremental general and administrative expenses associated with being a publicly traded limited partnership, including, among other things, costs associated with annual and quarterly reports to unitholders, tax return and Schedule K-1 preparation and distribution, registration and transfer agent fees, board of director compensation and incremental insurance costs, including director and officer liability insurance.

(5)

Represents actual maintenance capital expenditures of $56.7 million for the fiscal year ending December 31, 2005. Pursuant to the terms of the ARLP partnership agreement, an estimate of average maintenance capital expenditures necessary to the maintain ARLP’s operating capacity over the long term is deducted in determining the amount of operating surplus that is available for distribution to its partners. This estimate is used because actual capital expenditures can vary widely from year to year as a result of the expansion of an existing mine or the acquisition and development of a new mine. Estimated maintenance capital expenditures for the fiscal year ended December 31, 2005 were $50 million.

(6)	Growth capital expenditures for the fiscal year ended December 31, 2005 were $63.2 million. The growth capital expenditures for the fiscal year ended December 31, 2005 includes capital expenditures primarily related to the development of the Elk Creek, Van Lear and Mountain View mines.

(7)	Reflects the principal payment on ARLP’s indebtedness for the fiscal year ended December 31, 2005. Our consolidated principal debt maturities for each of the fiscal years ended December 31 would be as follows (in thousands):


2006	$	18,000
2007	$	18,000
2008	$	18,000
2009	$	18,000
2010	$	18,000
Thereafter	$	72,000

(8)	Reflects the cash distributions from ARLP to its current unitholders other than us based upon the most recently paid quarterly distribution of $0.46 per unit or $1.84 per unit on an annualized basis.

(9)

ARLP has historically financed its growth capital expenditures through the use of cash reserves and external financing alternatives, including borrowings under its credit facilities and the public and private capital markets. In the future, ARLP anticipates that it will continue to utilize cash reserves and these external sources of financing to fund its growth strategy.

(10)	Includes undistributed cash at ARLP of $56.7 million.

(11)

The table below sets forth the assumed number of outstanding common units upon the closing of this offering, assuming the full exercise of the underwriters’ option to purchase additional common units, and the estimated per unit and aggregate distribution amounts payable on such units during the year following the closing of this offering at our initial distribution rate.


	Number of Common Units	Distributions
	Number of Common Units	Per Unit		Aggregate
Estimated distributions on publicly held common units	13,875,000	$	0.74	$	10,267,500
Estimated distributions on common units held by management investors and Joseph W. Craft III	45,988,000	$	0.74	$	34,031,120

Total	59,863,000			$	44,298,620

(12)	If ARLP distributed an additional $56.7 million, we would receive 71.3%, or $40.5 million, of this amount.

Index to Financial Statements

(13)

The ARLP Revolving Credit Facility and Note Purchase Agreement requires that the ratio of ARLP’s Consolidated Net Debt (as defined in the Revolving Credit Facility and Note Purchase Agreement for ARLP) to ARLP’s Consolidated Cash Flow (as defined in the Revolving Credit Facility and Note Purchase Agreement for ARLP) for the four fiscal quarters most recently ended must be no greater than 3.00 to 1.00 in the Revolving Credit Facility and 4.00 to 1.00 in the Note Purchase Agreement. You should note that ARLP’s Consolidated Net Debt to ARLP’s Consolidated Cash Flows for purposes of ARLP’s financial covenants includes only the operations of ARLP and its subsidiaries and excludes our operations and those of our subsidiaries that are not subsidiaries of ARLP. In addition, this Revolving Credit Facility and Note Purchase Agreement requires that the ratio of ARLP’s Consolidated Cash Flow to ARLP’s Consolidated Interest Expense (as defined in the Revolving Credit Facility and Note Purchase Agreement for ARLP) for the four fiscal quarters most recently ended must not be less than 4.00 to 1.00 in the Revolving Credit Facility and 2.25 to 1.00 in the Note Purchase Agreement. As indicated in the table, ARLP’s Consolidated Cash Flow would have been sufficient to satisfy the ratios required by ARLP’s Revolving Credit Facility and Note Purchase Agreement to permit the payment to us of cash distributions sufficient to enable us to make our intended distribution.

Estimated Cash Available for Distributions

In order to pay the quarterly distribution to our common unitholders at our initial distribution rate of $0.185 per unit per quarter, we estimate that our Adjusted EBITDA for the twelve months ending March 31, 2007 must be at least $176.1 million. We define Adjusted EBITDA as net income before net interest expense, income taxes, depreciation, depletion and amortization and interests of affiliated and non-affiliated non-controlling partners in consolidated partnership’s net income. Adjusted EBITDA should not be considered an alternative to net income, income before income taxes, cash flows from operating activities or any other measure of financial performance calculated in accordance with accounting principles generally accepted in the United States, as those items are used to measure operating performance, liquidity or ability to service debt obligations.

In the table below entitled “Estimated Cash Available to Pay Distributions,” we estimate that our Adjusted EBITDA will be at least $176.1 million for the four fiscal quarters ended March 31, 2007. We refer to this amount as our “Estimated Minimum Consolidated Adjusted EBITDA.” We have also determined that if our Adjusted EBITDA for such period is at or above our estimate, ARLP would be permitted under its credit facilities to pay sufficient cash distributions to us to enable us to make distributions to our unitholders at the initial distribution rate of $0.185 per unit per quarter. In addition, we expect that we will be permitted to make cash distributions at this level under any restricted payment covenants in our anticipated credit facility.

In developing our Estimated Minimum Consolidated Adjusted EBITDA, we have included estimated maintenance and growth capital expenditures for the four fiscal quarters ended March 31, 2007. Maintenance capital expenditures are capital expenditures made on an ongoing basis to maintain current operations, which do not increase operating capacity or revenues from existing levels. Growth capital expenditures consist of capital expenditures we expect to make to expand the operating capacity of our current operations.

We believe we will generate at least the Estimated Minimum Consolidated Adjusted EBITDA of $176.1 million for the twelve months ending March 31, 2007. This amount is approximately $52.6 million less than the pro forma Adjusted EBITDA we recorded for the year ended December 31, 2005. In order for us to generate the Estimated Minimum Consolidated Adjusted EBITDA, we believe that ARLP must achieve a minimum base level of $177.6 million in Adjusted EBITDA for the twelve months ending March 31, 2007. For the twelve months ended December 31, 2005, ARLP generated $230.1 million in Adjusted EBITDA.

Our minimum base level estimate of $176.1 million in Adjusted EBITDA for the twelve months ending March 31, 2007 is intended to be an indicator or benchmark of the amount management considers to be the lowest amount of Adjusted EBITDA needed to generate sufficient available cash to make cash distributions to our common unitholders at our initial distribution rate of $0.185 per common unit per

Index to Financial Statements

quarter (or $0.74 per common unit on an annualized basis). The baseline estimates of Adjusted EBITDA should not be viewed as management’s projection of operating earnings of us or ARLP. Our management believes that our actual Adjusted EBITDA earned during the twelve months ending March 31, 2007 will meet or exceed the minimum base level amount.

You should read “—Assumptions and Considerations” below for a discussion of the material assumptions underlying this belief, which reflect our judgment of conditions we expect to exist and the course of action we expect to take. If our estimate is not achieved, we may not be able to pay the minimum quarterly distribution on all our units. We can give you no assurance that our assumptions will be realized or that we will generate $176.1 million in Adjusted EBITDA. There will likely be differences between our estimates and the actual results we will achieve and those differences could be material. If we do not generate the Estimated Minimum Consolidated Adjusted EBITDA or if our capital expenditures, interest expense or income tax expense are higher than estimated, we may not be able to pay the initial quarterly distribution on our common units. When considering our ability to generate the Estimated Minimum Consolidated Adjusted EBITDA of $176.1 million, you should keep in mind the risk factors and other cautionary statements under the heading “Risk Factors” and elsewhere in this prospectus. Any of these factors or the other risks discussed in this prospectus could cause our available cash to vary significantly from the amount set forth below.

Alliance Holdings GP, L.P.

Estimated Cash Available to Pay Distributions


	Twelve Months Ending March 31, 2007
	(in thousands, except per unit data)
Estimated Minimum Consolidated Adjusted EBITDA(1)	$	176,068

Less:
Interest expense(2)		(13,158	)
Principal payments on debt(3)		(18,000	)
Income tax expense(4)		(2,800	)
Estimated maintenance capital expenditures(5)		(59,400	)
Growth capital expenditures(6)		(100,600	)
Acquisition capital expenditures(7)		—
Distributions to non-affiliated owners of ARLP(8)		(38,411	)
Plus:
Net borrowings under loan agreements(9)		19,304
Proceeds from equity offering(9)		—
Use of cash reserves for growth capital expenditures(9)		81,296

Estimated Cash Available to Pay Distributions by Alliance Holdings GP, L.P.	$	44,299

Expected Cash Distributions by Alliance Holdings GP, L.P.(10)	$	44,299

Expected distributions per common unit	$	0.74

Distributions to our general partner		—
Distributions to our public common unitholders(10)		10,268
Distributions to common units held by the management investors and Joseph W. Craft III(10)		34,031

Total distributions(10)	$	44,299

Debt Covenant Ratios:

Alliance Resource Partners, L.P.
Consolidated Net Debt/Consolidated Cash Flow(11)		0.93x
Consolidated Cash Flow/Consolidated Interest Expense(11)		13.38x

Index to Financial Statements

(1)

This amount represents the estimated minimum amount of Adjusted EBITDA that we will need to generate for the twelve months ended March 31, 2007 in order to pay cash distributions to our unitholders at our initial distribution rate of $0.185 per unit per quarter. We believe that our Estimated Minimum Consolidated Adjusted EBITDA for the twelve months ending March 31, 2007 will be not less than $176.1 million. Please read “—Assumptions and Considerations,” below for discussion of the material assumptions underlying this belief, which reflect our judgment of conditions we expect to exist and the course of action we expect to take.

(2)	Our estimated interest expense is comprised of the following components:

(i)

Approximately $12.6 million associated with approximately $162.0 million in outstanding ARLP senior notes. The senior notes bear interest at a fixed rate of 8.31%. These senior notes mature in August 2014 and amortize $18 million annually.

(ii)

Approximately $0.6 million of interest expense on other ARLP borrowings at variable rates of interest, ranging between 5.89% and 8.31%.

(3)	Represents $18.0 million of principal payments on ARLP’s indebtedness. The consolidated principal payment requirements for each of the fiscal years ending December 31 is anticipated to be as follows (in millions):


2006	$	18.0
2007	$	18.0
2008	$	18.0
2009	$	18.0
2010	$	18.0
Thereafter	$	72.0

(4)	Our estimated income tax expense is attributable to federal and state income tax obligations of Alliance Service Inc., a wholly-owned subsidiary that provides certain services to a coal synfuel producer.

(5)

We currently expect that our consolidated estimated maintenance capital expenditures will be approximately $59.4 million for the twelve month period ending March 31, 2007 in comparison to our estimated $56.7 million in the fiscal year ended December 31, 2005. The increased expected maintenance capital expenditures for the twelve month period ending March 31, 2007 primarily reflects incremental costs associated with maintaining ARLP’s expanded production capacity to meet customer requirements. Our estimated consolidated maintenance capital expenditures should enable ARLP to support production of up to 24.4 million tons in the projected period.

(6)

This reflects our anticipated expenditure of $100.6 million for growth capital for the twelve month period ending March 31, 2007. During the fiscal years ended December 31, 2004 and December 31, 2005, we expended $23.1 million and $63.2 million respectively of growth capital on projects associated with, among other things, the purchase of mining equipment that expanded production capacity for ARLP’s mining operations as well as the construction of the Elk Creek, Van Lear and Mountain View underground mines.

Our anticipated consolidated growth capital expenditures of approximately $100.6 million for the twelve month period ending March 31, 2007 consists primarily of capital expenditures related to completing ARLP’s Elk Creek underground mine in western Kentucky ($35.8 million), development associated with the Mountain View mine in West Virginia ($29.0 million), construction of a rail loadout facility at Gibson County ($17.2 million), completion of the transition to the Van Lear seam at Pontiki ($6.3 million), development costs associated with the Tunnel Ridge and Gibson South projects ($4.8 million) and various efficiency projects at ARLP’s mining operations ($7.5 million). We are evaluating the amount of growth capital expenditures for the years 2006 and 2007 associated with the development of Penn Ridge. We are estimating total capital expenditures required to develop Penn Ridge to be approximately $165.0 million over a five-year period, substantially in periods after March 31, 2007.

Index to Financial Statements

(7)

Consistent with its acquisition strategy, ARLP is continuously pursuing strategic acquisitions that it expects to be accretive to its earnings. Since the inception of ARLP’s predecessor in 1996 and through December 31, 2005, ARLP has acquired two coal mining operations for cash and assumed debt of $37.0 million. While ARLP expects to continue to pursue acquisitions during its twelve month period ending March 31, 2007, because of the uncertain nature of the acquisition environment, we have not included an estimate of future acquisition capital expenditure requirements. If ARLP is successful in completing additional acquisitions, ARLP anticipates its primary source of consideration will be its cash reserves and through commercial borrowings, other debt and common unit issuances. If ARLP is unable to finance its growth through external sources or is unable to achieve its targeted debt/equity ratios, our cash available to pay distributions may be negatively impacted.

(8)	Reflects the cash distributions from ARLP to its unitholders, other than us, based upon the current quarterly distribution of $0.46 per unit for each quarter during the four-quarter period ending March 31, 2007, or $1.84 per unit on an annualized basis.

(9)

ARLP has historically financed growth capital expenditures and acquisitions primarily through the use of existing cash reserves. External financing sources, including borrowings under its credit facilities and the issuance of debt and equity securities, have been sourced at the discretion of the general partner, to the extent cash reserves are insufficient to finance growth capital expenditures and acquisition costs, or the terms of such financing were attractive. ARLP defines cash reserves as cash and cash equivalents plus marketable securities. As of December 31, 2005 cash reserves for ARLP totaled $81.3 million which consisted of cash and cash equivalents of $32.1 million and marketable securities of $49.2 million. Because assumed growth capital expenditures plus acquisitions totalling $100.6 million for the twelve month period ended March 31, 2007 is greater than ARLP’s cash reserve balance of $81.3 million at December 31, 2005, we have assumed these expenditures are funded by ARLP with a combination of its cash reserves ($81.3 million) and borrowing under its revolving credit facility ($19.3 million). ARLP, however, may elect to fund these projects with additional borrowings under loan agreements or with proceeds from equity offerings.

(10)	Represents the amount required to fund distributions to our unitholders for four quarters based upon our initial cash distribution rate of $0.185 per unit ($0.74 per unit annually) and assuming the underwriters’ option to purchase additional common units has been exercised in full.

(11)

Assumptions and Considerations

We believe that our partnership interests in ARLP will generate sufficient cash flow to enable us to pay our initial quarterly distribution of $0.185 per unit on all of our units for the four quarters ending March 31, 2007.

Index to Financial Statements

Our belief is based on a number of current assumptions that we believe to be reasonable over the next four quarters.

You should read the following assumptions and considerations for a discussion of the material assumptions underlying our belief that we will be able to generate our Estimated Minimum Consolidated Adjusted EBITDA. Our belief is based on certain assumptions and reflects our judgment of conditions we expect to exist and the course of action we expect to take. The assumptions disclosed herein are those that we believe are significant to our ability to generate the Estimated Minimum Consolidated Adjusted EBITDA.

Assuming the transactions contemplated in this prospectus were completed on April 1, 2006, we believe that our Estimated Minimum Consolidated Adjusted EBITDA for the twelve months ending March 31, 2007 will be not less than $176.1 million. This amount of Estimated Minimum Consolidated Adjusted EBITDA is approximately $52.6 million less than the pro forma Adjusted EBITDA we generated for the fiscal year ended December 31, 2005. In order for us to generate the Estimated Consolidated Adjusted EBITDA, we believe that ARLP must achieve a minimum base level of $177.6 million in Adjusted EBITDA.

Our Estimated Minimum Consolidated Adjusted EBITDA is based on a number of significant assumptions that are set forth below:

•

ARLP will pay a quarterly cash distribution of $0.46 per ARLP common unit for each of the four quarters in the four-quarter period ending March 31, 2007, which quarterly distribution is equal to the most recently paid cash distribution of $0.46 per unit for the quarter ended December 31, 2005. As a result, we estimate that the amount of cash distribution that we will receive from ARLP each quarter will be equal to or greater than $11.1 million during this period, including the distribution we will receive on our 1.98% general partner interest and incentive distribution rights. We have also assumed that Alliance Resource Management GP, LLC will maintain its aggregate 1.98% general partner interest in ARLP by making proportionate cash contributions to ARLP in connection with ARLP’s equity issuances.

•

ARLP will sell a minimum of 21.0 million tons of coal production for the twelve months ending March 31, 2007 as compared to 22.8 million tons sold for the twelve months ended December 31, 2005.

•

ARLP will receive an average price per ton of coal sold of $33.00 for the twelve months ending March 31, 2007 as compared to $35.07 for the twelve months ended December 31, 2005.

•

ARLP’s operating expenses will not exceed $515.4 million based on 21.0 million tons of production.

•

ARLP’s consolidated cash interest expense will not exceed approximately $13.2 million for the twelve month period ending March 31, 2007.

•

ARLP’s estimated income tax expense will not exceed $2.8 million.

•

ARLP’s estimated maintenance capital expenditures will not exceed $59.4 million for the twelve month period ending March 31, 2007 as compared to ARLP’s maintenance capital expenditures of $31.6 million for the fiscal year ended December 31, 2005. The increased expected maintenance capital expenditures for the twelve month period ending March 31, 2007 primarily reflects incremental costs associated with maintaining ARLP’s expanded production capacity to meet customer requirements. Our estimated consolidated maintenance capital expenditures should enable ARLP to support production of up to 24.4 million tons in the projected period.

•

ARLP’s growth capital expenditures will not exceed $100.6 million for the twelve month period ending March 31, 2007 as compared to ARLP’s growth capital expenditures of $63.2 million for the fiscal year ended December 31, 2005. Our anticipated growth capital expenditures primarily relate to the development of ARLP’s Elk Creek mine in Western Kentucky ($35.8 million) and Mountain View mine in West Virginia ($29.0 million), construction of a rail loadout facility at Gibson County ($17.2 million), completion of the transition to the Van Lear seam at Pontiki ($6.3 million), development costs

Index to Financial Statements

associated with the Tunnel Ridge and Gibson South projects ($4.8 million) and various efficiency projects at ARLP’s mining operations ($7.5 million). We are evaluating the amount of growth capital expenditures for the years 2006 and 2007 associated with the development of Penn Ridge. We are estimating total capital expenditures required to develop Penn Ridge to be approximately $165.0 million over a five-year period, substantially in periods after March 2007.

•

Our incremental general and administrative expenses associated with public company reporting and filing requirements will not exceed $1.5 million for the twelve month period ending March 31, 2007.

•

There will not be any new federal, state or local regulation of portions of the energy industry in which we and ARLP operate, or a new interpretation of existing regulation, that will be materially adverse to our or ARLP’s business.

•

Market, regulatory, insurance and overall economic conditions will not change substantially.

We cannot assure you that any of the assumptions summarized above, or any other assumptions upon which Estimated Minimum Consolidated Adjusted EBITDA is based, will prove to be correct. If the assumptions are incorrect, we may not have sufficient cash to make the contemplated distributions. While we believe that these assumptions are reasonable in light of our current beliefs concerning future events, the assumptions underlying our Estimated Minimum Consolidated Adjusted EBITDA are inherently uncertain and are subject to significant business, economic, regulatory and competitive risks and uncertainties that could cause actual results to differ materially from those we anticipate. If our assumptions are not realized, the actual available cash that we materially from those we anticipate. If our assumptions are not realized, the actual available cash that we generate could be substantially less than that currently expected and could, therefore, be insufficient to permit us to make distributions on the common units at the initial distribution rate, or at any level, in which event the market price of the common units may decline materially. Consequently, the statement that we believe that we will have sufficient available cash to pay the initial distribution on the common units for each quarter through March 31, 2007 should not be regarded as a representation by us or the underwriters or any other person that we will make such a distribution.

Our Sources of Distributable Cash

Our only cash-generating assets currently consist of our partnership interests in ARLP. Therefore, our cash flow and resulting ability to make distributions initially will be completely dependent upon the ability of ARLP to make distributions in respect of those interests and rights. The actual amount of cash that ARLP will have available for distribution will primarily depend on the amount of cash it generates from operations. The actual amount of this cash will fluctuate from quarter to quarter based on certain factors, including:

•

fluctuations in cash flow generated by ARLP’s operating activities;

•

the level of capital expenditures ARLP makes;

•

the cost of capital used to fund any acquisitions;

•

debt service requirements;

•

fluctuations in working capital needs;

•

restrictions on distributions contained in ARLP’s credit facility and senior notes;

•

ARLP’s ability to borrow under its working capital facility to make distributions;

•

prevailing economic conditions; and

•

the amount, if any, of cash reserves established by ARLP’s managing general partner in its discretion for the proper conduct of its business.

Index to Financial Statements

As ARLP makes quarterly distributions to its partners, we receive our share of such distributions in proportion to our ownership interests in ARLP. Upon completion of this offering, we will own, directly or indirectly:

•

a 1.98% general partner interest in ARLP, which we hold through our ownership interests in Alliance Resource Management GP, LLC, ARLP’s managing general partner;

•

the outstanding incentive distribution rights in ARLP, which we hold through our ownership interests in Alliance Resource Management GP, LLC;

•

15,550,628 common units of ARLP; and

•

a 0.001% managing interest in Alliance Coal, LLC.

Our Incentive Distribution Rights Related to ARLP’s Cash Distributions. The incentive distribution rights we own in ARLP represent our right to receive an increasing percentage of ARLP’s quarterly distributions of available cash from operating surplus after ARLP has made cash distributions in excess of its first target distribution level. If for any quarter ARLP has distributed available cash from operating surplus to its common unitholders in an amount equal to its minimum quarterly distribution, then ARLP will distribute any additional available cash from operating surplus for that quarter among its unitholders and ARLP’s general partners in the following manner:

•

First, 98% to all unitholders of ARLP, in accordance with their percentage interests, and 2% to the general partners, until each outstanding unit has received $0.275 per unit for such quarter (the “minimum quarterly distribution”);

•

Second, 85% to all unitholders of ARLP, in accordance with their percentage interests, 2% to the general partners, pro rata, and 13% to the managing general partner until each outstanding unit has received $0.3125 per unit for such quarter (the “second target cash distribution”);

•

Third, 75% to all unitholders of ARLP, in accordance with their percentage interests, 2% to the general partners, pro rata, and 23% to the managing general partner until each outstanding unit has received $0.375 per unit for such quarter (the “third target cash distribution”); and

•

Thereafter, 50% to all unitholders of ARLP, in accordance with their percentage interests, 2% to the general partners, pro rata, and 48% to the managing general partner.

Hypothetical Allocations of Distributions to Our Unitholders and ARLP’s Unitholders. The table set forth below illustrates the percentage allocations among (i) the owners of ARLP, other than us, and (ii) Alliance Holdings GP, L.P. as a result of certain assumed quarterly distribution payments per common unit made by ARLP, including the target distribution levels contained in ARLP’s partnership agreement. This information assumes:

•

ARLP has 36,426,306 common units outstanding; and

•

we own (i) 15,550,628 ARLP common units, comprising approximately 42.7% of the outstanding common units in ARLP, (ii) a 1.98% general partner interest in ARLP and (iii) the incentive distribution rights of ARLP.

The percentage interests shown for us and the other ARLP unitholders for the minimum quarterly distribution amount are also applicable to distribution amounts that are less than the minimum quarterly distribution. The amounts presented below are intended to be illustrative of the way in which we are entitled to

Index to Financial Statements

an increasing share of distributions from ARLP as total distributions from ARLP increase and are not intended to represent a prediction of future performance.


Distribution Level	ARLP Quarterly Distribution Per Unit		Distributions to Owners of ARLP Other Than Us as a Percentage of Total Distributions		Distributions to Alliance Holdings GP, L.P. as a Percentage of Total Distributions
Minimum Quarterly Distribution	$	0.2500	56.2	%	43.8	%
First Target Distribution	$	0.2750	56.2	%	43.8	%
Second Target Distribution	$	0.3125	55.2	%	44.8	%
Third Target Distribution	$	0.3750	52.7	%	47.3	%
Other Hypothetical Distributions	$	0.5000	43.6	%	56.4	%

Index to Financial Statements

SELECTED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA

The historical financial data of ARM GP below were derived from its audited consolidated financial statements as of and for the years ended December 31, 2003, 2004 and 2005 and as of May 8, 2002 and December 31, 2002 and for the period from January 1, 2002 to May 8, 2002 and the period from May 9, 2002 to December 31, 2002 and unaudited consolidated financial statements as of and for the year ended December 31, 2001. ARLP acquired Warrior Coal, LLC from ARH Warrior Holdings, Inc., a subsidiary of Alliance Resource Holdings, Inc., the owner of the special general partner of ARLP, in February 2003. Because the Warrior acquisition was between entities under common control, it is accounted for at historical cost in a manner similar to that used in a pooling of interests. Accordingly, the financial statements as of December 31, 2001, May 8, 2002 and December 31, 2002, and for the year ended December 31, 2001, the period from January 1, 2002 to May 8, 2002 and the period from May 9, 2002 to December 31, 2002 reflect the combined historical results of operations, financial position, and cash flows of ARLP and Warrior Coal, LLC. ARH Warrior Holdings, Inc. acquired the assets that comprise Warrior Coal, LLC on January 26, 2001.

Effective May 9, 2002, 74.1% of ARM GP’s members’ interests were acquired by AMH II, LLC in a business combination using the purchase method of accounting. The purchase price was allocated to the assets acquired and the liabilities assumed based on their fair values. Accordingly, the financial data prior to May 9, 2002 are not necessarily comparable to the financial data subsequent to May 8, 2002.

ARM GP has not had any operating activities apart from those conducted by ARLP. ARM GP’s cash flows currently consist of distributions from ARLP on the partnership interests, including incentive distribution rights, that we own. Accordingly, the selected historical consolidated financial data set forth in the table on the following page primarily reflect the operating activities and results of operations of ARLP.

Our summary unaudited pro forma financial information gives effect to the following transactions:

•

the sale of 12,500,000 common units in this offering and related use of proceeds;

•

the issuance of 20,641,168 of our common units to Alliance Resource GP, LLC, the special general partner of ARLP, in exchange for 15,310,622 ARLP common units; and

•

Index to Financial Statements

The pro forma balance sheet data below assumes that the offering and the related transactions occurred as of December 31, 2005. The pro forma financial and operating data below assumes this offering and the related transactions occurred on January 1, 2005.

We derived the data in the following table from, and it should be read together with and is qualified in its entirety by reference to, the historical and pro forma consolidated financial statements and the accompanying notes included in this prospectus. Historical financial data for the year ended December 31, 2001 was derived from unaudited consolidated financial statements. The table should also be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”


	Predecessor						Successor
				The Period January 1, 2002 to May 8,			The Period May 9, 2002 to December 31,			Year Ended December 31,									Pro Forma
	Year Ended December 31,			The Period January 1, 2002 to May 8,			The Period May 9, 2002 to December 31,			Year Ended December 31,									Year Ended December 31,
	2001			2002			2002			2003			2004			2005			2005
	(unaudited)			(audited)						(audited)									(unaudited)
	(in millions, except per ton data)
Statements of Operations:
Sales and operating revenues:
Coal sales	$	453.1		$	162.4		$	317.2		$	501.6		$	599.4		$	768.9		$	768.9
Transportation revenues		18.2			6.8			12.2			19.5			29.8			39.1			39.1
Other sales and operating revenues		6.2			6.3			14.1			21.6			24.1			30.7			30.7

Total revenues		477.5			175.5			343.5			542.7			653.3			838.7			838.7

Expenses:
Operating expenses		337.2			116.7			250.9			368.8			436.4			521.5			521.5
Transportation expenses		18.2			6.8			12.2			19.5			29.8			39.1			39.1
Outside purchases		28.9			3.9			6.1			8.5			9.9			15.1			15.1
General and administrative		18.7			7.4			13.0			28.3			45.4			33.5			33.5
Depreciation, depletion and amortization		50.7			18.3			34.1			52.5			53.7			55.6			55.6
Interest expense		16.9			5.8			10.6			16.0			15.0			11.8			11.8
Net gain from insurance settlement(1)		—			—			—			—			(15.2	)		—			—

Total expenses		470.6			158.9			326.9			493.6			575.0			676.6			676.6

Income (loss) from operations		6.9			16.6			16.6			49.1			78.3			162.1			162.1
Other income (expense)		0.8			0.6			(0.1	)		1.4			1.1			0.6			0.6

Income before income taxes and cumulative effect of accounting change and non-controlling interest		7.7			17.2			16.5			50.5			79.4			162.7			162.7
Income tax expense (benefit)		(0.8	)		0.2			(1.3	)		2.6			2.7			2.7			2.7

Income before cumulative effect of accounting change and non-controlling interest		8.5			17.0			17.8			47.9			76.7			160.0			160.0
Cumulative effect of accounting change(2)		7.9			—			—			—			—			—			—

Income before non-controlling interest		16.4			17.0			17.8			47.9			76.7			160.0			160.0
Affiliate non-controlling interest in consolidated partnership’s net income		(8.4	)		(8.3	)		(9.7	)		(21.1	)		(31.8	)		(63.3	)		(0.1	)
Non-affiliate non-controlling interest in consolidated partnership’s net income		(8.3	)		(8.2	)		(9.4	)		(26.5	)		(41.5	)		(84.3	)		(84.3	)

Net income (loss)	$	(0.3	)	$	0.5		$	(1.3	)	$	0.3		$	3.4		$	12.4		$	75.6

Index to Financial Statements


	Predecessor						Successor
				The Period January 1, 2002 to May 8,			The Period May 9, 2002 to December 31,			Year Ended December 31,									Pro Forma
	Year Ended December 31,			The Period January 1, 2002 to May 8,			The Period May 9, 2002 to December 31,			Year Ended December 31,									Year Ended December 31,
	2001			2002			2002			2003			2004			2005			2005
	(unaudited)			(audited)						(audited)									(unaudited)
	(in millions, except per ton data)
Balance Sheet Data:
Working capital (deficit)	$	0.4		$	7.6		$	(15.7	)	$	16.4		$	54.2		$	76.1		$	76.1
Total assets		311.8			331.1			317.2			336.6			412.9			532.8			532.8
Long-term debt		211.3			216.3			195.0			180.0			162.0			144.0			144.0
Total liabilities		349.8			367.5			355.7			323.9			357.6			376.9			376.9
Total non-controlling interest		(53.0	)		(51.8	)		(45.9	)		18.4			60.6			158.0			(33.7	)
Members’ capital (deficiency in capital)		15.0			15.4			7.4			(5.8	)		(5.3	)		(2.2	)		189.6
Other Operating Data:
Tons sold		18.6			6.2			12.2			19.5			20.8			22.8			22.8
Tons produced		17.4			7.0			11.0			19.2			20.4			22.3			22.3
Revenues per ton sold(3)	$	24.69		$	27.19		$	27.16		$	26.83		$	29.98			$35.07		$	35.07
Cost per ton sold(4)	$	20.69		$	20.66		$	22.11		$	20.80		$	23.64			$25.00		$	25.00
Other Financial Data:
Net cash provided by operating activities	$	70.4		$	19.2		$	82.3		$	110.3		$	145.2		$	193.6
Net cash used in investing activities		(31.1	)		(21.2	)		(35.7	)		(77.8	)		(77.6	)		(110.2	)
Net cash used in financing activities		(34.2	)		(2.5	)		(45.4	)		(31.5	)		(46.5	)		(82.6	)
Maintenance capital expenditures(5)		24.4			10.4			18.6			30.0			31.6			56.7			56.7

(1)

Represents the net gain from the final settlement with ARLP’s insurance underwriters for claims relating to the Dotiki Mine Fire Incident. Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Dotiki Fire Incident” for a description of the accounting treatment of expenses and insurance proceeds associated with the Dotiki Fire Incident.

(2)	Represents the cumulative effect of the change in the method of estimating coal workers’ pneumoconiosis (“black lung”) benefits liability effective January 1, 2001. Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies.”

(3)	Revenues per ton sold are based on the total of coal sales and other sales and operating revenues divided by tons sold.

(4)	Cost per ton sold is based on the total of operating expenses, outside purchases and general and administrative expenses divided by tons sold.

(5)

ARLP’s maintenance capital expenditures, as defined under the terms of ARLP’s partnership agreement, are those capital expenditures required to maintain, over the long-term, the operating capacity of ARLP’s capital assets. Maintenance capital expenditures for ARLP’s predecessor reflect our historical designation of maintenance capital expenditures. Maintenance capital expenditures for the year ended December 31, 2001 and for the period from January 1, 2002 to May 8, 2002 and the period from May 9, 2002 to December 31, 2002 have not been restated to include Warrior.

Index to Financial Statements

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion of Alliance Holdings GP’s financial condition and results of operations in conjunction with the historical consolidated financial statements and notes thereto included elsewhere in this prospectus. For more detailed information regarding the basis of presentation for the following information, you should read the notes to the historical financial statements included elsewhere in this prospectus. In addition, you should read “Forward-Looking Statements” and “Risk Factors” for information regarding some of the risks inherent in our and ARLP’s businesses.

Overview

Financial Presentation. We reflect our ownership interest in ARLP on a consolidated basis, which means that our financial results are combined with ARLP’s financial results and the results of our other subsidiaries. The non-controlling limited partner interests in ARLP will be reflected as an expense in our results of operations. We initially will have no separate operating activities apart from those conducted by ARLP, and our cash flows currently consist of distributions from ARLP on the partnership interests, including the incentive distribution rights, that we own. Our historical consolidated results of operations reflect the results of operations of ARM GP, our wholly-owned subsidiary. Throughout this discussion, when we refer to “our” consolidated results of operations, we are referring to the results of operations of ARM GP. ARM GP’s results of operations principally reflect the results of operations of ARLP adjusted for non-controlling partners interest in ARLP’s net income. Accordingly, the discussion of our financial position and results of operations in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” reflects the operating activities and results of operations of ARLP. The historical results of our operations do not reflect the incremental expenses we expect to incur as a result of being a publicly traded partnership.

General. We are a Delaware limited partnership. Our cash generating assets consist of our partnership interests in Alliance Resource Partners, L.P. (NASDAQ: ARLP), a publicly traded limited partnership engaged in the production and marketing of coal to major United States utilities and industrial users. Our aggregate partnership interests in ARLP will initially consist of the following:

•

a 1.98% general partner interest in ARLP, which we hold through our 100% ownership interest in Alliance Resource Management GP, LLC, ARLP’s managing general partner;

•

the incentive distribution rights in ARLP, which we hold through our 100% ownership interest in Alliance Resource Management GP, LLC;

•

15,550,628 common units of ARLP, representing approximately 42.7% of the common units of ARLP; and

•

a 0.001% managing interest in Alliance Coal, LLC.

Index to Financial Statements

(3) continuing to make productivity improvements in order to be a safe, low-cost producer in each region in which it operates and (4) strengthening its position with existing and future customers by offering a broad range of coal qualities, transportation alternatives and customized services.

We intend to support ARLP in implementing its business strategy by assisting it in identifying, evaluating, and pursuing growth opportunities. In the future, we may also support the growth of ARLP through the use of our capital resources, which could involve loans or capital contributions to ARLP to provide funding for the acquisition of a business or asset or for an internal growth project. We may also provide ARLP with other forms of credit support, such as guarantees related to financing a project or other types of support related to a merger or acquisition transaction.

We may support ARLP by pursuing business opportunities that ARLP may desire to pursue, but which it is unable to pursue due to capital constraints, contractual limitations, other pending transactions or other reasons and then offering the opportunity to ARLP at such time as it is able to pursue the opportunity. We will become party to the ARLP omnibus agreement at the closing of this offering, which governs the handling of business opportunities in such situations. Please read “Certain Relationships and Related Party Transactions—ARLP Omnibus Agreement.”

The following table sets forth the distributions that we would have received from ARLP during the period indicated and assumes the contribution transactions to be completed concurrent with the closing of this offering had they occurred as of the first day of such periods. These distributions represent payments that would have been made with respect to our partnership interests, including our incentive distribution rights, as of the date indicated.


	Assumed Cash Distributions Received by Us from ARLP
	Predecessor		Successor
	The Period January 1, 2002 to May 8, 2002		The Period May 9, 2002 to December 31, 2002		Year Ended December 31, 2003		Year Ended December 31, 2004		Year Ended December 31, 2005
	(in thousands)
Distributions on ARLP common units held by us	$	3,910	$	11,729	$	16,358	$	19,352	$	24,492
Distributions from ownership interest in the ARLP general partner		156		467		733		919		1,281
Distributions from ARLP incentive distribution rights		—		—		—		925		6,232

Total	$	4,066	$	12,196	$	17,091	$	21,196	$	32,005

Factors That Significantly Affect our Results. Our only cash-generating assets currently consist of our partnership interests in ARLP. Therefore, our cash flow and resulting ability to make distributions initially will be completely dependent upon the ability of ARLP to make distributions in respect of those interests. The actual amount of cash that ARLP will have available for distribution will primarily depend on the amount of cash it generates from operations.

ARLP’s results of operations are determined primarily by the tons of coal produced and marketed in its regions of operation. ARLP generates its revenues principally pursuant to short-term coal supply contracts (contracts having a term of less than one year) and long-term coal supply contracts (contracts having a term of one year or greater) on which ARLP generates an operating margin. The revenue it earns from these contracts is directly related to the tonnage of coal that is produced or marketed in its operations. The terms of its contracts vary based upon coal quality conditions, the competitive environment at the time the contracts are signed and

Index to Financial Statements

customer requirements. The contract mix may change as a result of changes in customer preferences, expansion in regions where some types of contracts are more common and other market factors.

As is customary in the coal industry, ARLP has entered into long-term contracts with many of its customers. These arrangements are beneficial ARLP and its customers by providing greater predictability of sales volumes and sales prices. In 2005, approximately 86.0% and 81.7% of ARLP’s sales tonnage and total coal sales, respectively, were sold under long-term contracts with maturities ranging from 2005 to 2023. ARLP’s total nominal commitment under significant long-term contracts for existing operations was approximately 117.6 million tons at December 31, 2005, and was expected to be delivered as follows: 20.2 million tons in 2006, 16.5 million tons in 2007, 14.7 million tons in 2008, 13.9 million tons in 2009, 13.9 million tons in 2010 and 38.4 million tons thereafter during the remaining terms of the relevant coal supply agreements. The total commitment of coal under contract is an approximate number because, in some instances, ARLP’s contracts contain provisions that could cause the nominal total commitment to increase or decrease by as much as 20%. The contractual time commitments for customers to nominate future purchase volumes under these contracts are sufficient to allow ARLP to balance ARLP’s sales commitments with prospective production capacity. In addition, the nominal total commitment can otherwise change because of price reopener provisions contained in certain of these long-term contracts.

The terms of long-term contracts are the results of both bidding procedures and extensive negotiations with each customer. As a result, the terms of these contracts vary significantly in many respects, including, among others, price adjustment features, price and contract reopener terms, permitted sources of supply, force majeure provisions, coal qualities, and quantities. Virtually all of ARLP’s long-term contracts are subject to price adjustment provisions, which permit an increase or decrease periodically in the contract price to reflect changes in specified price indices or items such as taxes, royalties or actual production costs. These provisions, however, may not assure that the contract price will reflect every change in production or other costs. Failure of the parties to agree on a price pursuant to an adjustment or a reopener provision may lead to early termination of a contract. Some of the long-term contracts also permit the contract to be reopened to renegotiate terms and conditions other than the pricing terms, and, where a mutually acceptable agreement on terms and conditions cannot be concluded, either party may have the option to terminate the contract. The long-term contracts typically stipulate procedures for quality control, sampling and weighing. Most contain provisions requiring ARLP to deliver coal within stated ranges for specific coal characteristics such as heat, sulfur, ash, moisture, grindability, volatility and other qualities. Failure to meet these specifications can result in economic penalties or termination of the contracts. While most of the contracts specify the approved seams and/or approved locations from which the coal is to be mined, some contracts allow the coal to be sourced from more than one mine or location. Although the volume to be delivered pursuant to a long-term contract is stipulated, the buyers often have the option to vary the volume within specified limits.

In addition, the actual amount of cash that ARLP will have available for distribution will fluctuate from quarter to quarter based on certain additional factors, including:

•

fluctuations in cash flow generated by ARLP’s operating activities;

•

the level of capital expenditures ARLP makes;

•

the cost of capital used to fund any acquisitions;

•

debt service requirements;

•

fluctuations in working capital needs;

•

restrictions on distributions contained in ARLP’s credit facility and senior notes;

•

ARLP’s ability to borrow under its working capital facility to make distributions;

•

prevailing economic conditions; and

Index to Financial Statements

•

the amount, if any, of cash reserves established by ARLP’s managing general partner in its discretion for the proper conduct of its business.

Alliance Resource Partners, L.P.

Alliance Resource Partners, L.P. is a Delaware limited partnership. ARLP’s common units are listed on the Nasdaq National Market under the symbol “ARLP.” ARLP’s business activities are primarily conducted through, and its assets are owned by, its subsidiary Alliance Coal, LLC and its subsidiaries, which are sometimes referred to collectively in this prospectus as Alliance Coal. Alliance Resource Partners, L.P., Alliance Resource Operating Partners, L.P., which we refer to as ARLP’s intermediate partnership, and Alliance Coal are sometimes referred to collectively in this prospectus as ARLP.

Overview of Our Operations

As discussed above, we have no independent operating activities apart from those conducted by ARLP. Accordingly, the overview of our operations primarily reflects the operating activities of ARLP.

ARLP is a diversified producer and marketer of coal to major U.S. utilities and industrial users. In 2005, ARLP’s total production was 22.3 million tons and ARLP’s total sales were 22.8 million tons. The coal ARLP produced in 2005 was approximately 30.0% low-sulfur coal, 14.8% medium-sulfur coal and 55.2% high-sulfur coal. ARLP classifies low-sulfur coal as coal with a sulfur content of less than 1%, medium-sulfur coal as coal with a sulfur content between 1% and 2%, and high-sulfur coal as coal with a sulfur content of greater than 2%.

In 2005, approximately 83.7% of ARLP’s sales tonnage was consumed by electric utilities with the balance consumed by cogeneration plants and industrial users. ARLP’s largest customers in 2005 were Synfuel Solutions Operating, LLC, or SSO, the Tennessee Valley Authority and Mt. Storm Coal Supply. In 2005, approximately 86.0% of ARLP’s sales tonnage, including approximately 85.6% of ARLP’s medium- and high-sulfur coal sales tonnage, was sold under long-term contracts. The balance of ARLP’s sales was made in the spot market. ARLP’s long-term contracts contribute to its stability and profitability by providing greater predictability of sales volumes and sales prices. In 2005, approximately 89.8% of ARLP’s medium- and high-sulfur coal was sold to utility plants with installed pollution control devices, also known as scrubbers, to remove sulfur dioxide.

ARLP has entered into long-term agreements with SSO to host and operate SSO’s coal synfuel production facility currently located at Warrior Coal, LLC, or Warrior, supply the facility with coal feedstock, assist SSO with the marketing of coal synfuel and provide SSO with other services. These agreements expire on December 31, 2007 and provide ARLP with coal sales and rental and service fees from SSO based on the synfuel facility throughput tonnages. These amounts are dependent on the ability of SSO’s members to use certain qualifying tax credits applicable to the facility. The term of each of these agreements is subject to early cancellation provisions customary for transactions of these types, including the unavailability of coal synfuel tax credits, the termination of associated coal synfuel sales contracts, and the occurrence of certain force majeure events. On April 19, 2006, ARLP received a letter from the managing member of SSO which stated that effective April 23, 2006, due to the increase in the wellhead price of domestic crude oil, SSO has elected to exercise its contractual right to suspend until further notice operation of its coal synfuel production facility located at ARLP’s Warrior mining complex in Hopkins County, Kentucky. SSO has advised ARLP that resumption of operations of the synfuel facility is dependent on the price of crude oil in the future. In anticipation of the suspension of operations at the SSO coal synfuel production facility, ARLP will sell coal directly to SSO’s synfuel customers under “back up” coal supply agreements, which automatically provide for the sale of ARLP’s coal in the event these customers do not purchase coal synfuel from SSO. For 2006, the incremental net income

Index to Financial Statements

benefit to ARLP from all of its coal synfuel-related agreements is expected to be in the range of approximately $26.0 million to $28.0 million, assuming that coal pricing would not increase without the availability of synfuel. Approximately $19.8 million of the 2006 estimated incremental net income benefit was attributable to the SSO facility, of which approximately $8.0 million was realized by ARLP prior to SSO’s anticipated suspension of operations at Warrior. Pursuant to its agreement with SSO, ARLP is not obligated to make retroactive adjustments or reimbursements if SSO’s synfuel tax credits are disallowed. In conjunction with a decision to relocate the coal synfuel production facility from the Hopkins County Complex to Warrior, agreements for providing certain of these services were assigned to Alliance Service, Inc., a wholly-owned subsidiary of Alliance Coal, in December 2002. Alliance Service is subject to federal and state income taxes. In 2005, ARLP entered into long-term agreements with PC Indiana Synthetic Fuel #2, L.L.C., or PCIN, and Mt. Storm Coal Supply, respectively, which also own coal synfuel facilities. ARLP hosts PCIN ’s coal synfuel facility, supplies the facility with coal feedstock, assists PCIN with the marketing of coal synfuel and provides it with other services. ARLP supplies Mt. Storm Coal Supply with coal feedstock. In 2005, revenues from the PCIN agreements represented less than 10% of total revenues, and revenues from the Mt. Storm Coal Supply agreement represented approximately 10% of total revenues. The PCIN and Mt. Storm Coal Supply synfuel facilities currently remain in operation; however, the continued operation of these facilities cannot be assured as the operators of these facilities have similar contractual rights to suspend production due to higher oil prices.

For 2005, the incremental annual net income benefit from the combination of the various coal synfuel-related agreements was approximately $24.1 million, assuming that coal pricing would not have increased without the availability of synfuel. The continuation of the incremental net income benefit associated with SSO’s coal synfuel facility cannot be assured. ARLP earns income by supplying SSO’s synfuel facility with coal feedstock, assisting SSO with the marketing of coal synfuel, and providing rental and other services. Pursuant to ARLP’s agreement with SSO, ARLP is not obligated to make retroactive adjustments or reimbursements if SSO’s tax credits are disallowed.

In June 2003, the IRS suspended the issuance of private letter rulings on the significant chemical change requirement to qualify for synfuel tax credits and announced that it was reviewing the test procedures and results used by taxpayers to establish that a significant chemical change had occurred. In October 2003, the IRS completed its review and concluded that the test procedures and results were scientifically valid if applied in a consistent and unbiased manner. The IRS has resumed issuing private letter rulings under its existing guidelines. SSO has advised ARLP that its private letter ruling could be reviewed by the IRS as part of a tax audit, similar to the IRS reviews of other synfuel procedures.

One of ARLP’s business strategies is to continue to make productivity improvements to remain a low-cost producer in each region in which ARLP operates. ARLP’s principal expenses related to the production of coal are labor and benefits, equipment, materials and supplies, maintenance, electricity, royalties and excise taxes. Unlike several of ARLP’s competitors in the eastern U.S., ARLP employs a totally union-free workforce. Many of the benefits of the union-free workforce are not necessarily reflected in direct costs, but ARLP believes they are related to higher productivity. In addition, while ARLP does not typically pay its customers’ transportation costs, these costs may be substantial and often the determining factor in a coal consumer’s contracting decision. ARLP’s mining operations are located near many of the major eastern utility generating plants and on major coal hauling railroads in the eastern U.S.

ARLP is currently estimating 2006 production in the range of 24.3 to 24.5 million tons, which is substantially committed under existing coal sales agreements. Approximately 71% of ARLP’s estimated 2007 production is committed under existing coal sales agreements and approximately 42% of the committed tonnage is subject to market price negotiations.

In response to demand in the Illinois Basin, ARLP previously entered into a coal supply arrangement with a third-party supplier. Its purchase tonnage requirements under this arrangement increased to 40,000 tons per month beginning January 1, 2005 and continues through June 30, 2007.

Index to Financial Statements

Analysis of Historical Results of Operations

Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

In 2005, income before non-controlling interest of $160.0 million was reported, an increase of 108% over 2004 income before non-controlling interest of $76.7 million. These results were achieved despite lost production, continuing fixed expenses, and other expenses incurred as a result of the MC Mining Fire Incident and Pattiki Vertical Belt Incident described below. Financial results for 2004 include the impact of lost production, continuing fixed expenses and other expenses incurred as a result of the Dotiki Fire Incident offset by the final settlement of an insurance claim with our insurance underwriters relating to the Dotiki Fire Incident described below. During 2005, ARLP benefited from strong coal markets as revenues rose to record levels and average coal sales prices in 2005 increased 16.9% compared to 2004.


	Year Ended December 31,				Year Ended December 31,
	2004		2005		2004		2005
	(in thousands)				(per ton sold)
Tons sold		20,823		22,849		N/A		N/A
Tons produced		20,377		22,290		N/A		N/A
Coal sales	$	599,399	$	768,958	$	28.79	$	33.65
Operating expenses and outside purchases	$	446,384	$	536,601	$	21.44	$	23.48

Coal sales. Coal sales increased 28.3% to $769.0 million for 2005 from $599.4 million for 2004. The increase of $169.6 million reflects increased sales volumes (contributing $58.3 million of the increase) and higher coal sales prices (contributing $111.3 million of the increase). Tons sold increased 9.7% to 22.8 million tons for 2005 from 20.8 million tons in 2004, primarily reflecting an increase in tons produced. Tons produced increased 9.4% to 22.3 million tons for 2005 from 20.4 million tons in 2004.

Operating expenses. Operating expenses increased 19.5% to $521.5 million in 2005 from $436.5 million in 2004. The increase of $85.0 million primarily resulted from an increase in operating expenses associated with additional coal sales of 2.0 million tons, including the following specific factors:

•

Labor and benefit costs increased $27.3 million reflecting increased headcount, pay rate increases and escalating health care costs;

•

Material and supplies, and maintenance costs increased $32.6 million and $7.8 million, respectively, reflecting increased production and increased costs for the products and services used in the mining process;

•

Third-party mining costs increased $7.5 million reflecting the addition of two small third-party mining operations at Mettiki;

•

Production taxes and royalties (which are incurred as a percentage of coal sales or volumes) increased $14.1 million; and

•

The impact of $2.9 million of expenses related to the Pattiki Vertical Belt Incident along with expenses associated with the MC Mining Fire Incident, both of which incidents are described below.

The increased expenses were partially offset by the following:

•

Coal supply agreement buy-out expense decreased $2.1 million; and

•

Operating expenses were reduced by $4.9 million, reflecting the net of additional operating expenses incurred in the mine development process offset by revenues received for coal produced incidental with the mine development process.

Operating expenses in 2004 include a $3.5 million buy-out expense of several coal contracts that allowed ARLP to take advantage of higher spot coal prices in 2005 and out-of-pocket expenses related to the Dotiki Fire

Index to Financial Statements

that were not offset by proceeds from the final settlement with ARLP’s insurance underwriters. Please read “—Dotiki Fire Incident” below.

Other sales and operating revenues. Other sales and operating revenues are principally comprised of rental and service fees to coal synfuel production facilities and Mt. Vernon Transfer Terminal transloading fees. Other sales and operating revenues increased 27.5% to $30.7 million in 2005 from $24.1 million in 2004. The increase of $6.6 million was primarily attributable to $4.5 million of additional rent and service fees associated with a new third-party coal synfuel facility at Gibson, which began producing synfuel in May 2005, $0.4 million of rent and service fees associated with increased volumes at the third-party coal synfuel facility at Warrior and $1.1 million of additional transloading fees attributable to increased transloading volumes at the Mt. Vernon Transfer Terminal.

Outside purchases. Outside purchases increased $5.2 million to $15.1 million in 2005 from $9.9 million in 2004. The increase was primarily attributable to a coal supply arrangement entered into with a third-party supplier in the Illinois Basin ($8.3 million) which also contributed to additional coal sales volumes at ARLP’s Illinois Basin operations offset by lower outside purchases in Central Appalachia ($3.4 million).

General and administrative. General and administrative expenses for 2005 decreased to $33.5 million compared to $45.4 million for 2004. The decrease of $11.9 million resulted from lower incentive compensation expense related to the Long-Term Incentive Plan, or LTIP, of $12.1 million. The lower incentive compensation expense for the LTIP is primarily attributable to a reduction in the number of restricted units outstanding due to the vesting in November 2005 and 2004 of the LTIP units for grant years 2003 and 2000 to 2002, respectively, combined with a lower incremental change in the market value of ARLP’s common units from 2004 to 2005 than from 2003 to 2004. The reduction in incentive compensation expense was partially offset by increased salaries and related costs and a number of other general and administrative costs, none of which was individually significant.

Depreciation, depletion and amortization. Depreciation, depletion and amortization increased to $55.6 million in 2005 compared to $53.7 million in 2004. The increase of $1.9 million was primarily the result of additional depreciation expense associated with operating Hopkins County Coal for the full year of 2005 compared to three months of operation in 2004 as a result of the temporary idling of that mine and increased capital expenditures and infrastructure investments in recent years, which have increased ARLP’s production capacity.

Interest expense. Interest expense decreased to $11.8 million in 2005 from $15.0 million in 2004. The decrease of $3.2 million was primarily attributable to increased interest income earned on increased marketable securities which is netted against interest expense in addition to the capitalization of $0.6 million in 2005 related to the development at the Elk Creek and Mountain View mines. ARLP had no borrowings under the credit facility during 2005 or 2004.

Transportation revenues and expenses. Transportation revenues and expenses increased 31.0% to $39.1 million in 2005 from $29.8 million for 2004. The increase of $9.3 million was primarily attributable to increased shipments to customers that reimburse ARLP for transportation costs rather than arranging and paying for transportation directly with transportation providers. Transportation services are a pass-through to ARLP’s customers. Consequently, we and ARLP do not realize any margin on transportation revenues.

Income before income taxes and non-controlling interest. Income before income taxes and non-controlling interest increased 104.9% to $162.7 million for 2005 compared to $79.4 million for 2004. The increase was primarily attributable to increased sales volumes, higher coal prices and reduced general and administrative expenses, partially offset by higher operating expenses, including expenses related to the Pattiki Vertical Belt Incident and MC Mining Fire Incident described below. The 2004 results included a $3.5 million buy-out expense of several coal contracts which allowed ARLP to take advantage of higher spot coal prices in 2005 in

Index to Financial Statements

addition to the impact of lost production, continuing fixed expenses and other expenses incurred as a result of the Dotiki Fire Incident offset by the final settlement of an insurance claim with ARLP’s insurance underwriters relating to the Dotiki Fire Incident described below.

Income tax expense. Income tax expense was comparable for both 2005 and 2004 at $2.7 and $2.6 million, respectively.

ARLP has the following three reportable segments: the Illinois Basin, Central Appalachia and Northern Appalachia. The segments also represent the three major coal deposits in the eastern United States. Coal quality, coal seam height, transportation methods and regulatory issues are similar within each of these three segments. The Illinois Basin segment is comprised of the Dotiki, Gibson, Hopkins, Pattiki and Warrior mines. Central Appalachia segment is comprised of the Pontiki and MC Mining mines. Northern Appalachia segment is comprised of the Mettiki, Mountain View, Tunnel Ridge and Penn Ridge mines. The Mountain View mine is currently being developed to eventually replace production from the Mettiki mine, which is expected to deplete its coal reserves in late 2006. ARLP is in the process of permitting the Tunnel Ridge and Penn Ridge properties for future mine development.

Our 2005 Segment Adjusted EBITDA increased $70.2 million, or 36.3%, to $263.6 million from 2004 Segment Adjusted EBITDA of $193.4 million. Segment Adjusted EBITDA, tons sold, coal sales, operating revenues and Adjusted Segment EBITDA Expense by segment are as follows (in thousands):


	Year Ended December 31,				Increase (Decrease)
	2005		2004		Increase (Decrease)
Segment Adjusted EBITDA
Illinois Basin	$	183,075	$	121,763	$	61,312		50.4	%
Central Appalachia		41,583		28,953		12,630		43.6	%
Northern Appalachia		36,047		41,141		(5,094	)	(12.4	)%
Other and Corporate		2,924		1,569		1,355

Total Segment Adjusted EBITDA(1)	$	263,629	$	193,426	$	70,203		36.3	%

Tons sold
Illinois Basin		16,264		13,760		2,504		18.2	%
Central Appalachia		3,249		3,781		(532	)	(14.1	)%
Northern Appalachia		3,330		3,282		48		1.5	%
Other and Corporate		6		—		6

Total tons sold		22,849		20,823		2,026		9.7	%

Coal sales
Illinois Basin	$	504,916	$	356,307	$	148,609		41.7	%
Central Appalachia		153,615		143,160		10,455		7.3	%
Northern Appalachia		106,997		99,932		7,065		7.1	%
Other and Corporate		3,430		—		3,430

Total coal sales	$	768,958	$	599,399	$	169,559		28.3	%

Other sales and operating revenues
Illinois Basin	$	24,493	$	19,087	$	5,406		28.3	%
Central Appalachia		282		187		95		50.8	%
Northern Appalachia		2,163		2,127		36		1.7	%
Other and Corporate		3,753		2,672		1,081

Total other sales and operating revenues	$	30,691	$	24,073	$	6,618		27.5	%

Index to Financial Statements


	Year Ended December 31,				Increase (Decrease)
	2005		2004		Increase (Decrease)
Segment Adjusted EBITDA Expense
Illinois Basin	$	346,335	$	268,848	$	77,487		28.8	%
Central Appalachia		112,313		114,394		(2,081	)	(1.8	)%
Northern Appalachia		73,112		60,917		12,195		20.0	%
Other and Corporate		4,260		1,104		3,156

Total Segment Adjusted EBITDA Expense(2)	$	536,020	$	445,263	$	90,757		20.4	%

(1)

Segment Adjusted EBITDA is defined as net income before income taxes and non-controlling interest, interest expense and interest income, depreciation, depletion and amortization, and general and administrative expense. Segment Adjusted EBITDA is reconciled to income before non-controlling interest below.

(2)	Segment Adjusted EBITDA Expense includes operating expenses, outside purchases and other income. Pass through transportation expenses are excluded.

Illinois Basin—Segment Adjusted EBITDA for 2005 increased 50.4%, to $183.1 million from 2004 Segment Adjusted EBITDA of $121.8 million. The increase of $61.3 million was primarily attributable to increased coal sales which increased by $148.6 million, or 41.7%, to $504.9 million during 2005 as compared to $356.3 million in 2004. Increased coal sales in 2005 reflect higher average coal sales prices per ton which increased $5.15 per ton to $31.05 per ton (contributing $83.8 million of the increase in coal sales) and increased tons sold of 2.5 million tons (contributing $64.8 million of the increase in coal sales). Other sales and operating revenues increased $5.4 million, primarily due to $4.5 million of revenues associated with the coal synfuel facility that began operating at Gibson in 2005. Total Segment Adjusted EBITDA Expense for 2005 increased 28.8% to $346.3 million from $268.8 million in 2004. On a per ton sold basis, 2005 Segment Adjusted EBITDA Expense rose to $21.30 per ton, an increase of 9.0% over the 2004 Segment Adjusted EBITDA Expense per ton of $19.54 per ton. The increase in 2005 Segment Adjusted EBITDA Expense in 2005 compared to 2004 primarily reflects the impact of cost increases described above in our discussion of consolidated operating expenses and outside purchases, partially offset by the benefit of increased tons produced, which increased 2.2 million tons in 2005 to 15.7 million tons. Segment Adjusted EBITDA for the year 2004 includes $15.2 million reported as the net gain from insurance settlement associated with the Dotiki Fire Incident.

Central Appalachia—Segment Adjusted EBITDA for 2005 increased $12.6 million, or 43.6%, to $41.6 million as compared to 2004 Segment Adjusted EBITDA of $29.0 million. The increase was primarily attributable to increased coal sales of $10.5 million, reflecting higher average coal sales price per ton of $47.27 in 2005, an increase of $9.41 per ton over the 2004 average coal sales prices per ton, (which contributed $30.6 million of the increase in coal sales) partially offset by a reduction in tons sold in 2005 to 3.2 million tons, a decrease of 0.5 million tons sold from 2004 (resulting in a reduction of coal sales of $20.1 million). Segment Adjusted EBITDA Expense for 2005 decreased 1.8% to $112.3 million from $114.4 million in 2004. On a per ton basis, 2005 Segment Adjusted EBITDA Expense rose by $4.31, or 14.3%, to $34.56 per ton reflecting the impact of cost increases described in our discussion of consolidated operating expenses above. This increase in per ton expense included the continuing impact of the MC Mining Fire Incident, partially offset by lower outside purchases ($3.5 million), and less favorable mining conditions, which contributed to lower production (0.4 million tons) resulting in fewer tons available for sale.

Northern Appalachia—Segment Adjusted EBITDA for 2005 decreased $5.1 million, or 12.4%, to $36.0 million as compared to 2004 Segment Adjusted EBITDA of $41.1 million. The decrease was primarily due to higher costs, reflecting less favorable mining conditions at Mettiki as the D-Mine approaches the depletion of its coal reserves. Segment Adjusted EBITDA Expense for 2005 increased 20.0% to $73.1 million as compared to $60.9 million in 2004. On a per ton basis, 2005 Segment Adjusted EBITDA Expense increased 18.3% to $21.95. The increase in 2005 Segment Adjusted EBITDA Expense primarily reflects the impact of higher costs partially

Index to Financial Statements

offset by higher coal sales in 2005, which increased $7.1 million to $107.0 million, primarily reflecting a 5.5% increase in the average coal sales price per ton which rose $1.68 per ton to $32.13 per ton (contributing $5.6 million of the increase in coal sales). The increase in the average sales price per ton primarily reflects coal sales that began in 2005 to a third-party coal synfuel producer.

A reconciliation of Segment Adjusted EBITDA to income before non-controlling interest is as follows (in thousands):


	Year Ended December 31,
	2005			2004
Segment Adjusted EBITDA	$	263,629		$	193,426

General & administrative		(33,484	)		(45,400	)
Depreciation, depletion and amortization		(55,647	)		(53,674	)
Interest expense		(11,811	)		(14,963	)
Income taxes		(2,682	)		(2,641	)

Income before non-controlling interest	$	160,005		$	76,748

Year Ended December 31, 2004 Compared to the Year Ended December 31, 2003

In 2004, income before non-controlling interest of $76.7 million was reported, an increase of 60% over 2003 income before non-controlling interest of $47.9 million. ARLP grew through expansion of production capacity at Gibson, Dotiki and Pattiki, resumption of operations at the surface mine at Hopkins County Coal, and the addition of two third-party mining operations at ARLP’s Mettiki operation. Tons produced increased 5.9% to 20.4 million tons. Tons sold increased 7.0% to 20.8 million tons.

During 2004, ARLP benefited from strong coal markets as revenues rose to record levels and average coal sales prices in 2004 increased 11.7% compared to 2003.


	Year Ended December 31,				Year Ended December 31,
	2003		2004		2003		2004
	(in thousands)				(per ton sold)
Tons sold		19,467		20,823		N/A		N/A
Tons produced		19,238		20,377		N/A		N/A
Coal sales	$	501,596	$	599,399	$	25.77	$	28.79
Operating expenses and outside purchases	$	377,343	$	446,384	$	19.38	$	21.44

Coal sales. Coal sales increased 19.5% to $599.4 million for 2004 from $501.6 million for 2003. The increase of $97.8 million reflects higher prices on long-term coal sales agreements and the sale of additional production at significantly higher prices on short-term coal sales agreements into the export and Central Appalachia coal markets. The increased average sales price contributed $62.9 million to the total increase in coal sales and an increase in tons sold contributed $34.9 million to the total increase in coal sales.

Higher prices on long-term contracts reflect a stronger market in the second half of 2003 when contracts were entered into for shipments in 2004. The export market opportunities for the U.S. coal industry were attributable generally to the strong economic expansion in China. The increase in Central Appalachia spot market pricing was attributable primarily to a combination of the diversion of coal production from domestic markets to export markets and a decline in region-wide production. Tons sold increased 7.0% to 20.8 million for 2004 from 19.5 million in 2003, primarily reflecting an increase in tons produced. Tons produced increased 5.9% to 20.4 million for 2004 from 19.2 million in 2003.

Index to Financial Statements

Operating expenses. Operating expenses increased 18.3% to $436.5 million in 2004 from $368.8 million in 2003. The increase of $67.7 million was associated with additional coal sales of 1.6 million tons, including the following specific factors:

•

Labor and benefit costs increased $18.1 million reflecting increased headcount, pay rate increases, higher levels of overtime and escalating health care costs;

•

Material and supplies and maintenance costs increased $19.5 million and $9.3 million, respectively, reflecting increased production and increased costs for the products and services used in the mining process;

•

Third party mining costs increased $1.9 million reflecting the addition, late in the year 2004, of two small third party mining operations at Mettiki;

•

Production taxes and royalties (which are incurred as a percentage of coal sales or volumes) increased $7.7 million;

•

Coal supply agreement buy-out expense of $3.5 million; and

•

Expenses of $4.1 million associated with the MC Mining Fire Incident.

ARLP’s initial estimate of the minimum non-reimbursable costs attributable to the MC Mining Fire Incident was $4.1 million. The $3.5 million buy-out expense of several coal supply agreements allowed ARLP to take advantage of anticipated higher spot coal prices in 2005. Additionally, operating expense per ton sold was adversely impacted by adverse geologic conditions at the Pontiki mine and increased longwall moves associated with shorter longwall panels at Mettiki.

Outside purchases. Outside purchases increased 16.5% to $9.9 million in 2004 from $8.5 million in 2003. The increase was primarily attributable to an increase in outside purchases associated with ARLP’s Illinois Basin ($4.6 million) and Central Appalachia ($2.7 million) operations partially offset by a decrease in the domestic brokerage market of $6.1 million.

Other sales and operating revenues. Other sales and operating revenues, which are primarily comprised of services to the coal synfuel production facility, increased 11.5% to $24.1 million in 2004 from $21.6 million in 2003. The increase of $2.5 million was primarily attributable to $1.5 million of additional rent and service fees associated with increased volumes at the third-party coal synfuel facility that originally operated at Hopkins County Coal and was relocated to Warrior in April 2003 and $1.1 million of additional transloading fees attributable to increased volumes at the Mt. Vernon Transfer Terminal.

General and administrative. General and administrative expenses for 2004 increased to $45.4 million compared to $28.2 million for 2003. The $17.2 million increase was primarily attributable to higher incentive compensation expense, which increased approximately $16.0 million. The last reported sales price of ARLP’s common units on the NASDAQ was $37.00 on December 31, 2004 compared to a closing price of $17.19 on December 31, 2003 (both closing prices are adjusted for the two-for-one unit split in September 2005).

Depreciation, depletion and amortization. Depreciation, depletion and amortization increased to $53.7 million in 2004 compared to $52.5 million in 2003. The increase of $1.2 million was primarily the result of additional depreciation expense associated with increased capital expenditures and infrastructure investments over the last few years, which have increased ARLP’s production capacity. The increase was partially offset by a $2.6 million decrease in depreciation attributable to operating Hopkins County Coal six months in 2003 compared to three months in 2004.

Interest expense. Interest expense declined 6.4% to $15.0 million in 2004 from $16.0 million in 2003. The decrease of $1.0 million was attributable to reduced interest expense associated with the revolving credit facility. ARLP had no borrowings under the credit facility during 2004.

Index to Financial Statements

Transportation revenues and expenses. Transportation revenues and expenses increased 52.5% to $29.8 million in 2004 from $19.6 million for 2003. The increase of $10.2 million was primarily attributable to increased shipments to customers that reimburse ARLP for transportation costs rather than arranging and paying for transportation directly with transportation providers. Transportation services are a pass-through to our customers. Consequently, we do not realize any margin on transportation revenues.

Income before income taxes and non-controlling interest. Income before income taxes and non-controlling interest increased 57.2% to $79.4 million for 2004 compared to $50.5 million for 2003. The increase was primarily attributable to higher sales prices, reflecting the continued strengthening of domestic and international coal markets, partially offset by higher operating expenses and increased general and administrative expense, primarily attributable to higher incentive compensation expense. The impact of the principal causes of the increase in income before income taxes and non-controlling interest are discussed in detail above.

Income tax expense (benefit). Income tax expense was comparable for both 2004 and 2003 at $2.6 million for each year.

Our Segment Adjusted EBITDA of $193.4 million for 2004 was $46.2 million, or 31.4%, higher than 2003 Segment Adjusted EBITDA of $147.2 million. Segment Adjusted EBITDA, tons sold, coal sales, operating revenues and Adjusted Segment EBITDA Expense by segment are as follows (in thousands):


	Year Ended December 31,				Increase (Decrease)
	2004		2003		Increase (Decrease)
Segment Adjusted EBITDA
Illinois Basin	$	121,763	$	95,351	$	26,412		27.7	%
Central Appalachia		28,953		23,962		4,991		20.8	%
Northern Appalachia		41,141		27,288		13,853		50.8	%
Other and Corporate		1,569		623		946

Total Segment Adjusted EBITDA(1)	$	193,426	$	147,224	$	46,202		31.4	%

Tons sold
Illinois Basin		13,760		12,223		1,537		12.6	%
Central Appalachia		3,781		3,608		173		4.8	%
Northern Appalachia		3,282		3,445		(163	)	(4.7	)%
Other and Corporate		—		191		(191	)

Total tons sold		20,823		19,467		1,356		7.0	%

Coal sales
Illinois Basin	$	356,307	$	301,976	$	54,331		18.0	%
Central Appalachia		143,160		114,366		28,794		25.2	%
Northern Appalachia		99,932		79,076		20,856		26.4	%
Other and Corporate		—		6,178		(6,178	)

Total coal sales	$	599,399	$	501,596	$	97,803		19.5	%

Other sales and operating revenues
Illinois Basin	$	19,087	$	17,233	$	1,854		10.8	%
Central Appalachia		187		779		(592	)	(76.0	)%
Northern Appalachia		2,127		1,980		147		7.4	%
Other and Corporate		2,672		1,606		1,066

Total operating revenues	$	24,073	$	21,598	$	2,475		11.5	%

Index to Financial Statements


	Year Ended December 31,				Increase (Decrease)
	2004		2003		Increase (Decrease)
Segment Adjusted EBITDA Expense
Illinois Basin	$	268,848	$	223,858	$	44,990		20.1	%
Central Appalachia		114,394		91,183		23,211		25.5	%
Northern Appalachia		60,917		53,768		7,149		13.3	%
Other and Corporate		1,104		7,161		(6,057	)

Total Segment Adjusted EBITDA Expense(2)	$	445,263	$	375,970	$	69,293		18.4	%

(1)

(2)	Segment Adjusted EBITDA Expense includes operating expenses, outside purchases and other income. Pass through transportation expenses are excluded.

Illinois Basin—Segment Adjusted EBITDA for 2004 increased $26.4 million, or 27.7%, to $121.8 million as compared to 2003 Segment Adjusted EBITDA of $95.4 million. The increase was primarily attributable to increased coal sales which increased $54.3 million in 2004 to $356.3 million, reflecting a 1.5 million ton, or 12.6%, increase in tons sold to 13.8 million tons (which contributed $37.9 million of the increase in coal sales) and a 4.8% increase in the average coal sales price per ton to $25.90 per ton (which contributed $16.4 million of the increase in coal sales). Other sales and operating revenues increased $1.9 million in 2004 to $19.1 million, reflecting additional revenues associated with SSO’s coal synfuel facility. Segment Adjusted EBITDA Expense for 2004 increased 20.1% to $268.8 million while Segment Adjusted EBITDA Expense per ton increased 6.7% to $19.54. This increase reflects the impact of increased costs as discussed in our discussion of consolidated operating expenses and outside purchases above, including the $3.3 million associated with the buy-out of several coal supply agreements that allowed us to take advantage of higher spot coal prices in 2005. The impact of increased costs was partially offset by higher production in 2004, which increased 1.1 million tons, or 8.9%, to 13.5 million tons. Segment Adjusted EBITDA for the year 2004 includes $15.2 million reported as the net gain from insurance settlement associated with the Dotiki Fire Incident.

Central Appalachia—Segment Adjusted EBITDA for 2004 increased $5.0 million, or 20.8%, to $29.0 million as compared to 2003 Segment Adjusted EBITDA of $24.0 million. The increase was primarily attributable to increased coal sales, which rose $28.8 million in 2004 to $143.2 million, reflecting a 19.4% increase in the average coal sales price per ton to $37.86 per ton (which contributed $23.3 million of the increase in coal sales) and increased tons sold of 0.2 million tons (which contributed $5.5 million of the increase in coal sales). Segment Adjusted EBITDA Expense for 2004 increased 25.5% to $114.4 million while Segment Adjusted EBITDA Expense per ton increased 19.7% to $30.25, reflecting less favorable mining conditions and the impact of cost increases as discussed in our discussion of consolidated operating expenses and outside purchases above. Segment Adjusted EBITDA Expense for the year 2004 included $4.1 million reflecting our initial estimate of the minimum non-reimbursable costs attributable to the MC Mining Fire Incident.

Northern Appalachia—Segment Adjusted EBITDA for 2004 increased $13.9 million, or 50.8%, to $41.1 million as compared to 2003 Segment Adjusted EBITDA of $27.3 million. The increase was primarily attributable to increased coal sales which rose $20.9 million in 2004 to $99.9 million, reflecting a 32.6% increase in the average coal sales price per ton to $30.45 (which increased coal sales by $24.6 million). The higher average coal sales price per ton was attributable to spot market opportunities for sales into the export market to satisfy demand created by economic expansion in China and India. The increase was partially offset by a 0.2 million ton decrease in tons sold during 2004 to 3.3 million tons (which reduced coal sales by $3.7 million). Segment Adjusted EBITDA Expense for 2004 increased 13.3% to $60.9 million, while Segment Adjusted

Index to Financial Statements

EBITDA Expense per ton increased 18.9% to $18.56, primarily as a result of less favorable mining conditions and the impact of cost increases and described under consolidated operating expenses above.

Other and Corporate—Lower coal sales and Segment Adjusted EBITDA Expense reflects a reduction in coal brokerage volumes. A strengthening coal market resulted in reduced opportunities for coal brokerage transactions.

A reconciliation of Segment Adjusted EBITDA to income before non-controlling interest is as follows (in thousands):


	Year Ended December 31,
	2004			2003
Segment Adjusted EBITDA	$	193,426		$	147,224
General & administrative		(45,400	)		(28,243	)
Depreciation, depletion and amortization		(53,674	)		(52,505	)
Interest expense		(14,963	)		(15,980	)
Income taxes		(2,641	)		(2,577	)

Income before non-controlling interest	$	76,748		$	47,919

Long-Term Incentive Plan

On October 25, 2005, the compensation committee of the board of directors of the managing general partner of ARLP determined that the vesting requirements for the 2003 LTIP grants of 278,710 restricted units (net of 3,700 restricted unit forfeitures) had been satisfied as of September 30, 2005. As a result of this vesting, on November 1, 2005, ARLP issued 165,426 common units to LTIP participants. The remaining units were settled in cash primarily to satisfy individual tax obligations of LTIP participants.

Insurance

On October 31, 2005, ARLP completed its annual property and casualty insurance renewal with the various insurance coverages effective as of October 1, 2005. Available capacity for underwriting property insurance has tightened as a result of recent events, including insurance carrier losses associated with U.S. gulf coast hurricanes, poor loss claims history in the underground coal mining industry and ARLP’s recent loss history (i.e., MC Mining Fire, Dotiki Fire and Pattiki Vertical Belt Incidents described below). As a result, ARLP will retain a participating interest along with its insurance carriers at an average rate of approximately 10% in our $75 million commercial property program. The aggregate maximum limit in the commercial property program is $75 million per occurrence of which ARLP would be responsible for a maximum amount of $7.75 million for each occurrence, excluding a $1.5 million deductible for property damage and a 45-day waiting period for business interruption. As a result of the renewal for comparable levels of commercial property coverage, premiums for its property insurance program increased by approximately 130%. We can make no assurances that ARLP will not experience significant insurance claims in the future, which as a result of its participation in the commercial property program, could have a material adverse effect on ARLP’s business, financial condition, results of operations and ability to purchase property insurance in the future.

Unit Split

On September 15, 2005, ARLP completed a two-for-one split of ARLP common units, whereby holders of record at the close of business on September 2, 2005 received one additional common unit for each common unit owned on that date. This unit split resulted in the issuance of 18,130,440 ARLP common units.

Index to Financial Statements

Pattiki Vertical Belt Incident

On June 14, 2005, ARLP’s White County Coal, LLC’s, or White County Coal, Pattiki mine was temporarily idled following the failure of the vertical conveyor belt system, which we refer to as the Vertical Belt Incident, used in conveying raw coal out of the mine. White County Coal surface personnel detected a failure of the vertical conveyor belt on June 14, 2005 and immediately shut down operation of all underground conveyor belt systems. On July 20, 2005, White County Coal’s efforts to repair the vertical belt system had progressed sufficiently to allow it to perform a full test of the vertical belt system. After evaluating the test results, the Pattiki mine resumed partial production operations on July 21, 2005. Production of raw coal has returned to levels that existed prior to the occurrence of the Vertical Belt Incident. The majority of repairs to the vertical belt conveyor system and ancillary equipment have been completed. ARLP’s operating expenses were increased by $2.9 million in 2005 to reflect the estimated direct expenses and costs attributable to the Vertical Belt Incident, which estimate included a $1.3 million retirement of the damaged vertical belt equipment. ARLP has not identified currently any significant additional costs compared to original cost estimates. ARLP conducted an analysis of a number of possible alternatives to mitigate the losses arising from the Vertical Belt Incident. This analysis included a review of the Vertical Belt System Design, Supply, and Oversight of Installation Contract, dated December 7, 2000 between White County Coal, LLC and Lake Shore Mining, Inc. As a result of this analysis, ARLP filed suit on January 19, 2006, against Frontier-Kemper Constructors, Inc. to whom Lake Shore Mining, Inc. had assigned all of its rights and obligations under the Installation Contract, for the damages ARLP suffered on account of the Vertical Belt Incident. Until this litigation is resolved, however, ARLP can make no assurances of the amount or timing of recoveries, if any. Concurrent with the renewal of its commercial property (including business interruption and extra expense) insurance policies concluded on October 31, 2005, White County Coal confirmed with the current underwriters of the commercial property insurance coverage that it would not file a formal insurance claim for losses arising from or in connection with the Pattiki Vertical Belt Incident.

MC Mining Fire Incident

On December 26, 2004, ARLP’s MC Mining, LLC’s, or MC Mining, Excel No. 3 mine was temporarily idled following the occurrence of a mine fire, which we refer to as the MC Mining Fire Incident. The fire was discovered by mine personnel near the bottom of the Excel No. 3 mine slope late in the evening of December 25, 2004. Under a firefighting plan developed by MC Mining, in cooperation with mine emergency response teams from the U.S. Department of Labor’s Mine Safety and Health Administration, or MHSA, and the Kentucky Office of Mine Safety and Licensing, the four portals at the Excel No. 3 mine were temporarily capped to deprive the fire of oxygen. A series of boreholes was then drilled into the mine from the surface, and nitrogen gas and foam were injected through the boreholes into the fire area to further suppress the fire. As a result of these efforts, the mine atmosphere was rendered substantially inert, or without oxygen, and the Excel No. 3 mine fire was effectively suppressed. MC Mining then began construction of temporary and permanent barriers designed to completely isolate the mine fire area. Once the construction of the permanent barriers was completed, MC Mining began efforts to repair and rehabilitate the Excel No. 3 mine infrastructure. On February 21, 2005, the repair and rehabilitation efforts had progressed sufficiently to allow initial resumption of production. Coal production has returned to near normal levels, but continues to be adversely impacted by inefficiencies attributable to or associated with the MC Mining Fire Incident.

ARLP maintains commercial property (including business interruption and extra expense) insurance policies with various underwriters, which policies are renewed annually in October and provide for self-retention and various applicable deductibles, including certain monetary and/or time element forms of deductibles, which we refer to collectively as the 2005 Deductibles, and 10% co-insurance, which we refer to as 2005 Co-Insurance. ARLP believes such insurance coverage will cover a substantial portion of the total cost of the disruption to MC Mining’s operations. However, concurrent with the renewal of ARLP’s commercial property (including business interruption and extra expense) insurance policies concluded on October 31, 2005, MC Mining confirmed with the current underwriters of the commercial property insurance coverage that any negotiated settlement of the losses arising from or in connection with the MC Mining Fire Incident would not exceed $40.0 million (inclusive of 2005 Co-insurance and 2005 Deductible amounts). Until the claim is resolved ultimately,

Index to Financial Statements

through either the claim adjustment process, settlement, or litigation, with the applicable underwriters, ARLP can make no assurance of the amount or timing of recovery of insurance proceeds.

ARLP made an initial estimate of certain costs primarily associated with activities relating to the suppression of the fire and the initial resumption of operations. Operating expenses for the 2004 fourth quarter were increased by $4.1 million to reflect an initial estimate of certain minimum costs attributable to the MC Mining Fire Incident that are not reimbursable under ARLP’s insurance policies due to the application of the 2005 Deductibles and 2005 Co-Insurance.

Following the initial two submittals by ARLP to a representative of the underwriters of its estimate of the expenses and losses (including business interruption losses) incurred by MC Mining and other affiliates arising from and in connection with the MC Mining Fire Incident, which we refer to as the MC Mining Insurance Claim, on September 15, 2005, ARLP filed a third estimate of its expenses and losses, with an update through July 31, 2005. Partial payments of $12.2 million were received in 2005, which are net of the 2005 Deductibles and 2005 Co-Insurance. The accounting for these partial payments and future payments, if any, made to ARLP by the underwriters will be subject to the accounting methodology described below. On March 23, 2006, ARLP filed a third partial proof of loss for the period through July 31, 2005 in the amount of $4.0 million. Currently, ARLP continues to evaluate its potential insurance recoveries under the applicable insurance policies in the following areas:

1. Fire Brigade/Extinguishing/Mine Recovery Expense; Expenses to Reduce Loss; Debris Removal Expenses; Demolition and Increased Cost of Construction; Expediting Expenses; and Extra Expenses incurred as a result of the fire—These expenses and other costs (e.g. professional fees) associated with extinguishing the fire, reducing the overall loss, demolition of certain property and removal of debris, expediting the recovery from the loss, and extra expenses that would not have been incurred by ARLP, but for the MC Mining Fire Incident are being expensed as incurred with related actual and/or estimated insurance recoveries recorded as they are considered to be probable, up to the amount of the actual cost incurred.

2. Damage to MC Mining mine property—The net book value of property destroyed of $154,000 was written off in the first quarter of 2005 with a corresponding amount recorded as an estimated insurance recovery, since such recovery is considered probable. Any insurance proceeds from the claims relating to the MC Mining mine property (other than amounts relating to the matters discussed in 1. above) that exceed the net book value of such damaged property are expected to result in a gain. The anticipated gain will be recorded when the MC Mining Insurance Claim is resolved and/or proceeds are received.

3. MC Mining mine business interruption losses—ARLP has submitted to a representative of the underwriters a business interruption loss analysis for the period of December 24, 2004 through July 31, 2005. Expenses associated with business interruption losses are expensed as incurred, and estimated insurance recoveries of such losses are recognized to the extent such recoveries are considered to be probable, up to the actual amount incurred. Recoveries in excess of actual costs incurred will be recorded as gains when the MC Mining Insurance Claim is resolved and/or proceeds are received.

Pursuant to the accounting methodology described above, of the $12.2 million of partial payments received, ARLP has recorded as an offset to operating expenses, $10.7 million in 2005, which amount represents the current estimated insurance recovery of actual costs incurred, net of the 2005 Deductibles and 2005 Co-Insurance. ARLP continues to discuss the MC Mining Insurance Claim and the determination of the total claim amount with representatives of the underwriters. The MC Mining Insurance Claim will continue to be developed as additional information becomes available and ARLP has completed its assessment of the losses (including the methodologies associated therewith) arising from or in connection with the MC Mining Fire Incident. At this time, based on the magnitude and complexity of the MC Mining Insurance Claim, ARLP is unable to reasonably estimate the total amount of the MC Mining Insurance Claim as well as its exposure, if any, for amounts not covered by its insurance program.

Index to Financial Statements

Dotiki Fire Incident

On February 11, 2004, ARLP’s Webster County Coal, LLC’s, or Webster County Coal, Dotiki mine was temporarily idled for a period of twenty-seven calendar days following the occurrence of a mine fire that originated with a diesel supply tractor, which we refer to as the Dotiki Fire Incident. As a result of the firefighting efforts of MSHA, the Kentucky Department of Mines and Minerals, and Webster County Coal personnel, Dotiki successfully extinguished the fire and totally isolated the affected area of the mine behind permanent barriers. Initial production resumed on March 8, 2004. For the Dotiki Fire Incident, ARLP had commercial property insurance that provided coverage for damage to property destroyed, interruption of business operations, including profit recovery, and expenditures incurred to minimize the period and total cost of disruption to operations.

On September 10, 2004, ARLP filed a final proof of loss with the applicable insurance underwriters reflecting a settlement of all expenses, losses and claims incurred by Webster County Coal and other affiliates arising from or in connection with the Dotiki Fire Incident in the aggregate amount of $27.0 million, inclusive of a $1.0 million self-retention of initial loss, a $2.5 million deductible and 10% co-insurance.

During 2004, ARLP had recorded as an offset to operating expenses $5.9 million and a combined net gain of approximately $15.2 million for damage to the property destroyed, interruption of business operations (including profit recovery), and extra expenses incurred to minimize the period and total cost of disruption to operations associated with the Dotiki Fire Incident.

Coal Supply Agreements

Seminole Electric Cooperative, Inc.

On February 1, 1986, Seminole Electric Cooperative, Inc., or Seminole, and certain of ARLP’s subsidiaries entered into a restated and amended coal supply agreement. Pursuant to the terms of this agreement, these subsidiaries are required to sell to Seminole, and Seminole is required to purchase from these subsidiaries, coal from the Dotiki and Pattiki mines for use in Seminole’s Plant Units 1 and 2 located in Florida. The agreement expires on December 31, 2010. On October 25, 2005, the parties agreed to amend the agreement to terminate certain provisions that allowed for the substitution of non-conventional source fuel, or “synfuel,” for contract coal. More specifically, the terminated provisions provided that, for each ton of synfuel purchased by Seminole from third parties that was processed from coal originally supplied by Alliance Coal, the amount of coal to be purchased would be proportionately reduced.

Virginia Electric and Power Company

On June 22, 2005, Virginia Electric and Power Company, or VEPCO, and Alliance Coal entered into a new seven-year coal supply agreement. Pursuant to this agreement, Alliance Coal has agreed to sell to VEPCO, and VEPCO has agreed to purchase, coal from various production sources controlled by Alliance Coal for use in VEPCO’s Mount Storm Power Station located in Grant County, West Virginia. Alliance Coal is obligated each year to deliver approximately 2.25 million tons of coal to the Mount Storm Power Station beginning January 1, 2007. Alliance Coal and/or its subcontractor(s) are required to construct various coal handling facilities located at the Mount Storm Power Station. Mettiki Coal, a subsidiary of Alliance Coal, currently sells coal to VEPCO for use at the Mount Storm Power Station pursuant to the terms of an existing coal supply agreement, which will expire on December 31, 2006. In connection with this agreement, Alliance Coal extended the terms of an existing lease agreement and equipment lease agreement with VEPCO for an additional seven years, until January 1, 2013.

Mount Storm Coal Supply, LLC

On August 4, 2005, Mount Storm Coal Supply, LLC, or Mount Storm Supply, and Alliance Coal entered into a feedstock agreement, effectively dated as of July 1, 2005, pursuant to which Alliance Coal has agreed to

Index to Financial Statements

sell to Mount Storm Supply, and Mount Storm Supply has agreed to purchase, up to 225,000 tons of coal per month. The feedstock agreement has a term continuing through December 31, 2007, with actual coal delivery to begin on January 1, 2007. This agreement may be terminated by either Alliance Coal or Mount Storm Supply on seven days’ prior written notice if the tax credits under Section 29 of the Internal Revenue Code, which arise from the production and sale of synthetic fuel derived from the coal, are no longer available or are materially reduced.

Ongoing Acquisition Activities

Consistent with ARLP’s business strategy, from time-to-time ARLP engages in discussions with potential sellers regarding possible acquisitions of certain assets and/or companies by ARLP.

Liquidity and Capital Resources

Liquidity

We rely on distributions from ARLP to fund any cash requirements for our operations. ARLP generally satisfies its working capital requirements and funds its capital expenditures and debt service obligations from cash generated from operations and borrowings under its revolving credit facility. We believe that the cash generated from ARLP’s operations and its borrowing capacity will be sufficient to meet its working capital requirements, anticipated capital expenditures (other than major capital improvements or acquisitions), scheduled debt payments and distribution payments. To further develop available financing alternatives, in October 2002, ARLP entered into a master lease agreement. Under the master lease agreement, lease terms and rental payments are negotiated individually when specific pieces of equipment are leased. During 2005, 2004 and 2003, ARLP had rental expense of $0.8 million, $1.3 million and $1.0 million, respectively, under the master lease agreement. ARLP’s credit facility limits the amount of total operating lease obligations to $15.0 million payable in any period of 12 consecutive months. ARLP’s ability to satisfy its obligations and planned expenditures will depend upon ARLP’s future operating performance, which will be affected by prevailing economic conditions in the coal industry, some of which are beyond its control.

ARLP earns income by supplying three coal synfuel facilities with coal feedstock and assists the owners of two of these facilities with the marketing of coal synfuel as well as the provision of certain other services. Assuming that coal pricing would not have increased without the availability of coal synfuel, the incremental net income benefit associated with these facilities (i.e., which equals cash generation except for working capital timing differences) was $24.1 million for the year ended December 31, 2005.

The continuation of the incremental net income benefit associated with the coal synfuel related agreements, however, cannot be assured. The terms of the coal synfuel related agreements expire on December 31, 2007, and the agreements are not expected to be extended. Additionally, the term of the synfuel related agreements is subject to early cancellation provisions customary for transactions of these types, including the unavailability of synfuel tax credits, the termination of associated coal synfuel sales contracts, and the occurrence of certain force majeure events. However, ARLP has maintained “back up” coal supply agreements with each coal synfuel customer that automatically provide for sale of ARLP’s coal to these customers in the event they do not purchase coal synfuel. On April 19, 2006, ARLP received a letter from the managing member of SSO which stated that effective April 23, 2006, due to the increase in the wellhead price of domestic crude oil, SSO has elected to exercise its contractual right to suspend until further notice operation of its coal synfuel production facility located at ARLP’s Warrior mining complex in Hopkins County, Kentucky. Please read “Prospectus Summary—Recent Developments—Suspension of Coal Synfuel Facility Operation at Warrior.”

Maryland, in which ARLP operates, has established a statutory framework for tax credits against income or franchise taxes, which tax credit has benefited, directly or indirectly, coal operators or customers purchasing coal produced from mines within the state. ARLP’s indirect benefit of this state tax credit was $8.3 million for the year ended December 31, 2005. Legislation has passed both houses of the Maryland Legislature and is expected to become law by May 30, 2006, which will significantly limit the use of this state tax credit beginning in 2007

Index to Financial Statements

and will eliminate it by 2020. ARLP does not expect this phase out of the state tax credit to materially effect its business, financial position or results of operations because ARLP is transitioning its Maryland operations from Maryland to West Virginia.

Crude oil and natural gas prices have increased significantly since 2003. These increases have not had a material direct impact on ARLP’s financial results since ARLP’s direct purchases of crude oil based fuel and natural gas does not represent a significant percentage of its operating expenses. Higher crude oil and natural gas prices have also resulted in increases to the cost of goods, services and equipment provided to ARLP and therefore indirectly impacted ARLP’s financial results. ARLP can provide no assurance that it will be able to pass the impact of these direct or indirect cost increases through to its customers.

Cash Flows

Cash provided by operating activities was $193.6 million in 2005 compared to $145.2 million in 2004. The increase in cash provided by operating activities was attributable principally to an increase in net income partially offset by an increase in total working capital. Increased working capital reflects a revenue driven increase in trade receivables, increased inventories, prepaid expenses and advance royalties. This increase was partially offset by increased accounts payable due to increased production and a lesser increase in 2005 compared to 2004 in the total accrued liability for grants made under the LTIP included in the current and long-term liability due to affiliates resulting from the vesting in 2005 of the 2003 LTIP grants and in 2004 of the 2000 to 2002 LTIP grants.

Net cash used in investing activities was $110.2 million in 2005 compared to $77.6 million in 2004. The increase is primarily attributable to an increase in capital expenditures associated with the addition of a continuous mining unit at ARLP’s Pattiki and Warrior mining complex and costs associated with the initial development at the Elk Creek and Mountain View mines along with construction to transition the Pontiki mine into a new coal seam. ARLP expects to fund these capital expenditures with available cash and marketable securities on hand, future cash generated from operations and/or borrowings available under the revolving credit facility. The increase was partially offset by purchasers, net of proceeds, of marketable securities during 2004 of $25.7 million.

Net cash used in financing activities was $82.6 million for 2005 compared to $46.5 million for 2004. The increase is primarily attributable to ARLP’s scheduled $18.0 million debt payment in August 2005 in addition to increased distributions by ARLP and Alliance Resource Management GP, LLC in 2005.

ARLP has various commitments primarily related to long-term debt, operating lease commitments related to buildings and equipment, obligations for estimated reclamation and mining closing costs, capital project commitments, and pension funding. ARLP expects to fund these commitments with cash generated from operations, proceeds from the sale of marketable securities, and borrowings under ARLP’s revolving credit facility. The following table provides details regarding ARLP’s contractual cash obligations as of December 31, 2005:


	Total		Less than 1 year		2-3 years		4-5 years		After 5 years
	(in thousands)
Contractual Obligations
Long-term debt	$	162,000	$	18,000	$	36,000	$	36,000		$72,000
Future interest obligations		62,406		12,917		21,347		15,364		12,778
Operating leases		15,874		3,812		6,643		5,203		216
Other long-term obligations (excluding discount effect of $28.8 million for reclamation liability)		70,652		2,597		7,675		3,223		57,157
Purchase obligations for capital projects		10,830		10,830		—		—		—
ICG coal purchases		46,526		46,526		—		—		—

	$	368,288	$	94,682	$	71,665	$	59,790	$	142,151

Index to Financial Statements

ARLP expects to contribute $7.9 million to the defined benefit pension plan (Pension Plan) during 2006. We estimate our income tax cash requirements to be approximately $2.7 million in 2006.

Capital Expenditures

ARLP’s capital expenditures increased to $119.9 million in 2005 compared to $54.7 million in 2004. Please see discussion of “Cash Flows” above concerning the increase in capital expenditures. Capital expenditures include items received but not yet paid, which is disclosed as non-cash activity, and purchase of property, plant and equipment.

ARLP currently projects that its average annual maintenance capital expenditures will be approximately $59.4 million. ARLP also currently expects to fund its anticipated total capital expenditures for 2006 of $160.0 million with cash generated from operations and borrowings under its revolving credit facility described below.

Debt Obligations

Alliance Holdings GP, L.P.

At the closing of this offering, we will enter into a $5.0 million revolving credit facility with C-Holdings, LLC, an entity controlled by Mr. Craft, as the lender. The facility will be available exclusively to fund our working capital borrowings. Borrowings under the facility will mature on March 31, 2007 and will bear interest at LIBOR plus 2.0%. We will pay a commitment fee to C-Holdings, LLC on the unused portion of the working capital facility of 0.3% annually. We believe we have adequate financing capacity over the next twelve months to meet currently anticipated expenditures, and we currently have no plans for any other financing sources during that period. The operating and financial restrictions and covenants in our credit facility, if any, and any future financing agreements could adversely affect our ability to finance future operations or capital needs or to engage, expand or pursue our business activities.

Our credit facility will limit our ability to pay distributions in the event we are not in compliance with its terms.

Alliance Resources Partners, L.P.

Alliance Resource Operating Partners, L.P., ARLP’s intermediate partnership, has $162.0 million principal amount of 8.31% senior notes due August 20, 2014, payable in nine remaining equal annual installments of $18 million with interest payable semi-annually, or Senior Notes. On April 13, 2006, ARLP’s intermediate partnership entered into a $100.0 million revolving credit facility, or Credit Facility, which expires in 2011. The Credit Facility replaced a $85.0 million credit facility that would have expired September 2006. The interest rate on the Credit Facility is based on the LIBOR Rate and the financial performance of the intermediate partnership. Initially, the interest rate will be the LIBOR rate plus 0.875%. Letters of credit can be issued under the Credit Facility not to exceed $50.0 million. Outstanding letters of credit will reduce amounts available under the Credit Facility. On April 13, 2006 the intermediate partnership had letters of credit of $10.8 million outstanding that were transferred to the Credit Facility.

The Senior Notes and Credit Facility are guaranteed by all of the subsidiaries of ARLP’s intermediate partnership. The Senior Notes and Credit Facility contain various restrictive and affirmative covenants, including restrictions on the amount of distributions by ARLP’s intermediate partnership and the incurrence of other debt exceeding $135.0 million. The Senior Note restrictions on distributions are consistent with ARLP’s partnership agreement, and the Credit Facility limits borrowings to fund distributions to $35.0 million. The Senior Note limitations on the amount of distributions by the Intermediate Partnership include limiting distributions to the amount of available cash, as defined in ARLP’s partnership agreement, meeting certain debt ratios and

Index to Financial Statements

maintaining the absence of default or an event of default as defined in the Senior Note agreement. ARLP was in compliance with the covenants of both the original $85.0 million credit facility and Senior Notes at December 31, 2005. ARLP is in compliance with the covenants of the Credit Facility.

ARLP has previously entered into and have maintained agreements with two banks to provide additional letters of credit in an aggregate amount of $25.0 million to maintain surety bonds to secure ARLP’s obligations for reclamation liabilities and workers’ compensation benefits. At December 31, 2005, ARLP had $24.8 million in letters of credit outstanding under these agreements. ARLP’s special general partner guarantees the letters of credit.

Critical Accounting Policies

From ARLP’s Summary of Significant Accounting Policies, ARLP has identified the following accounting policies that require the exercise of ARLP’s most difficult, complex and subjective levels of judgment. ARLP’s judgments in the following areas are principally based on estimates and assumptions that affect the reported amounts and disclosures in the consolidated financial statements. Actual results that are influenced by future events could materially differ from the current estimates.

Revenue Recognition

Revenues from coal sales are recognized when title passes to the customer as the coal is shipped. Some coal supply agreements provide for price adjustments based on variations in quality characteristics of the coal shipped. In certain cases, a customer’s analysis of the coal quality is binding and the results of the analysis are received on a delayed basis. In these cases, ARLP estimates the amount of the quality adjustment and adjusts the estimate to actual when the information is provided by the customer. Historically such adjustments have not been material. Non-coal sales revenues primarily consist of rental and service fees associated with agreements to host and operate third party coal synfuel facilities and to assist with the coal synfuel marketing and other related services. These non-coal sales revenues are recognized as the services are performed. Transportation revenues are recognized in connection with incurring the corresponding costs of transporting coal to customers through third party carriers since ARLP is directly reimbursed for these costs through customer billings.

Long-Lived Assets

ARLP reviews the carrying value of long-lived assets whenever events or changes in circumstances indicate that the carrying amount may not be recoverable based upon estimated undiscounted future cash flows. The amount of impairment is measured by the difference between the carrying value and the fair value of the asset, which is based on cash flows from that asset, discounted at a rate commensurate with the risk involved. Events or changes in circumstance that could cause ARLP to perform such a review include, but are not limited to, the loss of a major coal supply agreement, a significant decline in demand for ARLP’s coal or an adverse change in geologic conditions.

Mine Development Costs

Mine development costs are capitalized until production, other than production incidental to the mine development process, commences and amortized over the estimated life of the mine. Mine development costs represent costs that establish access to mineral reserves and include costs associated with sinking or driving shafts and underground drifts, permanent excavations, roads and tunnels.

Reclamation and Mine Closing Costs

The Federal SMCRA and similar state statutes require that mine property be restored in accordance with specified standards and an approved reclamation plan. ARLP records the liability for the estimated cost of future

Index to Financial Statements

mine reclamation and closing procedures on a present value basis when incurred, and the associated cost is capitalized by increasing the carrying amount of the related long-lived asset. Those costs relate to sealing portals at underground mines and to reclaiming the final pit and support acreage at surface mines. Other costs common to both types of mining are related to removing or covering refuse piles and settling ponds, and dismantling preparation plants, other facilities and roadway infrastructure. ARLP has accrued liabilities of $41.3 million and $34.0 million for these costs at December 31, 2005 and 2004, respectively. The liability for mine reclamation and closing procedures is sensitive to changes in cost estimates and estimated mine lives.

Workers’ Compensation and Pneumoconiosis (“Black Lung”) Benefits

ARLP provides income replacement and medical treatment for work-related traumatic injury claims as required by applicable state laws. ARLP provides for these claims through self-insurance programs. The liability for traumatic injury claims is the estimated present value of current workers’ compensation benefits, based on an annual independent actuarial study. The actuarial calculations are based on a blend of actuarial projection methods and numerous assumptions including development patterns, mortality, medical costs and interest rates. ARLP had accrued liabilities of $37.0 million and $32.6 million for these costs at December 31, 2005 and 2004, respectively. A one-percentage-point reduction in the discount rate would have increased the liability at December 31, 2005 approximately $2.1 million, which would have a corresponding increase in operating expenses.

Coal mining companies are subject to the Federal Mine Safety and Health Act of 1977, as amended, and various state statutes for the payment of medical and disability benefits to eligible recipients related to coal worker’s pneumoconiosis, or black lung. ARLP provides for these claims through self-insurance programs. ARLP’s estimated black lung liability is based on an annual actuarial study performed by an independent actuary. The actuarial calculations are based on numerous assumptions including disability incidence, medical costs, mortality, death benefits, dependents and interest rates. ARLP had accrued liabilities of $23.8 million and $20.3 million for these benefits at December 31, 2005 and 2004, respectively. A one-percentage-point reduction in the discount rate would have increased the expense recognized for the year ended December 31, 2005 by approximately $1.2 million. Under the service cost method used to estimate ARLP’s black lung benefits liability, actuarial gains or losses attributable to changes in actuarial assumptions such as the discount rate are amortized over the remaining service period of active miners.

Related Party Transactions

Administrative Services

ARLP’s partnership agreement provides that ARLP’s managing general partner and its affiliates be reimbursed for all direct and indirect expenses they incur or payments they make on our behalf, including, but not limited to, management’s salaries and related benefits (including incentive compensation), and accounting, budget, planning, treasury, public relations, land administration, environmental, permitting, payroll, benefits, disability, workers’ compensation management, legal and information technology services. ARLP’s managing general partner may determine in its sole discretion the expenses that are allocable to ARLP. Total costs billed by ARLP’s managing general partner and its affiliates to ARLP were approximately $14,069,000, $28,536,000, and $12,471,000 for the years ended December 31, 2005, 2004, and 2003, respectively.

The decrease in 2005 compared to 2004 was primarily attributable to lower compensation accruals for the LTIP, STIP and SERP. The increase from 2003 to 2004 was primarily attributable to higher accruals for the LTIP, STIP and SERP. The expenses associated with LTIP and SERP were impacted by the market value of the ARLP’s Common Units, which had a closing market price of $37.20, $37.00, and $17.19 at December 31, 2005, 2004 and 2003, respectively. The amounts billed by ARLP’s managing general partner include $10,559,000, $24,242,000, and $9,319,000 for the years ended December 31, 2005, 2004 and 2003, respectively, for the LTIP, STIP and SERP.

Index to Financial Statements

Tunnel Ridge

In January 2005, ARLP acquired 100% of the limited liability company member interests of Tunnel Ridge, LLC for approximately $500,000 and the assumption of reclamation liabilities from Alliance Resource Holdings, Inc., a company owned by ARLP’s management. Tunnel Ridge, LLC controls through a coal lease agreement with ARLP’s special general partner approximately 9,400 acres of land located in Ohio County, West Virginia and Washington County, Pennsylvania containing an estimated 70 million tons of high-sulfur coal in the Pittsburgh No. 8 coal seam. Under the terms of the coal lease, beginning on January 1, 2005, Tunnel Ridge, LLC has paid and will continue to pay ARLP’s special general partner an advance minimum royalty of $3.0 million per year, which advance royalty payments will be fully recoupable against earned royalties.

Tunnel Ridge, LLC also has rights to surface land and other tangible assets under a separate lease agreement with ARLP’s special general partner. Under the terms of the lease agreement, Tunnel Ridge, LLC has paid and will continue to pay ARLP’s special general partner an annual lease payment of $240,000. The lease agreement has an initial term of four years, which term may be extended to be consistent with the term of the coal lease. Lease expense was $240,000 for the year ended December 31, 2005.

Warrior Acquisition

On February 14, 2003, ARLP acquired Warrior Coal, LLC from an affiliate, ARH Warrior Holdings, Inc., a subsidiary of Alliance Resource Holdings, Inc., pursuant to an Amended and Restated Put and Call Option Agreement (Put/Call Agreement). Warrior Coal, LLC, or Warrior, purchased the capital stock of Roberts Bros. Coal Co., Inc., Warrior Coal Mining Company, Warrior Coal Corporation and certain assets of Christian Coal Corp. and Richland Mining Co., Inc. in January 2001. ARLP’s managing general partner had previously declined the opportunity to purchase these assets as ARLP had previously committed to major capital expenditures at two existing operations. As a condition to not exercising its right of first refusal, ARLP requested that ARH Warrior Holdings, Inc. enter into a put and call arrangement for Warrior. ARLP and ARH Warrior Holdings, Inc., with the approval of the conflicts committee of ARLP’s managing general partner, entered into the Put/Call Agreement in January 2001. Concurrently, ARH Warrior Holdings, Inc. acquired Warrior in January 2001 for $10.0 million.

The put option price of $12.7 million was paid to ARH Warrior Holdings, Inc. in accordance with the terms of the Put/Call Agreement. In addition, ARLP repaid Warrior’s borrowings of $17.0 million under the revolving credit agreement between ARLP’s special general partner and Warrior. The primary borrowings under the revolving credit agreement financed new infrastructure capital projects at Warrior that have contributed to improved productivity and significantly increased capacity. ARLP funded the Warrior acquisition through a portion of the proceeds received from the issuance of 4,500,000 common units. Because the Warrior acquisition was between entities under common control, it has been accounted for at historical cost in a manner similar to that used in a pooling of interests.

Under the terms of the Put/Call Agreement, ARLP assumed certain other obligations, including a mineral lease and sublease with SGP Land, a subsidiary of Alliance Resource Holdings, Inc., covering coal reserves that have been and will continue to be mined by Warrior. The terms and conditions of the mineral lease and sub-lease remain unchanged.

SGP Land

Dotiki has a mineral lease and sublease with SGP Land requiring annual minimum royalty payments of $2.7 million, payable in advance through 2013 or until $37.8 million of cumulative annual minimum and/or earned royalty payments have been paid. Dotiki paid royalties of $3,449,000, $4,611,000 and $3,460,000 for the years ended December 31, 2005, 2004 and 2003, respectively. As of December 31, 2005, Dotiki has recouped, as earned royalties, all advance minimum royalty payments made under these lease terms except for $1,018,000.

Index to Financial Statements

Warrior has a mineral lease and sublease with SGP Land. Under the terms of the lease, Warrior has paid and will continue to pay in arrears an annual minimum royalty obligation of $2,270,000 until $15,890,000 of cumulative annual minimum and/or earned royalty payments have been paid. The annual minimum royalty periods are from October 1st through the end of the following September, expiring September 30, 2007. Warrior paid royalties of $3,627,000, $2,561,000 and $2,453,000 for the years ended December 31, 2005, 2004 and 2003, respectively. As of December 31, 2005, Warrior has recouped, as earned royalties, all advance minimum royalty payments made in accordance with these lease terms.

Under the terms of the mineral lease and sublease agreements described above, Dotiki and Warrior also reimbursed SGP Land for SGP Land’s base lease obligations. ARLP reimbursed SGP Land $6,379,000, $5,428,000 and $4,395,000 for the years ended December 31, 2005, 2004 and 2003, respectively, for the base lease obligations. As of December 31, 2005, Dotiki and Warrior have recouped, as earned royalties, all advance minimum royalty payments made in accordance with these terms except for $236,000.

In 2001, SGP Land, as successor in interest to an unaffiliated third party, entered into an amended mineral lease with MC Mining, LLC, or MC Mining. Under the terms of the lease, MC Mining has paid and will continue to pay an annual minimum royalty obligation of $300,000 until $6.0 million of cumulative annual minimum and/or earned royalty payments have been paid. MC Mining paid royalties of $600,000 and $479,000 for the years ended December 31, 2005 and 2003, respectively. The 2004 annual minimum royalty obligation of $300,000 was paid in January 2005. As of December 31, 2005, MC Mining has recouped, as earned royalties, all advance minimum royalty payments made under these lease terms except for $600,000.

On October 23, 2005, ARLP exercised its option to lease and/or sublease certain reserves from an affiliate, SGP Land, LLC, that are associated with the Hopkins County Coal, LLC’s Elk Creek mine. Upon exercise of the option agreement, Hopkins County Coal entered into a Coal Lease and Sublease Agreement as well as a Royalty Agreement (collectively, the “Coal Lease Agreements”). The terms of the Coal Lease Agreements are through December 2015, with the right to extend the term for successive one-year periods for as long as ARLP is mining within the coal field, as such term is defined in the Coal Lease Agreements.

The Coal Lease Agreements provide for five annual minimum royalty payments of $684,000. The combined annual minimum royalty payments, consistent with the option agreement, and cumulative option fees of $3.4 million previously paid by ARLP are fully recoupable against future tonnage royalty payments. Under the terms of the Coal Lease Agreements, Hopkins County Coal will also reimburse SGP Land for SGP Land’s base lease obligations, and the earned royalty rate is $0.25 per ton. Hopkins County Coal paid advance minimum royalties and/or option fees of $684,000 and $1,368,000 during the years ended December 31, 2005 and 2004, respectively. The 2003 option fee of $684,000 was paid in January 2004 and is included in the due to affiliates balance as of December 31, 2003. As of December 31, 2005, Hopkins County Coal has outstanding $4,059,000 of advance minimum royalty payments made under the Coal Lease Agreements that management expects will be recouped from future production.

Special General Partner

Effective January 2001, Gibson entered into a noncancelable operating lease arrangement with ARLP’s special general partner for Gibson’s coal preparation plant and ancillary facilities. Based on the terms of the lease, Gibson has paid and will continue to make monthly payments of approximately $216,000 through January 2011. Lease expense incurred for each of the three years in the period ended December 31, 2005 was $2,595,000.

Index to Financial Statements

credit outstanding. ARLP’s special general partner agreed to waive the guarantee fee in exchange for a parent guarantee from ARLP’s intermediate partnership and Alliance Coal on the mineral lease and sublease with Dotiki and Warrior. Since the guarantee is made on behalf of entities within the consolidated ARLP, the guarantee has no fair value under Financial Accounting Standards Board (FASB) Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others and does not impact the consolidated financial statements. ARLP paid approximately $31,300 in guarantee fees to its special general partner for the year ended December 31, 2003.

Accruals of Other Liabilities

ARLP had accruals for other liabilities, including current obligations, totaling $115.5 million and $101.1 million at December 31, 2005 and 2004. These accruals were chiefly comprised of workers’ compensation benefits, black lung benefits, and costs associated with reclamation and mine closings. These obligations are self- insured. The accruals of these items were based on estimates of future expenditures based on current legislation, related regulations and other developments. Thus, from time to time, ARLP’s results of operations may be significantly affected by changes to these liabilities.

Pension Plan

ARLP maintains a Pension Plan, which covers certain employees at three mining operations.

ARLP’s pension expense was approximately $3,006,000 and $2,751,000 for the years ended December 31, 2005 and 2004, respectively. The pension expense is based upon a number of actuarial assumptions, including an expected long-term rate of returns on ARLP’s Pension Plan assets of 8.0% for both years ended December 31, 2005 and 2004 and discount rates of 5.75% and 6.25% for the years ended December 31, 2005 and 2004, respectively. ARLP’s actual return on plan assets was 7.2% and 11.9% for the years ended December 31, 2005 and 2004, respectively. Additionally, ARLP bases its determination of pension expense on the preferred method of unsmoothed fair market valuation of assets, which immediately recognizes all investment gains and losses.

In developing ARLP’s expected long-term rate of return assumption, ARLP evaluated input from its investment manager, including its review of asset class return expectations by economists, and ARLP’s actuary. At January 1, 2006, ARLP’s expected long-term return assumption is at least 8.0%. ARLP’s advisors base the projected returns on broad equity and bond indices. ARLP’s expected long-term rate of return on Pension Plan assets is based on an asset allocation assumption of 80.0% with equity managers, with an expected long-term rate of return of 10.4%, and 20.0% with fixed income managers, with an expected long-term rate of return of 5.3%. The pension plan trustee regularly reviews ARLP’s actual asset allocation in accordance with ARLP’s investment guidelines and periodically rebalances ARLP’s investments to ARLP’s targeted allocation when considered appropriate. The investment committee annually reviews ARLP’s asset allocation with ARLP’s compensation committee.

The discount rate that ARLP utilizes for determining its future pension obligation is based on a review of currently available high-quality fixed-income investments that receive one of the two highest ratings given by a recognized rating agency. ARLP has historically used the average monthly yield for December of an Aa-rated utility bond index as the primary benchmark for establishing the discount rate. The duration of the bonds that comprise this index is comparable to the duration of the benefit obligation in the Pension Plan. The discount rate determined on this basis decreased from 5.75% at December 31, 2004 to 5.6% at December 31, 2005.

ARLP estimates that its Pension Plan expense and cash contributions will be approximately $3,350,000 and $7,900,000, respectively, in 2006. Future actual pension expense and contributions will depend on future investment performance, changes in future discount rates and various other factors related to the employees participating in the Pension Plan.

Index to Financial Statements

Lowering the expected long-term rate of return assumption by 1.0% (from 8.0% to 7.0%) at December 31, 2004 would have increased ARLP’s pension expense for the year ended December 31, 2005 by approximately $240,000. Lowering the discount rate assumption by 0.5% (from 5.75% to 5.25%) at December 31, 2004 would have increased ARLP’s pension expense for the year ended December 31, 2005 by approximately $482,000.

Inflation

In 2005, an increase in the cost of steel, power and fuel has increased, directly and indirectly, ARLP’s materials, supplies and maintenance costs. Other elements of inflation in the U.S. have been relatively low in recent years and did not have a material impact on ARLP’s results of operations for the three years in the period ended December 31, 2005.

New Accounting Standards

In November 2004, the Financial Accounting Standard Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 151, Inventory Costs. SFAS No. 151 is an amendment of Accounting Research Bulletin (ARB) No. 43, chapter 4, paragraph 5 that deals with inventory pricing. SFAS No. 151 clarifies the accounting for abnormal amounts of idle facility expenses, freight, handling costs, and spoilage. Under previous guidance, paragraph 5 of ARB No. 43, chapter 4, items such as idle facility expense, excessive spoilage, double freight, and rehandling costs might be considered to be so abnormal, under certain circumstances, as to require treatment as current period charges. This Statement eliminates the criterion of “so abnormal” and requires that those items be recognized as current period charges. Also, SFAS No. 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for fiscal years beginning after June 15, 2005. ARLP is currently analyzing the requirements of SFAS No. 151 and believes that its adoption will not have any significant impact on ARLP’s financial position, results of operations or cash flows.

In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment. SFAS No. 123R is a revision of SFAS No. 123, Accounting for Stock Based Compensation, and supersedes Accounting Principles Board Opinion (“APB 25”). Among other items, SFAS No. 123R eliminates the use of APB No. 25 and the intrinsic value method of accounting, and requires companies to recognize in their financial statements the cost of employee services received in exchange for awards of equity instruments, based on the fair value of those awards, on the grant date.

In April 2005, the Securities and Exchange Commission issued a rule that amends the implementation dates for ARLP’s adoption of SFAS No. 123R from the third quarter of 2005 to the first quarter of 2006. SFAS No. 123R permits companies to adopt its requirements using either a “modified prospective” method, or a “modified retrospective” method. Under the “modified prospective” method, compensation cost is recognized in the financial statements beginning with the effective date, based on the requirements of SFAS No. 123R of all share-based payments granted after the effective date of the rule and based on the requirements of SFAS No. 123 for all unvested awards granted prior to the effective date of SFAS No. 123R. Under the “modified retrospective” method, the requirements are the same as under the “modified prospective” method, but also permits entities to restate financial statements of previous periods based on proforma disclosures made in accordance with SFAS No. 123. ARLP adopted SFAS No. 123R on January 1, 2006. ARLP used the modified prospective method of adoption provided under SFAS No. 123R, and therefore, will not restate prior period results. Because ARLP has previously expensed share-based payments using the current market value of its common units at the end of each period, the adoption of SFAS No. 123R will not have a material impact on its consolidated results of operations. The intrinsic value previously recognized at December 31, 2005 essentially equals the fair value at January 1, 2006 and therefore, no incremental compensation cost will be recognized upon adoption of SFAS 123R. As required by SFAS No. 123R, the fair value will be reduced for expected forfeitures, to the extent compensation cost has been previously recognized and this amount will be recognized as a cumulative effect of accounting change. Because the share-based compensation will be settled by delivery of common units, except for the

Index to Financial Statements

minimum statutory withholding requirements, the previously recognized liability reflected in the due to affiliates current and long-term accounts in the consolidated balance sheet will be reclassified to Partners’ Capital upon adoption of SFAS 123R.

As permitted by SFAS No. 123, prior to January 1, 2006, ARLP accounted for share-based payments to employees using the APB No. 25 intrinsic method and related FASB Interpretation No. 28 based upon the current market value of its common units at the end of each period. ARLP has recorded compensation expense of $8,193,000, $20,320,000 and $7,687,000 for each of the three years ended December 31, 2005, respectively.

In March 2005, the FASB issued Emerging Issues Task Force (EITF) No. 04-6 Accounting for Stripping Costs in the Mining Industry and concluded that stripping costs incurred during the production phase of a mine are variable production costs that should be included in the costs of the inventory produced during the period that the stripping costs are incurred. EITF No. 04-6 does not address the accounting for stripping costs incurred during the pre-production phase of a mine. EITF No. 04-6 is effective for the first reporting period in fiscal years beginning after December 15, 2005 with early adoption permitted. The effect of initially applying this consensus would be accounted for in a manner similar to a cumulative-effect adjustment. Since ARLP has historically adhered to the accounting principles similar to EITF No. 04-6 in accounting for stripping costs incurred at ARLP’s surface operation, ARLP believes that the adoption of EITF No. 04-6, on January 1, 2006, did not have a material impact on its consolidated financial statements.

In April 2005, the FASB adopted Financial Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations (FIN 47). FIN 47 clarifies that the term “conditional asset obligation” from SFAS No. 143, Accounting for Asset Retirement Obligations, refers to a legal obligation to perform an asset retirement activity on which the timing or method of settlement is conditional on a future event and requires the recognition of such conditional obligations even though uncertainty exists. Our adoption of FIN 47 as of December 31, 2005 did not affect our consolidated financial statements.

Quantitative and Qualitative Disclosures about Market Risk

ARLP has significant long-term coal supply agreements. Virtually all of the long-term coal supply agreements are subject to price adjustment provisions, which permit an increase or decrease periodically in the contract price to principally reflect changes in specified price indices or items such as taxes, royalties or actual production costs.

Essentially all of ARLP’s transactions are denominated in U.S. dollars, and as a result, ARLP does not have material exposure to currency exchange-rate risks. At the current time, ARLP does not have any interest rate, foreign currency exchange rate or commodity price-hedging transactions outstanding.

On August 22, 2003, ARLP’s intermediate partnership completed an $85 million revolving credit facility which replaces a $100 million credit facility. Borrowings under the credit facility and the previous credit facility are and were at variable rates and, as a result, ARLP has interest rate exposure. ARLP’s earnings are not materially affected by changes in interest rates. ARLP had no borrowings outstanding under the Credit Facility during 2005 or at December 31, 2005.

Index to Financial Statements

The table below provides information about ARLP’s market sensitive financial instruments and constitutes a “forward-looking statement.” The fair values of long-term debt are estimated using discounted cash flow analyses, based upon ARLP’s current incremental borrowing rates for similar types of borrowing arrangements as of December 31, 2005, and 2004. The carrying amounts and fair values of financial instruments are as follows (dollars in thousands):


	Expected Maturity Dates as of December 31, 2005																				Fair Value December 31, 2005
	2006			2007			2008			2009			2010			Thereafter			Total		Fair Value December 31, 2005
Senior Notes fixed rate	$	18,000		$	18,000		$	18,000		$	18,000		$	18,000		$	72,000		$	162,000	$	176,254
Weighted Average interest rate		8.31	%		8.31	%		8.31	%		8.31	%		8.31	%		8.31	%

	Expected Maturity Dates as of December 31, 2004																				Fair Value December 31, 2004
	2005			2006			2007			2008			2009			Thereafter			Total		Fair Value December 31, 2004
Senior Notes fixed rate	$	18,000		$	18,000		$	18,000		$	18,000		$	18,000		$	90,000		$	180,000	$	197,278
Weighted Average interest rate		8.31	%		8.31	%		8.31	%		8.31	%		8.31	%		8.31	%

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Index to Financial Statements

BUSINESS OF ALLIANCE HOLDINGS GP, L.P.

General

Our cash generating assets consist of our partnership interests in ARLP, a publicly traded limited partnership engaged in the production and marketing of coal to major United States utilities and industrial users. Our aggregate partnership interests in ARLP will initially consist of the following:

•

a 1.98% general partner interest in ARLP, which we hold through our 100% ownership interest in Alliance Resource Management GP, LLC, ARLP’s managing general partner;

•

the incentive distribution rights in ARLP, which we hold through our 100% ownership interest in Alliance Resource Management GP, LLC;

•

15,550,628 common units of ARLP, representing approximately 42.7% of the common units of ARLP; and

•

a 0.001% managing interest in Alliance Coal, LLC.

Our primary business objective is to increase our cash distributions to our unitholders by actively assisting ARLP in executing its business strategy. ARLP’s business strategy is to create sustainable, capital-efficient growth in distributable cash flow to maximize its distribution to unitholders by, among other things (1) expanding its operations by adding and developing mines and coal reserves in existing, adjacent or neighboring properties, (2) developing new mining complexes in locations with attractive market conditions, (3) continuing to make productivity improvements in order to be a safe, low-cost producer in each region in which it operates and (4) strengthening its position with existing and future customers by offering a broad range of coal qualities, transportation alternatives and customized services.

We intend to support ARLP in implementing its business strategy by assisting it in identifying, evaluating, and pursuing growth opportunities. In the future, we may also support the growth of ARLP through the use of our capital resources, which could involve loans or capital contributions to ARLP to provide funding for the acquisition of a business or asset or for an internal growth project. We may also provide ARLP with other forms of credit support, such as guarantees related to financing for a project or other types of support related to a merger or acquisition transaction.

ARLP is required by its partnership agreement to distribute all of its cash on hand at the end of each quarter after establishing reserves to provide for the proper conduct of its business or to provide for future distributions. Historically, these reserves have represented a substantial portion of the cash ARLP generates from its operations and have been used in funding organic growth projects of ARLP. While maintaining these reserves, ARLP has successfully increased its distributions to its unitholders. On February 14, 2006, ARLP paid a quarterly distribution of $0.46 per unit (or $1.84 per unit on our annualized basis) for the quarter ended December 31, 2005. On April 26, 2006, ARLP declared a quarterly distribution of $0.46 per unit for the quarter ended March 31, 2006 to be paid on May 15, 2006. ARLP has increased its quarterly distribution by 84.0% since its initial public offering in 1999 and has increased its quarterly distribution in six of the last 10 quarters.

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Index to Financial Statements

While we, like ARLP, are structured as a limited partnership, our capital structure and cash distribution policy differ materially from those of ARLP. Most notably, our general partner does not have an economic interest in us and is not entitled to receive any distributions from us and our capital structure does not include incentive distribution rights. Therefore, all of our distributions are made to our common unitholders.

Our ownership of ARLP’s incentive distribution rights entitle us to receive the following percentages of cash distributed by ARLP as the following target cash distribution levels are reached:

•

13.0% of all cash distributed in a quarter after $0.275 has been distributed in respect of each common unit of ARLP for that quarter;

•

23.0% of all cash distributed after $0.3125 has been distributed in respect of each common unit of ARLP for that quarter; and

•

48.0% of all cash distributed after $0.375 has been distributed in respect of each common unit of ARLP for that quarter.

•

ARLP’s 36,426,306 common units outstanding; and

•

The graph illustrates the impact to us of ARLP’s raising or lowering its per unit distribution from its most recent quarterly distribution of $0.46 per unit, or $1.84 per unit on an annualized basis. This information is presented for illustrative purposes only, is not intended to be a prediction of future performance and does not attempt to illustrate the impact of changes in our or ARLP’s business, including changes that may result from changes in interest rates, changes in coal prices, changes in general economic conditions, or the impact of any future acquisitions or expansion projects or the issuance of additional units.

LOGO

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Index to Financial Statements


	Three Months Ended December 31, 2005
	(in thousands, except unit and per unit amounts)
Net income	$	45,658
Depreciation, depletion and amortization		14,815
Interest expense		2,131
Income taxes		426

EBITDA(1)		63,030
Interest expense		(2,131	)
Estimated maintenance capital expenditures(2)		(14,175	)
Income tax expense		(426	)

ARLP cash available for distribution before reserves	$	46,298

ARLP actual cash distributions	$	21,057

ARLP coverage ratio(3)		2.2	x
Distributions on our partnership interests in ARLP:
Common units	$	7,153
1.98% general partner interest		418
Incentive distribution rights		3,879

Total distributions to us		11,450
Estimated public company expenses		(375	)

Our cash available for distribution	$	11,075

Our anticipated cash distributions	$	11,075

Our common units outstanding		59,863
Our anticipated distribution per unit	$	0.185

(1)

ARLP defines EBITDA as net income before net interest expense, income taxes and depreciation, depletion and amortization. EBITDA is used as a supplemental financial measure by ARLP’s management and by external users of ARLP’s financial statements such as investors, commercial banks, research analysts and others, to assess:

the financial performance of ARLP’s assets without regard to financing methods, capital structure or historical cost basis;

the ability of ARLP’s assets to generate cash sufficient to pay interest costs and support ARLP’s indebtedness;

ARLP’s 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. ARLP’s 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).

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Index to Financial Statements

The following table presents a reconciliation of ARLP’s GAAP financial measure of cash provided by operating activities to the non-GAAP financial measure of EBITDA:


	Three Months Ended December 31, 2005
	(in thousands)
Cash provided by operating activities	$	42,049
Reclamation and mine closing		(568	)
Coal inventory adjustment to market		(506	)
Other		(144	)
Net effect of changes in operating assets and liabilities		19,642
Interest expense		2,131
Income taxes		426

EBITDA	$	63,030

(2)	ARLP’s maintenance capital expenditures, as defined under the terms of ARLP’s partnership agreement, are those capital expenditures required to maintain, over the long term, the operating capacity of ARLP’s capital assets.

(3)	ARLP refers to the ratio of cash available for distribution before reserves to actual cash distribution as the “coverage ratio.”

Please read “Our Cash Distribution Policy and Restrictions on Distributions.” ARLP’s cash distributions to us will vary depending on several factors, including ARLP’s total outstanding partnership interests on the record date for the distribution, the per unit distribution and our relative ownership of ARLP’s partnership interests. If ARLP increases distributions to its unitholders, including us, we would expect to increase distributions to our unitholders, although the timing and amount of such increased distributions, if any, will not necessarily be comparable to the timing and amount of the increase in distributions made by ARLP. In addition, the level of distributions we receive from ARLP may be affected by the various risks associated with the underlying business of ARLP. The level of distributions our unitholders receive from us will also be affected by the various risks associated with the underlying business of ARLP. Please read “Risk Factors.”

We intend to pay to our unitholders, on a quarterly basis, distributions equal to the cash we receive from our distributions, less certain reserves for expenses and other uses of cash, including:

•

the expenses associated with being a public company and other general and administrative expenses;

•

interest expense related to any current and future indebtedness;

•

expenditures to maintain or, at our election, to increase our ownership interest in ARLP; and

•

reserves our general partner believes prudent to maintain for the proper conduct of our business or to provide for future distributions.

If ARLP is successful in implementing its business strategy and increasing distributions to its limited partners, we would generally expect to increase distributions to our unitholders, although the timing and amount of any such increased distributions will not necessarily be comparable to the timing and amount of increased ARLP distributions. In August 2006, we expect to pay a prorated distribution for the portion of the quarter ending June 30, 2006 that we are a publicly traded partnership. However, we cannot assure you that any distributions will be declared or paid. Any distributions received by us from ARLP related to periods prior to the closing of this offering will be distributed entirely to the management investors. Please read “Our Cash Distribution Policy and Restrictions on Distributions.”

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Index to Financial Statements

•

with respect to ARLP distributions, ARLP’s common unitholders have a priority over the incentive distribution rights; and

•

we participate in ARLP’s managing general partner’s distributions and the incentive distribution rights, and ARLP’s common unitholders do not.

How Our Partnership Agreement Terms Differ from those of Other Publicly Traded Partnerships

Although we are organized as a limited partnership, the terms of our partnership agreement differ from those of many other publicly traded partnerships. For example,

•

our general partner is not entitled to incentive distributions (most publicly traded partnerships have incentive distribution rights which entitle the general partner to receive increasing percentages, commonly up to 50%, of the cash distributed in excess of a certain per unit distribution);

•

we do not have subordinated units (most publicly traded partnerships initially have subordinated units that (i) do not receive distributions in a quarter until all common units receive the minimum quarterly distribution plus arrearages and (ii) convert to common units upon meeting certain financial tests); and

•

our general partner is not required to make additional capital contributions to us in connection with additional issuances of units by us because it has no economic interest in us (most general partners of publicly traded partnerships have a 2% general partner interest and are required to or have the option to make additional capital contributions to the partnership in order to maintain their percentage general partner interest upon issuance of additional partnership interests by the partnership).

You should read the summaries in “Description of Our Common Units” and “Description of Our Partnership Agreement,” as well as Appendix A—Form of Amended and Restated Agreement of Limited Partnership of Alliance Holdings GP, L.P., for a more complete description of the terms of our partnership agreement.

Legal Proceedings

We are not a party to any litigation.

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Index to Financial Statements

BUSINESS OF ALLIANCE RESOURCE PARTNERS, L.P.

General

ARLP currently operates seven underground mining complexes in Illinois, Indiana, Kentucky and Maryland. ARLP’s surface mine located in Kentucky depleted its active reserve area in December 2005, and its production eventually will be replaced by an underground mine that is expected to emerge from mine development during the second quarter of 2006. ARLP is also currently developing an additional underground mine in West Virginia that will replace production from ARLP’s underground mine in Maryland, which is expected to deplete its reserves in November 2006. Its mining activities are conducted in three geographic regions commonly referred to in the coal industry as the Illinois Basin, Central Appalachia and Northern Appalachia regions. ARLP has grown historically, and expects to grow in the future, through expansion of its operations by adding and developing mines and coal reserves in existing, adjacent or neighboring properties. At ARLP’s Warrior Coal, LLC, or Warrior, mining complex located in the Illinois Basin region, ARLP hosts and operates a coal synfuel facility, supplies the facility with coal feedstock, assists with the marketing of coal synfuel and provides other services to the owner of the synfuel facility. In January 2005, ARLP entered into several agreements to provide similar services for a synfuel facility to be located at ARLP’s Gibson mining complex in the Illinois Basin region and in August 2005 entered into an agreement to provide coal feedstock to a synfuel facility located at the power plant of the primary customer of the Mettiki Coal, LLC, or Mettiki, mine that is located in the Northern Appalachia region.

For the year ended December 31, 2005, ARLP had revenues of approximately $838.7 million and net income of approximately $160.0 million.

ARLP’s Business Strategy

ARLP’s business strategy is to create sustainable, capital-efficient growth in distributable cash flow to maximize its distributions to its unitholders by:

•

expanding its operations by adding and developing mines and coal reserves in existing, adjacent or neighboring properties;

•

developing new mining complexes in locations with attractive market conditions;

•

extending the lives of its mines through the development of currently undeveloped coal reserves using its existing infrastructure;

•

engaging in strategic acquisitions of mining operations and reserves;

•

continuing to make productivity improvements in order to be a safe, low-cost producer in each region in which it operates;

•

strengthen its position with existing and future customers by offering a broad range of coal qualities, transportation alternatives and customized services; and

•

developing strategic relationships to take advantage of opportunities created by the significant changes that have occurred in the electric utility industry.

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Index to Financial Statements

management believes this focus on organic opportunities provides the most capital-efficient means of achieving ARLP’s growth objectives due to: (1) the absence of an acquisition premium typically associated with a competitive bidding process involving multiple parties; and (2) the ability to realize cost savings and revenue enhancements by operating the newly developed mines in conjunction with the expansion of ARLP’s existing operations.

•

anticipated long-term benefits, such as new customer relationships or cost-savings; and

•

to enter into new geographic areas or new lines of business.

The price to be paid and other terms of any acquisitions ARLP makes from related parties will be approved by the conflicts committee of the board of directors of ARLP’s managing general partner.

Recent Developments

ARLP Financial and Operating Results for the Three Months Ended March 31, 2006 Compared to the Three Months Ended March 31, 2005. On April 24, 2006, ARLP announced financial and operating results for the three months ended March 31, 2006. Net income for the three months ended March 31, 2006 increased approximately 23% to $48.2 million as compared to $39.1 million for the three months ended March 31, 2005. The following chart sets forth ARLP’s summarized results for the periods indicated:


	Three Months Ended March 31,
	2005		2006
	(In thousands, except per ton amounts)
Tons sold		5,631		6,102
Tons produced		5,729		6,248
Coal sales price per ton(1)	$	31.76	$	35.76

Total revenues	$	195,627	$	238,320
Total operating expenses		155,943		189,695

Income from operations		39,684		48,625
Other income		105		271

Income before income taxes and cumulative effect of accounting change		39,789		48,896
Income tax expense		710		759

Income before cumulative effect of accounting change		39,079		48,137
Cumulative effect of accounting change		—		112

Net income	$	39,079	$	48,249

(1)	Sales price per ton is defined as total coal sales divided by total tons sold.

ARLP’s coal sales volumes for the three months ended March 31, 2006 totaled 6.1 million tons, an increase of more than 8% over the 5.6 million tons of coal sold in the three months ended March 31, 2005. This increase was primarily attributable to higher sales from the Excel No. 3 mine, which resumed operations following the

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Index to Financial Statements

MC Mining Fire Incident on February 21, 2005. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—MC Mining Fire Incident.”

Suspension of Coal Synfuel Facility Operation at Warrior. On April 19, 2006, ARLP received a letter from the managing member of Synfuel Solutions Operating, LLC, or SSO, which stated that effective April 23, 2006, due to the increase in the wellhead price of domestic crude oil, SSO has elected to exercise its contractual right to suspend until further notice operation of its coal synfuel production facility located at ARLP’s Warrior Coal, LLC, or Warrior, mining complex in Hopkins County, Kentucky. ARLP receives fees from coal sales, rental, marketing and other services provided to SSO pursuant to various long-term agreements associated with the coal synfuel facility located at Warrior. These agreements, which expire on December 31, 2007, are dependent on the ability of SSO to use certain qualifying federal income tax credits available to the coal synfuel facility and are subject to early cancellation if the synfuel tax credits become unavailable to SSO due to a rise in the price of crude oil or otherwise. SSO has advised ARLP that resumption of operations of the synfuel facility is dependent on the price of crude oil in the future. In anticipation of the suspension of operations at the SSO coal synfuel production facility, ARLP will sell coal directly to SSO’s synfuel customers under “back up” coal supply agreements, which automatically provide for the sale of ARLP’s coal in the event these customers do not purchase coal synfuel from SSO. ARLP has also entered into agreements with the owners of two other coal synfuel production facilities—PC Indiana Synthetic Fuel #2, L.L.C., or PCIN, related to its coal synfuel facility located at ARLP’s Gibson County Coal, LLC mining complex in Gibson County, Indiana and Mt. Storm Coal Supply, LLC, or Mt. Storm Coal Supply, related to its coal synfuel facility located at Virginia Electric and Power Company’s Mt. Storm power station, which is adjacent to ARLP’s Mettiki Coal, LLC mining complex in Garrett County, Maryland. The PCIN and Mt. Storm Coal Supply synfuel facilities currently remain in operation; however, the continued operation of these facilities cannot be assured as the operators of these facilities have similar contractual rights to suspend production due to higher oil prices. For 2006, the incremental net income benefit to ARLP from all of its coal synfuel-related agreements is expected to be in the range of approximately $26.0 million to $28.0 million, assuming that coal pricing would not increase without the availability of synfuel.

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Index to Financial Statements

Approximately $19.8 million of the 2006 estimated incremental net income benefit was attributable to the SSO facility, of which approximately $8.0 million was realized by ARLP prior to SSO’s anticipated suspension of operations at Warrior. Pursuant to its agreement with SSO, ARLP is not obligated to make retroactive adjustments or reimbursements if SSO’s synfuel tax credits are disallowed.

River View Coal Reserves. On April 12, 2006, ARLP announced that Alliance Coal, LLC, its wholly-owned subsidiary, acquired the rights to approximately 99.3 million tons of high sulfur coal reserves in Union County, Kentucky. As a result of the purchase of all of the members’ interests of River View Coal, LLC, or River View, ARLP gained control of approximately 89.7 million tons of coal by lease and approximately 9.6 million tons of coal through direct ownership in the Kentucky No. 7, No. 9 and No. 11 coal seams, along with related surface properties and other assets. The acquisition of the River View reserves increases ARLP’s total coal reserve holdings by approximately 18% to approximately 642 million tons. The River View reserve area encompasses approximately 24,600 acres located in Union County, Kentucky. ARLP intends to develop the River View mine as an underground mining complex utilizing continuous mining units employing room-and-pillar mining techniques. ARLP estimates the River View mining complex will be designed to produce annually up to 3.5 million tons of coal. Total capital expenditures required to develop the River View reserves are currently estimated to be in the range of approximately $110 to $130 million over a four-year period. It is currently anticipated that the River View complex will begin production in the 2008-2009 time frame and employ as many as 300 workers. Definitive development commitment for River View is dependent upon final approval of the board of directors of ARLP’s managing general partner.

Allegheny Coal Lease and Coal Sales Agreement. On December 29, 2005, ARLP announced that its newly formed subsidiary, Penn Ridge Coal, LLC, or Penn Ridge, had entered into a coal lease and sales agreement with affiliates of Allegheny Energy, Inc., or Allegheny, to pursue development of Allegheny’s Buffalo coal reserve in Washington County, Pennsylvania. Under this coal lease and sales agreement, an affiliate of Allegheny has agreed to lease to Penn Ridge the Buffalo coal reserve in exchange for lease payments consisting of fixed production royalties on coal sales proceeds. The lease term is fifteen years, and it commenced on December 28, 2005. The Buffalo coal reserve lease encompasses approximately 19,800 acres and is estimated to include approximately 55 million tons of coal in the Pittsburgh No. 8 seam and 300 acres of surface land located near Avella, Pennsylvania. ARLP anticipates that the Penn Ridge operation will be capable of producing annually up to 5.0 million tons of coal and may employ as many as 270 persons. ARLP is estimating total capital expenditures required to develop Penn Ridge to be approximately $165.0 million over a five-year period. ARLP has begun the development process for the Penn Ridge mine, which includes obtaining the necessary permits. ARLP anticipates production from Penn Ridge commencing between 2009 and 2010. In conjunction with the Buffalo coal reserve lease, Penn Ridge also entered into a ten-year, 20 million ton coal sales agreement with affiliates of Allegheny at market based prices. Upon commencement of initial production, Penn Ridge will supply annually up to two million tons of coal produced from the Buffalo coal reserve for use in Allegheny’s power plants. The Buffalo coal reserve area is north of and contiguous to the ARLP’s Tunnel Ridge reserve area, which is located in Washington County, Pennsylvania and Ohio County, West Virginia. When combined with ARLP’s Tunnel ridge reserves, ARLP controls an estimated 125 million tons of coal in the Pittsburgh No. 8 seam. Definitive development commitment for Allegheny’s Buffalo coal reserve and the Tunnel Ridge reserves is dependent upon final approval of the board of directors of ARLP’s managing general partner.

LG&E Coal Sales Agreement. On December 21, 2005, ARLP announced that its subsidiary, Alliance Coal, LLC, had entered into a new six-year, 23.5 million ton coal sales agreement, effective January 1, 2006, with Louisville Gas and Electric Company, or LG&E. At the end of the primary six-year term, the parties have the option to extend the new agreement for an incremental 16.0 million tons of coal over an additional four years. Under the new agreement, beginning January 1, 2006, Alliance Coal, LLC will ship annually up to 4.0 million tons of coal directly to LG&E or as feedstock for synfuel produced for the benefit of LG&E. Since 2001, Alliance Coal, LLC and its affiliates have supplied annually approximately 2.4 million tons of Illinois Basin coal to LG&E, either directly or as synfuel feedstock, under existing coal supply agreements. The new agreement

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Index to Financial Statements

represents an increase of approximately 1.6 million tons over coal shipments historically supplied by Alliance Coal LLC’s subsidiaries, Hopkins County Coal, LLC, Webster County Coal, LLC, and Warrior Coal, LLC.

New Mine Safety Rules. As a result of recent coal mining accidents in West Virginia and Kentucky, the U.S Department of Labor’s Mine Safety and Health Administration as well as West Virginia and several other states, including Kentucky, Pennsylvania and Illinois, have imposed or are considering imposing, stringent new mine safety and accident reporting requirements and increased civil and criminal penalties for violations of mine safety laws. Please read “—Regulation and Laws—Mine Health and Safety Laws.”

Mining Operations

ARLP produces a diverse range of steam coals with varying sulfur and heat contents, which enables ARLP to satisfy the broad range of specifications required by ARLP’s customers. The following chart summarizes ARLP’s coal production by region for the last five years:


	Year Ended December 31,
Regions and Complexes	2001	2002	2003	2004	2005
	(tons in millions)
Illinois Basin:
Dotiki, Warrior, Pattiki, Hopkins and Gibson Complexes	11.9	12.1	12.3	13.6	15.7

Central Appalachia:
Pontiki and MC Mining Complexes	2.8	3.0	3.6	3.6	3.3

Northern Appalachia:
Mettiki Complex	2.7	2.9	3.3	3.2	3.3

Total	17.4	18.0	19.2	20.4	22.3

ARLP’s interests in each of the mining complexes discussed below are held through wholly-owned subsidiaries of Alliance Coal, LLC, ARLP’s wholly-owned operating subsidiary, with each subsidiary holding its respective coal reserve interests through lease agreements or fee ownership, or through a combination of lease agreements and fee ownership.

Illinois Basin Operations

ARLP’s Illinois Basin mining operations are located in western Kentucky, southern Illinois and southern Indiana. ARLP has approximately 1,440 employees in the Illinois Basin and currently operates five mining complexes. Additionally, ARLP hosts coal synfuel facilities at two of its mining complexes.

Dotiki Complex. Webster County Coal, LLC operates Dotiki, which is an underground mining complex located near the city of Providence in Webster County, Kentucky. The complex was opened in 1966, and ARLP purchased the mine in 1971. ARLP’s Dotiki complex utilizes continuous mining units employing room-and-pillar mining techniques. In 2004, the preparation plant throughput capacity is 1,300 tons of raw coal an hour. Capacity was increased principally to accommodate a change in customer requirements for washed coal rather than raw coal.

On February 11, 2004, the Dotiki mine was temporarily idled following the occurrence of a mine fire. The fire was successfully extinguished and the affected area of the mine was totally isolated behind permanent barriers. Production resumed on March 8, 2004. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Dotiki Fire Incident.”

Production of high-sulfur coal from the Dotiki complex is shipped via the CSX and PAL railroads and by truck on U.S. and state highways. ARLP’s primary customers for coal produced at Dotiki are Louisville Gas &

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Index to Financial Statements

Electric, or LG&E, Seminole Electric Cooperative, Inc., or Seminole, and Tennessee Valley Authority, or TVA, all of which purchase ARLP’s coal pursuant to long-term contracts for use in their scrubbed generating units.

Warrior Complex. Warrior Coal, LLC, or Warrior, operates the Cardinal mine, an underground mining complex located near Madisonville, in Hopkins County, Kentucky, between and adjacent to ARLP’s other western Kentucky operations. The Warrior complex was opened in 1985 and acquired by ARLP in February 2003. Warrior utilizes continuous mining units employing room-and-pillar mining techniques producing high-sulfur coal. During 2005, Warrior increased mining capacity with the addition of one continuous miner unit. Warrior’s preparation plant has a throughput capacity of 600 tons of raw coal an hour.

Warrior sells substantially all of its production to SSO for feedstock in the production of coal synfuel, as discussed below. SSO’s coal synfuel production facility was moved from Hopkins County Coal, LLC, or Hopkins, to Warrior in April 2003. Warrior’s production can be shipped via the CSX and PAL railroads and by truck on U.S. and state highways. Additionally, Warrior purchased supplemental production from Dotiki and a third-party supplier for resale to SSO and will continue to purchase tons from the third-party supplier through June 2007. SSO continues to ship coal synfuel to electric utilities that have been purchasers of ARLP’s coal. ARLP maintains “back-up” coal supply agreements with these long-term customers for ARLP’s coal, which automatically provide for the sale of ARLP’s coal to them in the event they do not purchase coal synfuel from SSO.

ARLP has entered into long-term agreements with SSO to host and operate its coal synfuel facility currently located at Warrior, supply the facility with coal feedstock, assist SSO with the marketing of coal synfuel and provide other services. These agreements expire on December 31, 2007, and provide ARLP with coal sales, rental and service fees from SSO based on the synfuel facility throughput tonnages. These amounts are dependent on the ability of SSO’s members to use certain qualifying tax credits applicable to the facility. As discussed above, ARLP sells most of the coal produced at Warrior to SSO, while Alliance Coal Sales, a division of Alliance Coal, assists SSO with the sale of its coal synfuel to ARLP’s customers pursuant to a sales agency agreement. The term of each of these agreements is subject to early cancellation provisions customary for transactions of these types, including the unavailability of synfuel tax credits, the termination of associated coal synfuel sales contracts, and the occurrence of certain force majeure events. Therefore, the continuation of the revenues associated with the coal synfuel production facility cannot be assured. However, ARLP has maintained “back up” coal supply agreements with each coal synfuel customer that automatically provide for sale of ARLP’s coal to these customers in the event they do not purchase coal synfuel from SSO. In conjunction with a decision to relocate the coal synfuel production facility to Warrior, agreements for providing certain of these services were assigned to Alliance Service, a wholly-owned subsidiary of Alliance Coal, in December 2002. Alliance Service is subject to federal and state income taxes. On April 19, 2006, ARLP received a letter from the managing member of SSO which stated that effective April 23, 2006, due to the increase in the wellhead price of domestic crude oil, SSO has elected to exercise its contractual right to suspend until further notice operation of its coal synfuel production facility located at ARLP’s Warrior mining complex in Hopkins County, Kentucky. Please read “Prospectus Summary—Recent Developments—Suspension of Coal Synfuel Facility Operation at Warrior.”

For 2005, the incremental annual net income benefit from the combination of the various coal synfuel-related agreements associated with the facility located at Warrior was approximately $18.9 million, assuming that coal pricing would not have increased without the availability of synfuel. The continuation of the incremental net income benefit associated with SSO’s coal synfuel facility cannot be assured. Pursuant to ARLP’s agreement with SSO, ARLP is not obligated to make retroactive adjustments or reimbursements if SSO’s tax credits are disallowed.

In June 2003, the Internal Revenue Service (IRS) suspended the issuance of private letter rulings on the significant chemical change requirement to qualify for synfuel tax credits and announced that it was reviewing the test procedures and results used by taxpayers to establish that a significant chemical change had occurred. In October 2003, the IRS completed its review and concluded that the test procedures and results were scientifically

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Index to Financial Statements

valid if applied in a consistent and unbiased manner. The IRS has resumed issuing private letter rulings under its existing guidelines. SSO has advised ARLP that its private letter ruling could be reviewed by the IRS as part of a tax audit, similar to the IRS reviews of other synfuel procedures.

Pattiki Complex. White County Coal, LLC operates Pattiki, which is an underground mining complex located near the city of Carmi, in White County, Illinois. ARLP began construction of the complex in 1980 and have operated it since its inception. ARLP’s Pattiki complex utilizes continuous mining units employing room-and-pillar mining techniques. The preparation plant has a throughput capacity of 1,000 tons of raw coal an hour.

Production of high-sulfur coal from the complex is shipped via the CSX railroad. ARLP’s primary customers for coal produced at Pattiki have been Northern Indiana Public Service Company, or NIPSCO, and Seminole for use in their scrubbed generating units. Pattiki production is also shipped via rail to ARLP’s Mt. Vernon transloading facility for sale to utilities capable of receiving barge deliveries. In 2006, Pattiki expects to ship a significant portion of its production to TVA and Tampa Electric and transfer its Seminole shipments to Dotiki and Warrior.

Hopkins Complex. Hopkins County Coal, LLC operates a mining complex consisting of one active surface mine, which we refer to as the Newcoal surface mine, one undeveloped surface mine, and the Elk Creek reserves that commenced development in 2005. During 2005, Hopkins County Coal’s production was from its Newcoal surface mine that depleted its reserves in December 2005. Hopkins County Coal is located near the city of Madisonville in Hopkins County, Kentucky. ARLP acquired the complex in January 1998. The Newcoal surface mine was idled in June 2003 because ARLP was unable to secure sufficient sales commitments in the Illinois Basin region. In October 2004, the surface mine was re-opened in response to incremental sale opportunities from existing customers as well as strong market demand for Illinois Basin region coal.

The surface operation utilized dragline mining and the preparation plant has a throughput capacity of 1,000 tons of raw coal an hour. In conjunction with the development of the Elk Creek mine, Hopkins County Coal is constructing a new preparation plant with a throughput capacity of 1,200 tons of coal an hour. The new preparation plant will provide significant operating efficiencies. Hopkins’ production has the ability to be shipped via the CSX and PAL railroads and by truck on U.S. and state highways.

On October 23, 2005, ARLP exercised an option to lease the Elk Creek reserves located in Hopkins County, Kentucky. The Elk Creek coal reserves consist of approximately 36.0 million tons of high-sulfur coal. The Elk Creek mine will be an underground mining complex, using continuous mining units employing room-and-pillar mining techniques. ARLP intends to utilize the existing coal handling and other surface facilities at Hopkins to process and ship coal produced from the Elk Creek mine. Elk Creek is expected to emerge from mine development in early 2006. When the Elk Creek mine reaches full production capacity, we expect annual production to be approximately 3.8 million tons.

Gibson Complex. Gibson County Coal, LLC operates Gibson, an underground mining complex located near the city of Princeton in Gibson County, Indiana. The mine began production in November 2000. ARLP’s Gibson mining complex utilizes continuous mining units employing room-and-pillar mining techniques. The preparation plant has a throughput capacity of 700 tons of raw coal an hour. ARLP refers to the reserves mined at this location as the Gibson “North” reserves. ARLP also controls undeveloped reserves in Gibson County, which are not contiguous to the reserves currently being mined. ARLP refers to these as the Gibson “South” reserves.

Production from Gibson is a low-sulfur coal that historically has been shipped primarily via truck approximately 10 miles on U.S. and state highways to Gibson’s principal customer, PSI Energy Inc., or PSI, a subsidiary of Cinergy Corporation. Gibson’s production is also trucked to ARLP’s Mt. Vernon transloading facility for sale to utilities capable of receiving barge deliveries.

In January 2005, Gibson entered into long-term agreements with PC Indiana Synthetic Fuel #2, L.L.C., or PCIN, to host its coal synfuel facility, supply the facility with coal feedstock, assist PCIN with the marketing of

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Index to Financial Statements

coal synfuel and provide other services. The synfuel facility commenced operations at Gibson in May 2005. A significant portion of Gibson’s production is sold to PCIN. The agreements expire on December 31, 2007 and provide us with coal sales, rental and service fees from PCIN based on the synfuel facility throughput tonnages. These amounts are dependent on the ability of PCIN’s members to use certain qualifying tax credits applicable to the facility. The term of each of these agreements is subject to early cancellation provisions customary for transactions of these types, including the unavailability of synfuel tax credits, the termination of associated coal synfuel sales contracts, and the occurrence of certain force majeure events. Therefore, revenues associated with the coal synfuel production facility cannot be assured. However, ARLP has entered into “back up” coal supply agreements with each coal synfuel customer that automatically provide for sale of ARLP’s coal to these customers in the event they do not purchase coal synfuel from PCIN.

For 2005, the incremental annual net income benefit from the combination of the various coal synfuel related agreements associated with the facility located at Gibson was approximately $3.0 million, assuming that coal pricing would not have increased without the availability of synfuel. This estimated incremental net income cannot be assured going forward. Pursuant to ARLP’s agreement with PCIN, ARLP is not obligated to make retroactive adjustments or reimbursements if PCIN’s tax credits are disallowed.

ARLP has initiated the permitting process for the Gibson South reserves and is actively evaluating its development. Capital expenditures required to develop the Gibson South reserves are estimated to be approximately $100 million. Assuming sufficient sales commitments are obtained and the permitting process progresses as anticipated, initial production could commence in 2008 or 2009. When the Gibson South mine reaches full production capacity, we expect annual production to be approximately 3.1 million tons. Definitive development commitment for Gibson South is dependent upon final approval by the board of directors of ARLP’s managing general partner.

River View. Alliance Coal, LLC has rights to approximately 99.3 million tons of high sulfur coal reserves in Union County, located in western Kentucky. Definitive development commitment for River View is dependent upon final approval of the board of directors of ARLP’s managing general partner.

Central Appalachia Operations

ARLP’s Central Appalachia mining operations are located in the Central Appalachia coal fields. ARLP’s Central Appalachia mines produce low-sulfur coal. ARLP has approximately 530 employees and operates two mining complexes in Central Appalachia.

Pontiki Complex. Pontiki Coal, LLC owns Pontiki, an underground mining complex located near the city of Inez in Martin County, Kentucky. ARLP constructed the mine in 1977. Pontiki owns the mining complex and leases the reserves, and Excel Mining, LLC, or Excel, an affiliate of Pontiki, is responsible for conducting all mining operations. Substantially all of the coal produced at Pontiki in 2005 met or exceeded the compliance requirements of Phase II of the Clean Air Act amendments. ARLP’s Pontiki operation utilizes continuous mining units employing room-and-pillar mining techniques. The preparation plant has a throughput capacity of 800 tons of raw coal an hour. In February 2005 construction efforts began that will allow Pontiki to migrate its mining units into a new coal seam. The first mining unit in the new coal seam emerged from mine development in the fourth quarter of 2005. Beginning in 2006, production will still be low sulfur but, because of changes in geology and the migration of some of Pontiki’s mining units into this new coal seam, may no longer meet the compliance requirements of Phase II Clean Air Act.

ARLP’s primary customer for the low-sulfur coal produced at Pontiki is ICG, LLC, the successor-in-interest of certain assets of Horizon Natural Resources Company. In November 2005, ARLP settled a contract dispute in which ICG alleged ARLP failed to deliver 138,111 tons of coal. Please read “—Legal Proceedings.” Production from the mine is shipped primarily to electric utilities located in the southeastern United States via the Norfolk Southern railroad or by truck via U.S. and state highways to various docks on the Big Sandy River in Kentucky.

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Index to Financial Statements

MC Mining Complex. MC Mining, LLC owns MC Mining, an underground mining complex located near the city of Pikeville in Pike County, Kentucky. ARLP acquired the mine in 1989. MC Mining owns the mining complex and leases the reserves, and Excel, an affiliate of MC Mining, is responsible for conducting all mining operations. On December 26, 2004, MC Mining was temporarily idled following the occurrence of a mine fire. The fire was successfully extinguished and the affected area of the mine was totally isolated behind permanent barriers. Initial production resumed on February 21, 2005. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—MC Mining Fire Incident.”

Substantially all of the coal produced at MC Mining in 2005 met or exceeded the compliance requirements of Phase II of the Clean Air Act amendments. The complex utilizes continuous mining units employing room-and-pillar mining techniques. The preparation plant has a throughput capacity of 800 tons of raw coal an hour.

Production from the mine is shipped via the CSX railroad or by truck via U.S. and state highways to various docks on the Big Sandy River. MC Mining sells its low-sulfur production primarily in the spot market.

Northern Appalachia Operations

ARLP’s Northern Appalachia mining operation is located in the Northern Appalachia coal fields. ARLP has approximately 230 employees and operates one mining complex in Northern Appalachia.

Mettiki Complex. Mettiki Coal, LLC operates Mettiki, an underground longwall mining complex, which is sometimes referred to as the D-Mine, located near the city of Oakland in Garrett County, Maryland. ARLP constructed Mettiki in 1977 and has operated it since its inception. The operation utilizes a longwall miner for the majority of the coal extraction as well as continuous mining units used to prepare the mine for future long-wall mining. The preparation plant has a throughput capacity of 1,350 tons of raw coal an hour. In response to strong market demand, Mettiki’s production capacity was increased through two small-scale third-party mining operations.

Historically, ARLP’s primary customer for the medium-sulfur coal produced at Mettiki has been Virginia Electric and Power Company, or VEPCO, which purchased the coal pursuant to a long-term contract for use in the scrubbed generating units at its Mt. Storm, West Virginia power plant, located less than 20 miles away. ARLP’s coal is trucked to Mt. Storm over a private haul road, which links to a state highway. Mettiki is also served by the CSX railroad.

In June 2005 and subsequently amended in August 2005, Mettiki entered into an agreement with Mt. Storm Coal Supply, LLC, or Mt. Storm Coal Supply, to supply its coal synfuel facility, located at the Mt. Storm power plant, with coal feedstock. For 2005, the incremental annual net income benefit from the coal feedstock agreement is estimated to be $2.2 million, assuming that coal pricing would not increase without the availability of synfuel. The continuation of this agreement cannot be assured because the non-conventional source fuel tax credits are subject to a pro-rata phase-out or reduction based on the annual average wellhead price per barrel for all domestic crude oil (the reference price) as determined by the Secretary of the Treasury. ARLP has entered into a “back up” coal supply agreement with VEPCO for sale of ARLP’s coal in the event VEPCO does not purchase coal synfuel from Mt. Storm Coal Supply. Pursuant to ARLP’s agreement with Mt. Storm Coal Supply, ARLP is not obligated to make retroactive adjustments or reimbursements if Mt. Storm Coal Supply’s tax credits are disallowed.

Mettiki Coal (WV). Mettiki Coal (WV), LLC is developing an underground longwall mine in Tucker County, West Virginia (the Mountain View Mine, also known as the E-Mine), which will eventually replace Mettiki Coal’s D-Mine. ARLP anticipates the active D-Mine will deplete its coal reserves in November 2006, at which time the longwall mining system will be relocated from D-Mine to Mettiki Coal (WV)’s Mountain View Mine. Longwall production is expected to commence in January 2007.

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Index to Financial Statements

Penn Ridge Coal, LLC (Penn Ridge). Penn Ridge has entered into a coal lease and sales agreement with affiliates of Allegheny, to pursue development of Allegheny’s Buffalo coal reserve in Washington County, Pennsylvania. The Buffalo coal reserve lease is estimated to include approximately 55 million tons of coal in the Pittsburgh No. 8 seam. Definitive development commitment for Penn Ridge is dependent upon final approval of the board of directors of ARLP’s managing general partner.

Tunnel Ridge, LLC (Tunnel Ridge). Tunnel Ridge controls, through a coal lease agreement with ARLP’s special general partner, approximately 70 million tons of high-sulfur coal in the Pittsburgh No. 8 coal seam. Definitive development commitment for Tunnel Ridge is dependent upon final approval of the board of directors of ARLP’s managing general partner.

Other Operations

Mt. Vernon Transfer Terminal, LLC

The Mt. Vernon transfer terminal leases land and operates a coal loading terminal on the Ohio River at Mt. Vernon, Indiana. Coal is delivered to Mt. Vernon by both rail and truck. The terminal has a capacity of 8 million tons per year with existing ground storage. During 2005, the terminal loaded approximately 2.1 million tons for Pattiki, Dotiki, and Gibson customers and for third-party shippers.

Coal Brokerage

As markets allow, ARLP buys coal from non-affiliated producers principally throughout the eastern United States, which ARLP then resells, both directly and indirectly, primarily to utility customers. ARLP purchased and sold approximately 6,000 tons of coal from non-affiliated producers in 2005. ARLP has a policy of matching ARLP’s outside coal purchases and sales to minimize market risks associated with buying and reselling coal. Purchased coal that is delivered to ARLP’s operations and commingled with ARLP’s production is not classified as brokerage coal.

Additional Services

ARLP develops and markets additional services in order to establish itself as the supplier of choice for its customers. Examples of the kind of services ARLP has offered to date include ash and scrubber sludge removal, coal yard maintenance and arranging alternate transportation services. Revenues from these services have historically represented less than one percent of ARLP’s total revenues.

Reportable Segments

Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and the accompanying notes in this prospectus for information concerning our reportable segments.

Coal Marketing and Sales

As is customary in the coal industry, ARLP has entered into long-term contracts with many of ARLP’s customers. These arrangements are mutually beneficial to ARLP and its customers by providing greater predictability of sales volumes and sales prices. In 2005, approximately 86.0% and 81.7% of ARLP’s sales tonnage and total coal sales, respectively, were sold under long-term contracts (contracts having a term of one year or greater) with maturities ranging from 2005 to 2023. ARLP’s total nominal commitment under significant long-term contracts for existing operations was approximately 117.6 million tons at December 31, 2005, and is expected to be delivered as follows: 20.2 million tons in 2006, 16.5 million tons in 2007, 14.7 million tons in 2008, 13.9 million tons in 2009, 13.9 million tons in 2010 and 38.4 million tons thereafter during the remaining

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Index to Financial Statements

terms of the relevant coal supply agreements. The total commitment of coal under contract is an approximate number because, in some instances, ARLP’s contracts contain provisions that could cause the nominal total commitment to increase or decrease by as much as 20%. The contractual time commitments for customers to nominate future purchase volumes under these contracts are sufficient to allow ARLP to balance ARLP’s sales commitments with prospective production capacity. In addition, the nominal total commitment can otherwise change because of price reopener provisions contained in certain of these long-term contracts.

The terms of long-term contracts are the results of both bidding procedures and extensive negotiations with each customer. As a result, the terms of these contracts vary significantly in many respects, including, among others, price adjustment features, price and contract reopener terms, permitted sources of supply, force majeure provisions, coal qualities, and quantities. Virtually all of ARLP’s long-term contracts are subject to price adjustment provisions, which permit an increase or decrease periodically in the contract price to reflect changes in specified price indices or items such as taxes, royalties or actual production costs. These provisions, however, may not assure that the contract price will reflect every change in production or other costs. Failure of the parties to agree on a price pursuant to an adjustment or a reopener provision can lead to early termination of a contract. Some of the long-term contracts also permit the contract to be reopened to renegotiate terms and conditions other than the pricing terms, and where a mutually acceptable agreement on terms and conditions cannot be concluded, either party may have the option to terminate the contract. The long-term contracts typically stipulate procedures for quality control, sampling and weighing. Most contain provisions requiring ARLP to deliver coal within stated ranges for specific coal characteristics such as heat, sulfur, ash, moisture, grindability, volatility and other qualities. Failure to meet these specifications can result in economic penalties or termination of the contracts. While most of the contracts specify the approved seams and/or approved locations from which the coal is to be mined, some contracts allow the coal to be sourced from more than one mine or location. Although the volume to be delivered pursuant to a long-term contract is stipulated, the buyers often have the option to vary the volume within specified limits.

Reliance on Major Customers

ARLP’s three largest customers in 2005 were SSO, TVA and Mt. Storm Coal Supply. Sales to these customers in the aggregate accounted for approximately 36.4% of ARLP’s 2005 total revenues, and sales to each of these customers accounted for approximately 10% or more of ARLP’s 2005 total revenues.

Competition

The United States coal industry is highly competitive with numerous producers in all coal producing regions. ARLP competes with other large producers and hundreds of small producers in the United States. The largest coal company is estimated to have sold approximately 21% of the total 2005 tonnage sold in the United States market. ARLP competes with other coal producers primarily on the basis of coal price at the mine, coal quality (including sulfur content), transportation cost from the mine to the customer, and the reliability of supply. Continued demand for ARLP’s coal and the prices that ARLP obtains are also affected by demand for electricity, environmental and government regulations, technological developments, and the availability and price of alternative fuel supplies, including nuclear, natural gas, oil, and hydroelectric power.

Transportation

ARLP’s coal is transported to ARLP’s customers by rail, truck and barge. Depending on the proximity of the customer to the mine and the transportation available for delivering coal to that customer, transportation costs can range from 4% to 41% of the delivered cost of a customer’s coal. As a consequence, the availability and cost of transportation constitute important factors in the marketability of coal. ARLP believes its mines are located in favorable geographic locations that minimize transportation costs for ARLP’s customers.

Typically, ARLP’s customers pay the transportation costs from the contractual F.O.B. point (free-on-board point), which is the standard practice in the industry and is generally from the mine to the customer’s plant. In

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Index to Financial Statements

2005, the largest volume transporter of ARLP’s coal shipments, including coal synfuel shipped by SSO, was the CSX railroad, which moved approximately 44.5% of ARLP’s tonnage over its rail system. The practices of, and rates set by, the railroad serving a particular mine or customer might affect, either adversely or favorably, ARLP’s marketing efforts with respect to coal produced from the relevant mine. At Gibson and Mettiki, independent contractors operate truck delivery systems that transport the coal to Gibson and Mettiki’s primary customer’s power plants.

Regulation and Laws

The coal mining industry is subject to regulation by federal, state and local authorities on matters such as:

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employee health and safety;

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mine permits and other licensing requirements;

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air quality standards;

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water quality standards;

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storage of petroleum products and substances which are regarded as hazardous under applicable laws or which, if spilled, could reach waterways or wetlands;

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plant and wildlife protection;

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reclamation and restoration of mining properties after mining is completed;

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the discharge of materials into the environment;

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storage and handling of explosives;

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wetlands protection;

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surface subsidence from underground mining; and

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the effects, if any, that mining has on groundwater quality and availability.

In addition, the utility industry is subject to extensive regulation regarding the environmental impact of its power generation activities, which could affect demand for ARLP’s coal. The possibility exists that new legislation or regulations, or new interpretations of existing laws or regulations, may be adopted that may have a significant impact on ARLP’s mining operations or ARLP’s customers’ ability to use coal.

ARLP is committed to conducting mining operations in compliance with applicable federal, state and local laws and regulations. However, because of extensive and comprehensive regulatory requirements, violations during mining operations are not unusual in the industry and, notwithstanding ARLP’s compliance efforts, ARLP does not believe these violations can be eliminated completely. None of the violations to date have had a material impact on ARLP’s operations or financial condition.

While it is not possible to quantify the costs of compliance with applicable federal and state laws, those costs have been and are expected to continue to be significant. Capital expenditures for environmental matters have not been material in recent years. ARLP has accrued for the present value estimated cost of reclamation and mine closings, including the cost of treating mine water discharge when necessary. The accruals for reclamation and mine closing costs are based upon permit requirements and the costs and timing of reclamation and mine closing procedures. Although management believes it has made adequate provisions for all expected reclamation and other costs associated with mine closures, future operating results would be adversely affected if ARLP later determines these accruals to be insufficient. Compliance with these laws has substantially increased the cost of coal mining for all domestic coal producers.

Mining Permits and Approvals

Numerous governmental permits or approvals are required for mining operations. ARLP may be required to prepare and present to federal, state or local authorities data pertaining to the effect or impact that any proposed

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Index to Financial Statements

production of coal may have upon the environment. All requirements imposed by any of these authorities may be costly and time consuming, and may delay or prevent commencement or continuation of mining operations in certain locations. Future legislation and administrative regulations may emphasize more heavily the protection of the environment and, as a consequence, ARLP’s activities may be more closely regulated. Legislation and regulations, as well as future interpretations of existing laws and regulations, may require substantial increases in equipment and operating costs, or delays, interruptions or terminations of operations, the extent of any of which cannot be predicted.

Under some circumstances, substantial fines and penalties, including revocation of mining permits, may be imposed under the laws described above. Monetary sanctions and, in severe circumstances, criminal sanctions may be imposed for failure to comply with these laws. Regulations also provide that a mining permit can be refused or revoked if the permit applicant or permittee owns or controls, directly or indirectly through other entities, mining operations which have outstanding environmental violations. Although like other coal companies ARLP has been cited for violations in the ordinary course of its business, ARLP has never had a permit suspended or revoked because of any violation, and the penalties assessed for these violations have not been material.

Before commencing mining on a particular property, ARLP must obtain mining permits and approvals by state regulatory authorities of a reclamation plan for restoring, upon the completion of mining, the mined property to its approximate prior condition, productive use or other permitted condition. Typically, ARLP commences actions to obtain permits between 18 and 24 months before ARLP plans to mine a new area. In ARLP’s experience, permits generally are approved within 12 months after a completed application is submitted. Generally, ARLP has not experienced material or significant difficulties in obtaining mining permits in the areas where ARLP’s reserves are currently located. However, the permitting process for certain mining operations has extended over several years and we cannot assure you that ARLP will not experience difficulty in obtaining mining permits in the future.

ARLP’s subsidiary, Mettiki Coal (WV), LLC, is developing an underground longwall mining operation in Tucker County, West Virginia (which we refer to as the Mountain View Mine or E-Mine), which will eventually replace Mettiki Coal’s existing longwall mining operation at the D-Mine located in Garrett County, Maryland. The Mountain View Mine is located approximately 10 miles from Mettiki Coal. In order to proceed with development of the Mountain View Mine, Mettiki Coal (WV) submitted various permit applications to the West Virginia Department of Environmental Protection, or WVDEP, including an application for approval to conduct underground mining. WVDEP issued the required permits in the Spring of 2004. Certain complainants appealed WVDEP’s decision issuing the underground mining permit to the West Virginia Surface Mine Board, or SMB, which held administrative hearings on the matter in late 2004 and early 2005. On March 8, 2005, the SMB on a divided 3-3 vote issued a final order concluding consideration of the appeal without effectively rendering a decision, which, by operation of West Virginia law, resulted in the affirmation of WVDEP’s decision to issue the underground mining permit. The complainants appealed the SMB decision, but subsequently voluntarily agreed to withdraw the appeal, which was dismissed with prejudice by the Tucker County circuit court in West Virginia on April 26, 2005.

On April 19, 2005, these same complainants submitted a letter to the U.S. Department of Interior’s Office of Surface Mining, Reclamation and Enforcement, or OSM, and the OSM’s regional field office in Charleston, West Virginia, or CHFO, requesting federal monitoring and inspection of the Mountain View Mine and alleging that operations at the mine would create acid mine drainage with no defined end point. By written notice dated April 21, 2005, the CHFO advised WVDEP that it would review the complainants’ allegation that the Mountain View Mine would cause material harm to the hydrological balance within and outside of the permit area. Following its initial review, on September 15, 2005, the CHFO notified WVDEP that it intended to initiate a formal investigation into the issuance of the underground mining permit for the Mountain View Mine. WVDEP requested an informal review of the CHFO decision by the OSM. By two letters, both dated October 21, 2005, OSM reversed the decision of the CHFO concluding that the CHFO and OSM lacked statutory authority to

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review the WVDEP’s issuance of the underground mining permit, and the Department of the Interior ordered that this was the Department’s final decision on the matter raised in the complainants’ letter dated April 19, 2005. The Mountain View Mine is not currently subject to any pending or threatened agency or third-party claims. However, in correspondence dated March 8, 2006, these same complainants requested that the Director of OSM evaluate whether West Virginia is properly administering and enforcing its state mining program in compliance with the requirements of SMCRA. These complainants submitted a similar request on April 19, 2005, which was rejected by the Department of Interior’s final decision on October 21, 2005. In a letter dated March 24, 2006, the Department of the Interior denied the complainants request and stated that this denial was the final decision of the Department of the Interior.

Mine Health and Safety Laws

Stringent safety and health standards have been imposed by federal legislation since 1969 when the Coal Mine Health and Safety Act of 1969, or CMHSA, was adopted. The Federal Mine Safety and Health Act of 1977, and regulations adopted pursuant thereto, significantly expanded the enforcement of health and safety standards and imposed comprehensive safety and health standards on numerous aspects of mining operations, including training of mine personnel, mining procedures, blasting, the equipment used in mining operations and other matters. The Mine Safety and Health Administration, or MSHA, monitors compliance with these federal laws and regulations. In addition, as part of the Mine Safety and Health Act of 1977, the Black Lung Benefits Act requires payments of benefits by all businesses that conduct current mining operations to a coal miner with black lung disease and to some survivors of a miner who dies from this disease. Most of the states where ARLP operates also have state programs for mine safety and health regulation and enforcement. In combination, federal and state safety and health regulation in the coal mining industry is perhaps the most comprehensive and rigorous system for protection of employee safety and health affecting any segment of any industry, and this regulation has a significant effect on ARLP’s operating costs. ARLP’s competitors in all of the areas in which ARLP operates are subject to the same laws and regulations.

Recent mining accidents involving fatalities in West Virginia and Kentucky have received national attention and prompted responses at the state and national level that have resulted in increased scrutiny of current industry safety practices and procedures at all mining operations. On January 26, 2006, West Virginia Governor Joe Manchin signed into law a bill imposing stringent new mine safety and accident reporting requirements and increased civil and criminal penalties for violations of mine safety laws. Other states, including Illinois, Pennsylvania and Kentucky, have proposed or passed similar bills and resolutions addressing mine safety practices. In addition, several mine safety bills have been introduced in Congress that would mandate similar improvements in mine safety practices; increase or add civil and criminal penalties for non-compliance with such laws or regulations; and expand the scope of federal oversight, inspection, and enforcement activities. On February 7, 2006, the federal Mine Safety and Health Administration (MSHA) announced the promulgation of new emergency rules on mine safety. These rules address mine safety equipment, training, and emergency reporting requirements. Unlike most MSHA rules, these emergency rules will become effective immediately upon their publication in the Federal Register. Implementing and complying with these new laws and regulations could adversely affect ARLP’s results of operation and financial position.

Black Lung Benefits Act

The Federal Black Lung Benefits Act, or BLBA, levies a tax on production of $1.10 per ton for underground-mined coal and $0.55 per ton for surface-mined coal, but not to exceed 4.4% of the applicable sales price, in order to compensate miners who are totally disabled due to black lung disease and some survivors of miners who died from this disease, and who were last employed as miners prior to 1970 or subsequently where no responsible coal mine operator has been identified for claims. In addition, BLBA provides that some claims for which coal operators had previously been responsible are or will become obligations of the government trust funded by the tax. The Revenue Act of 1987 extended the termination date of this tax from January 1, 1996, to the earlier of January 1, 2014, or the date on which the government trust becomes solvent. For miners last

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Index to Financial Statements

employed as miners after 1969 and who are determined to have contracted black lung, ARLP self-insures the potential cost using actuarially determined estimates of the cost of present and future claims. ARLP is also liable under state statutes for black lung claims.

Congress and state legislatures regularly consider various items of black lung legislation, which, if enacted, could adversely affect ARLP’s business, financial condition and results of operations. Effective January 2001, new Federal Black Lung regulations took effect. These regulations relax the stringent award criteria established under the previous regulations potentially allowing more new Federal claims to be awarded and allowing previously denied claimants to re-file under the new criteria. The new regulations may also increase black lung related medical costs by broadening the scope of conditions for which medical costs are reimbursable, and increase legal costs by shifting more of the burden of proof to the employer.

Workers’ Compensation

ARLP is required to compensate employees for work-related injuries. Several states in which ARLP operates consider changes in workers’ compensation laws from time to time. ARLP self-insures the potential cost using actuarially determined estimates of the cost of present and future claims. Concerning ARLP’s requirement to maintain bonds to secure ARLP’s workers’ compensation obligations, see the discussion of surety bonds below under Surface Mining Control and Reclamation Act.

Coal Industry Retiree Health Benefits Act

The Federal Coal Industry Retiree Health Benefits Act, or CIRHBA, was enacted to provide for the funding of health benefits for some United Mine Workers of America retirees. The act merged previously established union benefit plans into a single fund into which “signatory operators” and “related persons” are obligated to pay annual premiums for beneficiaries. The act also created a second benefit fund for miners who retired between July 21, 1992, and September 30, 1994, and whose former employers are no longer in business. Because of ARLP’s union-free status, ARLP is not required to make payments to retired miners under CIRHBA, with the exception of limited payments made on behalf of predecessors of MC Mining. However, in connection with the sale of the coal assets acquired by Alliance Resource Holdings, Inc. in 1996, MAPCO Inc., now a wholly-owned subsidiary of The Williams Companies, Inc., agreed to retain, and be responsible for, all liabilities under CIRHBA.

Surface Mining Control and Reclamation Act

The Federal Surface Mining Control and Reclamation Act, or SMCRA, establishes operational, reclamation and closure standards for all aspects of surface mining as well as many aspects of deep mining. The act requires that comprehensive environmental protection and reclamation standards be met during the course of and upon completion of mining activities. In conjunction with mining the property, ARLP reclaims and restores the mined areas by grading, shaping and preparing the soil for seeding. Upon completion of mining, reclamation generally is completed by seeding with grasses or planting trees for a variety of uses, as specified in the approved reclamation plan. ARLP believes it is in compliance in all material respects with applicable regulations relating to reclamation.

SMCRA and similar state statutes require, among other things, that mined property be restored in accordance with specified standards and approved reclamation plans. The act requires ARLP to restore the surface to approximate the original contours as contemporaneously as practicable with the completion of surface mining operations. The mine operator must submit a bond or otherwise secure the performance of these reclamation obligations. Federal law and some states impose on mine operators the responsibility for replacing certain water supplies damaged by mining operations and repairing or compensating for damage to certain structures occurring on the surface as a result of mine subsidence, a consequence of longwall mining and possibly other mining operations. In addition, the Abandoned Mine Lands Program, which is part of SMCRA,

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imposes a tax on all current mining operations, the proceeds of which are used to restore mines closed before 1977. The maximum tax is $0.35 per ton on surface-mined coal and $0.15 per ton on underground-mined coal. The Abandoned Mine Lands tax is set to expire June 30, 2006, and there are various legislative proposals that are under consideration by Congress to extend the tax. ARLP has accrued for the estimated costs of reclamation and mine closing, including the cost of treating mine water discharge when necessary. In addition, states from time to time have increased and may continue to increase their fees and taxes to fund reclamation of orphaned mine sites and AMD control on a statewide basis.

Under SMCRA, responsibility for unabated violations, unpaid civil penalties and unpaid reclamation fees of independent contract mine operators and other third parties can be imputed to other companies which are deemed, according to the regulations, to have “owned” or “controlled” the third-party violator. Sanctions against the “owner” or “controller” are quite severe and can include being blocked from receiving new permits and revocation of any permits that have been issued since the time of the violations or, in the case of civil penalties and reclamation fees, since the time their amounts became due. ARLP is not aware of any currently pending or asserted claims against us relating to the “ownership” or “control” theories discussed above. However, we cannot assure you that such claims will not develop in the future.

Federal and state laws require bonds to secure ARLP’s obligations to reclaim lands used for mining, to pay federal and state workers’ compensation, to pay certain black lung claims, and to satisfy other miscellaneous obligations. These bonds are typically renewable on a yearly basis. It has become increasingly difficult for ARLP and for ARLP’s competitors generally to secure new surety bonds without the posting of partial collateral. In addition, surety bond costs have increased while the market terms of surety bonds have generally become less favorable to ARLP. It is possible that surety bonds issuers may refuse to renew bonds or may demand additional collateral upon those renewals. ARLP’s failure to maintain, or inability to acquire, surety bonds that are required by state and federal laws would have a material adverse effect on ARLP.

Air Emissions

The Federal Clean Air Act, or CAA, and similar state and local laws and regulations, which regulate emissions into the air, affect coal mining operations. The CAA directly impacts our coal mining and processing operations by imposing permitting requirements and, in some cases, requirements to install certain emissions control equipment, on sources that emit various hazardous and non-hazardous air pollutants. The CAA also indirectly affects coal mining operations by extensively regulating the air emissions of coal-fired electric power generating plants. There have been a series of recent federal rulemakings that are focused on emissions from coal-fired electric generating facilities. Installation of additional emissions control technology and additional measures required under EPA laws and regulations will make it more costly to operate coal-fired power plants and, depending on the requirements of individual state implementation plans, could make coal a less attractive fuel alternative in the planning and building of power plants in the future. Any reduction in coal’s share of power generating capacity could have a material adverse effect on ARLP’s business, financial condition and results of operations.

The EPA’s Acid Rain Program, provided in Title IV of the CAA, regulates emissions of sulfur dioxide from electric generating facilities. Sulfur dioxide is a by-product of coal combustion. Affected facilities purchase or are otherwise allocated sulfur dioxide emissions allowances, which must be surrendered annually in an amount equal to a facility’s sulfur dioxide emissions in that year. Affected facilities may sell or trade excess allowances to other facilities that require additional allowances to offset their sulfur dioxide emissions. In addition to purchasing or trading for additional sulfur dioxide allowances, affected power facilities can satisfy the requirements of EPA’s Acid Rain Program by switching to lower sulfur fuels, installing pollution control devices such as flue gas desulfurization systems, or “scrubbers,” or by reducing electricity generating levels.

EPA has promulgated rules, referred to as the “NOx SIP Call,” that require coal-fired power plants in 21 eastern states and Washington D.C. to make substantial reductions in nitrogen oxide emissions in an effort to

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reduce the impacts of ozone transport between states. Additionally, in March 2005, EPA issued the final Clean Air Interstate Rule, or CAIR, which will permanently cap nitrogen oxide and sulfur dioxide emissions in 28 eastern states and Washington, D.C. beginning in 2009 and 2010, respectively. CAIR requires these states to achieve the required emission reductions by requiring power plants to either participate in an EPA-administered “cap-and-trade” program that caps emission in two phases, or by meeting an individual state emissions budget through measures established by the state.

In March 2005, EPA finalized the Clean Air Mercury Rule, or CAMR, which establishes a two-part, nationwide cap on mercury emissions from coal-fired power plants beginning in 2010. While currently the subject of extensive controversy and litigation, if fully implemented, CAMR would permit states to implement their own mercury control regulations or participate in an interstate cap-and-trade program for mercury emission allowances.

EPA has adopted new, more stringent national air quality standards for ozone and fine particulate matter. As a result, some states will be required to amend their existing state implementation plans to attain and maintain compliance with the new air quality standards. For example, in December 2004, EPA designated specific areas in the United States as in “non-attainment” with the new national ambient air quality standard for fine particulate matter. In November 2005, EPA published proposed rules addressing how states would implement plans to bring applicable non-attainment regions into compliance with the new air quality standard. Under EPA’s proposed rulemaking, states would have until April 2008 to submit their implementation plans to EPA for approval. Because coal mining operations and coal-fired electric generating facilities emit particulate matter, ARLP’s mining operations and its customers could be affected when the new standards are implemented by the applicable states.

In June 2005, EPA announced final amendments to its regional haze program originally developed in 1999 to improve visibility in national parks and wilderness areas. As part of the new rules, affected states must develop implementation plans by December 2007 that, among other things, identify facilities that will have to reduce emissions and comply with stricter emission limitations. This program may restrict construction of new coal- fired power plants where emissions are projected to reduce visibility in protected areas. In addition, this program may require certain existing coal-fired power plants to install emissions control equipment to reduce haze-causing emissions such as sulfur dioxide, nitrogen oxide, and particulate matter. Demand for ARLP’s coal could be affected when these new standards are implemented by the applicable states.

The Department of Justice, on behalf of EPA, has filed lawsuits against a number of coal-fired electric generating facilities, including some of ARLP’s customers, alleging violations of the new source review provisions of the CAA. EPA has alleged that certain modifications have been made to these facilities without first obtaining certain permits issued under the new source review program. Several of these lawsuits have settled, but others remain pending. Depending on the ultimate resolution of these cases, demand for ARLP’s coal could be affected.

Carbon Dioxide Emissions

The Kyoto Protocol to the United Nations Framework Convention on Climate Change calls for developed nations to reduce their emissions of greenhouse gases to five percent below 1990 levels by 2012. Carbon dioxide, which is a major byproduct of the combustion of coal and other fossil fuels, is subject to the Kyoto Protocol. The Kyoto Protocol went into effect on February 16, 2005 for those nations that ratified the treaty.

In 2002, the United States withdrew its support for the Kyoto Protocol. With the Kyoto Protocol now effective, there will likely be increasing international pressure on the United States to adopt mandatory restrictions on carbon dioxide emissions. The United States Congress has considered bills in the past that would regulate domestic carbon dioxide emissions, but such bills have not yet received sufficient Congressional approvals. Several states have also either passed legislation or announced initiatives focused on decreasing or stabilizing carbon dioxide emissions associated with the combustion of fossil fuels, and many of these measures have focused on emissions from coal-fired electric generating facilities. For example, in December 2005, seven

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northeastern states agreed to implement a regional cap-and-trade program to stabilize carbon dioxide emissions from regional power plants beginning in 2009.

While higher prices for natural gas and oil, and improved efficiencies and new technologies for coal-fired electric power generation have helped to increase demand for ARLP’s coal, it is possible that future federal and state initiatives to control carbon dioxide emissions could result in increased costs associated with coal consumption, such as costs to install additional controls to reduce carbon dioxide emissions or costs to purchase emissions reduction credits to comply with future emissions trading programs. Such increased costs for coal consumption could result in some customers switching to alternative sources of fuel, which could have a material adverse effect on ARLP’s business, financial condition and results of operations.

Water Discharge

The Federal Clean Water Act, or CWA, and similar state and local laws and regulations affect coal mining operations by imposing restrictions on effluent discharge into waters. Regular monitoring, as well as compliance with reporting requirements and performance standards, are preconditions for the issuance and renewal of permits governing the discharge of pollutants into water. Section 404 of the CWA imposes permitting and mitigation requirements associated with the dredging and filling of wetlands and streams. The CWA and equivalent state legislation, where such equivalent state legislation exists, affect coal mining operations that impact wetlands and streams. Although permitting requirements have been tightened in recent years, ARLP believes it has obtained all necessary wetlands permits required under CWA Section 404. However, mitigation requirements under existing and possible future wetlands permits may vary considerably. At this time ARLP does not anticipate any increase in such requirements or in post-mining reclamation accrual requirements. For that reason, the setting of post-mine reclamation accruals for such mitigation projects is difficult to ascertain with certainty. ARLP believes that it has obtained all permits required under the CWA as traditionally interpreted by the responsible agencies. Although more stringent permitting requirements may be imposed in the future, ARLP is not able to accurately predict the impact, if any, of any such permitting requirements.

On September 22, 2005, environmental groups led by the Ohio Valley Environmental Coalition filed suit in the Federal District Court for the Southern District of West Virginia challenging the Army Corps of Engineers’, or Corps of Engineers, authority to issue CWA Section 404 discharge permits for certain mountaintop mining projects. The case, styled Ohio Valley Environmental Coalition v. United States Army Corps of Engineers alleges that the Corps of Engineers generally acted arbitrarily and capriciously in issuing certain Section 404 permits to operators engaged in mountaintop mining operations. On February 1, 2006, the plaintiffs moved to amend their pleadings to seek a preliminary injunction that would void the Corps of Engineers approval of three particular

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Index to Financial Statements

Section 404 permits issued to operators. Although ARLP’s mining operations are not implicated in this particular litigation, it is possible that similar litigation affecting the Corps of Engineers ability to issue CWA permits could adversely affect ARLP’s results of operation and financial position.

Each individual state is required to submit to EPA their biennial CWA Section 303(d) lists identifying all waterbodies not meeting state specified water quality standards. For each listed waterbody, the state is required to begin developing a Total Maximum Daily Load (TMDL) to:

•

determine the maximum pollutant loading the waterbody can assimilate without violating water quality standards,

•

identify all current pollutant sources and loadings to that waterbody,

•

calculate the pollutant loading reduction necessary to achieve water quality standards, and

•

establish a means of allocating that burden among and between the point and non-point sources contributing pollutants to the waterbody.

ARLP is currently participating in stakeholders meetings and in negotiations with states and EPA to establish reasonable TMDLs that will accommodate expansion of ARLP’s operations. These and other regulatory developments may restrict ARLP’s ability to develop new mines, or could require ARLP’s customers or ARLP to modify existing operations, the extent of which we cannot accurately or reasonably predict.

The Federal Safe Drinking Water Act, or SDWA, and its state equivalents affect coal mining operations by imposing requirements on the underground injection of fine coal slurries, fly ash, and flue gas scrubber sludge, and by requiring permits to conduct such underground injection activities. The inability to obtain these permits could have a material impact on ARLP’s ability to inject materials such as fine coal refuse, fly ash, or flue gas scrubber sludge into the inactive areas of some of ARLP’s old underground mine workings.

In addition to establishing the underground injection control program, the SDWA also imposes regulatory requirements on owners and operators of “public water systems.” This regulatory program could impact ARLP’s reclamation operations where subsidence or other mining-related problems require the provision of drinking water to affected adjacent homeowners. However, it is unlikely that any of ARLP’s reclamation activities would fall within the definition of a “public water system.” While ARLP has several drinking water supply sources for ARLP’s employees and contractors that are subject to SDWA regulation, the SDWA is unlikely to have a material impact on ARLP’s operations.

Hazardous Substances and Wastes

The Federal Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA, or the “Superfund” law, and analogous state laws, impose liability, without regard to fault or the legality of the original conduct on certain classes of persons that are considered to have contributed to the release of a “hazardous substance” into the environment. These persons include the owner or operator of the site where the release occurred and companies that disposed or arranged for the disposal of the hazardous substances found at the site. Persons who are or were responsible for releases of hazardous substances under CERCLA may be subject to joint and several liability for the costs of cleaning up the hazardous substances that have been released into the environment and for damages to natural resources. Some products used by coal companies in operations generate waste containing hazardous substances. ARLP is currently unaware of any material liability associated with the release or disposal of hazardous substances from ARLP’s past or present mine sites.

The Federal Resource Conversation and Recovery Act, or RCRA, and corresponding state laws regulating hazardous waste affect coal mining operations by imposing requirements for the generation, transportation, treatment, storage, disposal and cleanup of hazardous wastes. Many mining wastes are excluded from the regulatory definition of hazardous wastes, and coal mining operations covered by SMCRA permits are by statute

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exempted from RCRA permitting. RCRA also allows EPA to require corrective action at sites where there is a release of hazardous substances. In addition, each state has its own laws regarding the proper management and disposal of waste material. While these laws impose ongoing compliance obligations, such costs are not believed to have a material impact on ARLP’s operations.

In 2000, EPA declined to impose hazardous waste regulatory controls on the disposal of some coal combustion by-products, including the practice of using coal combustion by-products, or CCB, as mine fill. However, under pressure from environmental groups, EPA has continued evaluating the possibility of placing additional solid waste burdens on the disposal of these types of materials. On March 1, 2006, the National Academy of Sciences released a report commissioned by Congress that studied CCB mine filling practices and recommended federal regulatory oversight of CCB mine filling under either SMCRA or the non-hazardous waste provisions of RCRA. It is unclear at this time how federal regulators will view this report and whether they will propose federal regulations under either SMCRA or RCRA. Assuming federal regulations are proposed in the future, it is not possible at this time to assess how such regulations would impact ARLP’s operations. However, we believe the beneficial uses of coal combustion by-products that ARLP employs (such as the practice of placing by-products in abandoned mine areas) do not constitute poor environmental practices because, among other things, ARLP’s CWA discharge permits for treated AMD contain parameters for pollutants of concern, such as metals, and those permits require monitoring and reporting of effluent quality data.

Other Environmental, Health And Safety Regulation

In addition to the laws and regulations described above, ARLP is subject to regulations regarding underground and above ground storage tanks where ARLP may store petroleum or other substances. Some monitoring equipment that ARLP uses is subject to licensing under the Federal Atomic Energy Act. Water supply wells located on ARLP’s property are subject to federal, state and local regulation.

The Federal Safe Explosives Act, or the SEA, applies to all users of explosives. Knowing or willful violations of the SEA may result in fines, imprisonment, or both. In addition, violations of SEA may result in revocation of user permits and seizure or forfeiture of explosive materials.

The costs of compliance with these requirements should not have a material adverse effect on ARLP’s business, financial condition or results of operations.

Employees

To conduct ARLP’s operations, ARLP’s managing general partner and its affiliates employ approximately 2,300 employees, including approximately 100 corporate employees and approximately 2,200 employees involved in active mining operations. ARLP’s work-force is entirely union-free. Relations with ARLP’s employees are generally good.

Coal Reserves

ARLP must obtain permits from applicable state regulatory authorities before beginning to mine particular reserves. Applications for permits require extensive engineering and data analysis and presentation, and must address a variety of environmental, health, and safety matters associated with a proposed mining operation. These matters include the manner and sequencing of coal extraction, the storage, use and disposal of waste and other substances and other impacts on the environment, the construction of water containment areas, and reclamation of the area after coal extraction. ARLP is required to post bonds to secure performance under ARLP’s permits. As is typical in the coal industry, ARLP strives to obtain mining permits within a time frame that allows ARLP to mine reserves as planned on an uninterrupted basis. ARLP begins preparing applications for permits for areas that ARLP intends to mine sufficiently in advance of ARLP’s planned mining activities to allow adequate time to complete the permitting process. Regulatory authorities have considerable discretion in

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the timing of permit issuance, and the public has rights to comment on and otherwise engage in the permitting process, including intervention in the courts. For the reserves set forth in the table below, ARLP is not currently aware of matters which would significantly hinder ARLP’s ability to obtain future mining permits on a timely basis.

ARLP’s reported coal reserves are those ARLP believes can be economically and legally extracted and produced at the date of this prospectus and are in accordance with guidance from SEC Industry Guide No. 7. In determining whether ARLP’s reserves meet this economical and legal standard, ARLP takes into account, among other things, ARLP’s potential ability or inability to obtain a mining permit, the possible necessity of revising a mining plan, changes in estimated future costs, changes in future cash flows caused by changes in mining permits, variations in quantity and quality of coal, and varying levels of demand and their effects on selling prices.

At December 31, 2005, ARLP had approximately 549.0 million tons of proven and probable coal reserves in Illinois, Indiana, Kentucky, Maryland, Pennsylvania and West Virginia. All of the estimates of reserves which are presented in this prospectus are of proven and probable reserves (as defined below). For information on location of ARLP’s mines, please read “—Mining Operations” above.

The following table sets forth reserve information, at December 31, 2005, about each of ARLP’s mining complexes:


Operations	Mine Type	Heat Content (Btus per pound)	Proven and Probable Reserves Pounds S0₂ per MMbtu								Reserve Assignment
Operations	Mine Type	Heat Content (Btus per pound)	<1.2		1.2-2.5		>2.5		Total		Assigned		Unassigned
		(tons in millions)
Illinois Basin Operations
Dotiki	Underground	12,300	—		—		89.5		89.5		89.5		—
Warrior	Underground	12,500	—		—		17.8		17.8		17.8		—
Pattiki	Underground	11,700	—		—		47.6		47.6		47.6		—
Hopkins	Underground	11,300	—		—		56.7		56.7		36.5		20.2
	/ Surface		—		—		7.6		7.6		7.6		—
Gibson (North)	Underground	11,600	—		27.2		7.9		35.1		35.1		—
Gibson (South)	Underground	11,600	—		18.6		64.1		82.7		—		82.7

Region Total			—		45.8		291.2		337.0		234.1		102.9

Central Appalachia Operations
Pontiki	Underground	12,800	6.5		11.9		—		18.4		18.4		—
MC Mining	Underground	12,800	21.0		—		1.8		22.8		22.8		—

Region Total			27.5		11.9		1.8		41.2		41.2		—

Northern Appalachia Operations
Mettiki	Underground	13,000	—		8.1		10.5		18.6		18.6		—
Mettiki Coal (WV)	Underground	13,000	—		6.7		18.3		25.0		25.0		—
Tunnel Ridge	Underground	12,600	—		—		70.5		70.5		70.5		—
Penn Ridge	Underground	12,500	—		—		56.7		56.7		56.7		—

Region Total			—		14.8		156.0		170.8		170.8		—

Total			27.5		72.5		449.0		549.0		446.1		102.9

% of Total			5.0	%	13.2	%	81.8	%	100.0	%	81.3	%	18.7	%

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Index to Financial Statements

ARLP’s reserve estimates are prepared from geological data assembled and analyzed by ARLP’s staff of geologists and engineers. This data is obtained through ARLP’s extensive, ongoing exploration drilling and in-mine channel sampling programs. ARLP’s drill spacing criteria adhere to standards as defined by the U.S. Geological Survey. The maximum acceptable distance from seam data points varies with the geologic nature of the coal seam being studied, but generally the standard for (a) proven reserves is that points of observation are no greater than ¹/2 mile apart and are projected to extend as a ¹/4 mile wide belt around each point of measurement and (b) probable reserves is that points of observation are between ¹/2 and 1¹/2 miles apart and are projected to extend as a ¹/2 mile wide belt that lies ¹/4 mile from the points of measurement.

Reserve estimates will change from time to time to reflect evolving market conditions, mining activities, additional analyses, new engineering and geological data, acquisition or divestment of reserve holdings, modification of mining plans or mining methods, and other factors.

Reserves represent that part of a mineral deposit that can be economically and legally extracted or produced, and reflect estimated losses involved in producing a saleable product. All of ARLP’s reserves are steam coal. The 27.5 million tons of reserves listed as <1.2 pounds of SO₂ per MMbtu are compliance coal which means coal that meets sulfur emission standards imposed by Phase I and II of the CAA. ARLP classifies low-sulfur coal as coal with a sulfur content of less than 1%, medium-sulfur coal as coal with a sulfur content between 1% and 2%, and high-sulfur coal as coal with a sulfur content of greater than 2%.

Assigned reserves are those reserves that have been designated for mining by a specific operation.

Unassigned reserves are those reserves that have not yet been designated for mining by a specific operation.

BTU values are reported on an as shipped, fully washed basis. Shipments that are either fully or partially raw will have a lower BTU value.

ARLP controls certain leases for coal deposits that are near, but not contiguous to, ARLP’s primary reserve bases. The tons controlled by these leases are classified as non-reserve coal deposits and are not included in ARLP’s reported reserves. At December 31, 2005, these non-reserve coal deposits are as follows: Dotiki—20.2 million tons, Pattiki—3.2 million tons, Gibson (North)—0.9 million tons, Gibson (South)—7.5 million tons, and Warrior—8.2 million tons.

ARLP leases almost all of its reserves and generally has the right to maintain leases in force until the exhaustion of mineable and merchantable coal located within the leased premises or a larger coal reserve area. These leases provide for royalties to be paid to the lessor at a fixed amount per ton or as a percentage of the sales price. Many leases require payment of minimum royalties, payable either at the time of the execution of the lease or in periodic installments, even if no mining activities have begun. These minimum royalties are normally credited against the production royalties owed to a lessor once coal production has commenced.

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The following table sets forth production data about each of ARLP’s mining complexes:


	Tons Produced
	Year Ended December 31,
Operations	2003	2004	2005	Transportation	Equipment
	(tons in millions)
Illinois Basin Operations
Dotiki	4.9	4.8	4.7	CSX, PAL; truck; barge	CM
Warrior	2.4	3.1	4.1	CSX, PAL; truck	CM
Pattiki	1.8	2.5	2.6	CSX; barge	CM
Hopkins	0.8	0.2	0.9	CSX, PAL; truck	DL; CM
Gibson (North)	2.4	3.0	3.4	Truck; barge	CM

Region Total	12.3	13.6	15.7

Central Appalachia Operations
Pontiki	2.0	1.7	1.7	NS; truck	CM
MC Mining	1.6	1.9	1.6	CSX; truck	CM

Region Total	3.6	3.6	3.3

Northern Appalachia Operations
Mettiki	3.3	3.2	3.3	Truck; CSX	LW; CM; CS

Region Total	3.3	3.2	3.3

TOTAL	19.2	20.4	22.3

CSX-CSX Railroad

PAL-Paducah & Louisville Railroad

NS -Norfolk & Southern Railroad

CM -Continuous Miner

CS -Contour Strip

DL -Dragline with Stripping Shovel, Front End Loaders and Dozers

LW -Longwall

Legal Proceedings

ARLP is subject to various types of litigation in the ordinary course of business. Disputes between ARLP and its customers over the provisions of long-term coal supply contracts arise occasionally and generally relate to, among other things, coal quality, quantity, pricing and the existence of force majeure conditions. Other than the recently settled contract dispute with ICG described below, ARLP is not involved in any litigation involving any of ARLP’s long-term coal supply contracts. However, we cannot assure you that disputes will not occur or that ARLP will be able to resolve those disputes in a satisfactory manner. ARLP is not engaged in any litigation that we believe is material to ARLP’s operations, including under the various environmental protection statutes to which ARLP is subject. ARLP provides for costs related to litigation and regulatory proceedings, including civil fines issued as part of the outcome of these proceedings, when a loss is probable and the amount is reasonably determinable. Although the ultimate outcome of these matters cannot be predicted with certainty, in the opinion of management, the outcome of these matters to the extent not previously provided for or covered under insurance, is not expected to have a material adverse effect on ARLP’s business, financial position or results of operations. Nonetheless, these matters or estimates that are based on current facts and circumstances, if resolved in a manner different from the basis on which management has formed its opinion, could have a material adverse effect on ARLP’s financial position or results of operations.

On April 24, 2006, ARLP was served with a complaint from Mr. Ned Comer, et al, who we refer to as the plaintiffs, alleging that approximately 40 oil and coal companies, including ARLP, which we refer to as the defendants, are liable to the plaintiffs for tortiously causing damage to plaintiffs’ property in Mississippi. The plaintiffs allege that the defendants’ greenhouse gas emissions caused global warning and resulted in the increase in the destructive capacity of Hurricane Katrina. ARLP believes this complaint is without merit and does not

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believe that this complaint will have a material adverse effect on ARLP’s business, financial position or results of operations.

ARLP’s subsidiary, Mettiki Coal (WV), LLC, is developing an underground longwall mine in Tucker County, West Virginia (which we refer to as the Mountain View Mine or E-Mine), which will eventually replace Mettiki Coal’s existing longwall mining operation at the D-Mine located in Garrett County, Maryland. The Mountain View Mine is located approximately 10 miles from Mettiki Coal. In order to proceed with development of the Mountain View Mine, Mettiki Coal (WV) submitted various permit applications to the West Virginia Department of Environmental Protection, or WVDEP, including an application for approval to conduct underground mining. WVDEP issued the required permits in the Spring of 2004. Certain complainants appealed WVDEP’s decision issuing the underground mining permit to the West Virginia Surface Mine Board, or SMB, which held administrative hearings on the matter in late 2004 and early 2005. On March 8, 2005, the SMB on a divided 3-3 vote issued a final order concluding consideration of the appeal without effectively rendering a decision, which, by operation of West Virginia law, resulted in the affirmation of WVDEP’s decision to issue the underground mining permit. The complainants appealed the SMB decision, but subsequently voluntarily agreed to withdraw the appeal, which was dismissed with prejudice by the Tucker County circuit court in West Virginia on April 26, 2005.

On April 19, 2005, these same complainants submitted a letter to the U.S. Department of the Interior’s Office of Surface Mining, Reclamation and Enforcement, or OSM, and the OSM’s regional field office in Charleston, West Virginia, or CHFO, requesting federal monitoring and inspection of the Mountain View Mine and alleging that operations at the mine would create acid mine drainage with no defined end point. By written notice dated April 21, 2005, the CHFO advised WVDEP that it would review the complainants’ allegation that the Mountain View Mine would cause material harm to the hydrological balance within and outside of the permit area. Following its initial review, on September 15, 2005, the CHFO notified WVDEP that it intended to initiate a formal investigation into the issuance of the underground mining permit for the Mountain View Mine. WVDEP requested an informal review of the CHFO decision by the OSM. By two letters, both dated October 21, 2005, OSM reversed the decision of the CHFO concluding that the CHFO and OSM lacked statutory authority to review the WVDEP’s issuance of the underground mining permit, and the Department of the Interior ordered that this was the Department’s final decision on the matter raised in the complainants’ letter dated April 19, 2005. The Mountain View Mine is not currently subject to any pending or threatened agency or third-party claims. However, in correspondence dated March 8, 2006, these same complainants requested that the Director of OSM evaluate whether West Virginia is properly administering and enforcing its state mining program in compliance with the requirements of SMCRA. These complainants submitted a similar request on April 19, 2005, which was rejected by the Department of Interior’s final decision on October 21, 2005. In a letter dated March 24, 2006, the Department of the Interior denied the complainants request and stated that this denial was the final decision of the Department of the Interior.

On October 12, 2004, Pontiki Coal, LLC, or Pontiki, one of ARLP’s subsidiaries and the successor-in-interest of Pontiki Coal Corporation as a result of a merger completed on August 4, 1999, was served with a complaint from ICG, LLC, or ICG, alleging breach of contract and seeking declaratory relief to determine the parties’ rights under a coal sales agreement between Horizon Natural Resource Sales Company, or Horizon Sales, as buyer, and Pontiki Coal Corporation, as seller, dated October 3, 1998, as amended on February 28, 2001, which we refer to as the Horizon Agreement. ICG has represented that it acquired the rights and assumed the liabilities of the Horizon Agreement effective September 30, 2004, as part of an asset sale approved by the U.S. Bankruptcy Court supervising the bankruptcy proceedings of Horizon Sales and its affiliates.

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Index to Financial Statements

transportation services for the delivery of coal as required under the Horizon Agreement. In November 2005, ARLP settled this contract dispute with ICG. Under this settlement, effective August 1, 2005, Pontiki will ship coal in approximate even monthly quantities until the remaining contract obligation of 1,681,303 tons is shipped, and this contract will terminate on or by December 31, 2006. Under the terms of the settlement, the existing coal supply agreement was amended to change the coal quality specifications and to exclude from the definition of “force majeure” the events of railroad car shortages and geological and quality issues with respect to coal. As part of this settlement, ARLP and ICG also executed a new coal sales agreement whereby another subsidiary of ARLP will purchase 892,000 tons of coal from ICG. Approximately 63,000 tons were purchased and sold at a profit in 2005 and the remaining 829,000 tons are expected to be purchased and sold at a profit in 2006. These agreements will expire on or by December 31, 2006.

At certain of ARLP’s operations, property tax assessments for several years are under audit by various state tax authorities. ARLP believes that it has recorded adequate liabilities based on reasonable estimates of any property tax assessments that may be ultimately assessed as a result of these audits.

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Index to Financial Statements

MANAGEMENT

Alliance Holdings GP, L.P.

Directors and Officers of Alliance GP, LLC

The following table sets forth certain information with respect to the executive officers and members of the board of directors of our general partner, Alliance GP, LLC. Executive officers and directors will serve until their successors are duly appointed or elected.

The board of directors of our general partner has the authority to appoint our general partner’s executive officers. C-Holdings, LLC, which owns 100% of our general partner, has the authority to appoint our general partner’s directors. Joseph W. Craft III owns C-Holdings, LLC. Pursuant to other authority, the board of directors of our general partner may appoint additional management personnel to assist in the management of our operations.


Name	Age	Position With General Partner
Joseph W. Craft III	55	President, Chief Executive Officer and Chairman of the Board and Member of Audit and Compensation Committees
Thomas L. Pearson	52	Senior Vice President - Law and Administration, General Counsel and Secretary
Brian L. Cantrell	46	Senior Vice President and Chief Financial Officer
Michael J. Hall	61	Director and Member of the Audit* and Compensation Committees
Thomas M. Davidson, Sr.	68	Director and Member of the Audit and Conflicts* Committees

*	Indicates Chairman of Committee

Joseph W. Craft III has been President, Chief Executive Officer and Chairman of our board of directors since November 2005 and has majority ownership of ARLP’s managing general partner. Mr. Craft owns indirectly a majority of the outstanding interest in ARLP’s special general partner. Mr. Craft has been President, Chief Executive Officer and a Director of ARLP’s managing general partner since August 1999. Previously Mr. Craft served as President of MAPCO Coal Inc. since 1986. During that period, he also was Senior Vice President of MAPCO Inc. and had been previously that company’s General Counsel and Chief Financial Officer. Before joining MAPCO, Mr. Craft was an attorney at Falcon Coal Corporation and Diamond Shamrock Coal Corporation. He is past Chairman of the National Coal Council, a Board and Executive Committee Member of the National Mining Association, a Director of the Center for Energy and Economic Development and a Member of the Board of Trustees of the University of Tulsa. Mr. Craft holds a Bachelor of Science degree in Accounting and a Juris Doctor degree from the University of Kentucky. Mr. Craft also is a graduate of the Senior Executive Program of the Alfred P. Sloan School of Management at Massachusetts Institute of Technology.

Thomas L. Pearson has been Senior Vice President—Law and Administration, General Counsel and Secretary since November 2005. Mr. Pearson has been Senior Vice President—Law and Administration, General Counsel and Secretary of ARLP’s managing general partner since August 1996. Mr. Pearson previously was Assistant General Counsel of MAPCO Inc., and served as General Counsel and Secretary of MAPCO Coal Inc. from 1989 to 1996. Before joining the company, he was General Counsel and Secretary of McLouth Steel Products Corporation, Corporate Counsel for Midland-Ross Corporation, and an attorney for Arter & Hadden, a law firm in Cleveland, Ohio. Mr. Pearson’s current and past business, charitable and education involvement includes Trustee of the Energy and Mineral Law Foundation, Vice Chairman, Legal Affairs Committee, National Mining Association, and Member, Dean’s Committee, The University of Iowa College of Law. Mr. Pearson holds a Bachelor of Arts degree in History and Communications from DePauw University and a Juris Doctor degree from The University of Iowa.

Brian L. Cantrell has been Senior Vice President and Chief Financial Officer since November 2005. Mr. Cantrell has been Senior Vice President and Chief Financial Officer of ARLP’s managing general partner

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Index to Financial Statements

since October 2003. Prior to his current position, Mr. Cantrell was President of AFN Communications, LLC from November 2001 to October 2003 where he had previously served as Executive Vice President and Chief Financial Officer after joining AFN in September 2000. Mr. Cantrell’s previous positions include Chief Financial Officer, Treasurer and Director with Brighton Energy, LLC from August 1997 to September 2000; Vice President—Finance of KCS Medallion Resources, Inc.; and Vice President—Finance, Secretary and Treasurer of Intercoast Oil and Gas Company. Mr. Cantrell is a Certified Public Accountant and holds a Master of Accountancy and Bachelor of Accountancy from the University of Oklahoma.

Michael J. Hall became a Director in March 2006. Mr. Hall was elected President and Chief Executive Officer of Matrix Service Company (Matrix), a construction services company, on March 28, 2005 and continues to serve in that capacity. Mr. Hall was Vice President—Finance and Chief Financial Officer, Secretary and Treasurer of Matrix from September, 1998 until he retired in May, 2004. He serves on Matrix’s board of directors, a position he assumed when he joined Matrix in 1998. Matrix is a company which provides general industrial construction and repair and maintenance services principally to the petroleum, petrochemical, power, bulk storage terminal, pipeline and industrial gas industries. Prior to working for Matrix, Mr. Hall was Vice President and Chief Financial Officer of Pexco Holdings, Inc., Vice President—Finance and Chief Financial Officer for Worldwide Sports & Recreation, Inc. an affiliated company of Pexco, and worked for T.D. Williamson, Inc., as Senior Vice President, Chief Financial and Administrative Officer, and Director of Operations—Europe, Africa and Middle East Region. Mr. Hall holds a Bachelor of Science degree in Accounting from Boston College and a Master of Business Administration from Stanford University. Mr. Hall is chairman of the audit committee of Alliance GP, LLC and Alliance Resource Management GP, LLC.

Thomas M. Davidson, Sr. became a Director in March 2006. In 1999, Mr. Davidson founded Davidson Capital Group, which is engaged primarily in assisting enterprises in obtaining venture capital and private equity to enable growth initiatives such as mergers and acquisitions and consolidations. Mr. Davidson is a President and Senior Managing Director for Davidson Capital Group and has served in such capacity since 1999. From 1986 to 1989, Mr. Davidson was Senior Vice President and General Counsel of The Peter Kiewit Companies, a coal mining and construction company. From 1982 to 1985, Mr. Davidson was a senior law partner in the Corporate Group of Akin, Gump, Strauss, Hauer and Feld. From 1977 to 1982, Mr. Davidson was Senior Vice President and General Counsel of MAPCO Inc. Mr. Davidson holds a Bachelor degree in Political Science from Williams College and a Juris Doctor degree from Duke University.

Board Committees

Audit Committee. Our general partner’s board of directors will establish an audit committee to be effective upon the closing of this offering. Ultimately, three independent members of our general partner’s board of directors will serve on the audit committee that will review our external financial reporting, maintain responsibility for engaging our independent auditors and review procedures for internal auditing and the adequacy of our internal accounting controls. Initially, Messrs. Craft, Hall and Davidson will comprise our audit committee. Mr. Craft will be replaced within one year by an independent director in compliance with the National Association of Securities Dealers, or NASD, rules. In addition to satisfying certain other requirements, the members of the audit committee must meet the independence standards for an audit committee of a board of directors established by the NASD rules.

Conflicts Committee. Our general partner’s board of directors will establish a conflicts committee to be effective upon the closing of this offering. Ultimately, two members of our general partner’s board of directors will serve on the conflicts committee, which will be charged with reviewing specific matters that our general partner’s board of directors believes may involve conflicts of interest. Initially, Mr. Davidson will comprise our conflicts committee. The conflicts committee will determine if the resolution of any conflict of interest submitted to it is fair and reasonable to us. In addition to satisfying certain other requirements, the members of the conflicts committee must meet the independence standards for a conflicts committee of a board of directors established by NASD rules. Any matters approved by the conflicts committee will be conclusively deemed to be fair and

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Index to Financial Statements

reasonable to us, approved by all of our unitholders, and not a breach by us of any duties we may owe to our unitholders.

Compensation Committee. Our general partner’s board of directors will establish a compensation committee of at least two directors to be effective upon the closing of this offering. The compensation committee will oversee compensation decisions and benefits for the officers of our general partner. Initially, Messrs. Craft and Hall will comprise our compensation committee.

Other Committees. Our general partner’s board of directors may establish other committees from time to time to facilitate our management.

Governance Matters

Independence of Board Members. Pursuant to the NASD rules and the Nasdaq Stock Market rules, a director will be considered independent if the board determines that he or she does not have a material relationship with our general partner or us (either directly or as a partner, unitholder or officer of an organization that has a material relationship with our general partner or us). In compliance with the corporate governance rules of the NASD and Nasdaq, the members of the board of directors of our general partner will appoint one independent member prior to the closing of this offering and a second independent member within three months of listing. The independent members of the board of directors of our general partner will serve as the initial members of the audit and conflicts committees.

Heightened Independence for Audit Committee Members. As required by the Sarbanes-Oxley Act of 2002, the Commission has adopted rules that direct national securities exchanges and associations to prohibit the listing of securities of a public company if members of its audit committee do not satisfy a heightened independence standard. In order to meet this standard, a member of an audit committee may not receive any consulting fee, advisory fee or other compensation from the public company other than fees for service as a director or committee member and may not be considered an affiliate of the public company. The board of directors of our general partner expects that all members of its audit and conflicts committee will satisfy this heightened independence requirement.

Audit Committee Financial Expert. An audit committee plays an important role in promoting effective corporate governance, and it is imperative that members of an audit committee have requisite financial literacy and expertise. As required by the Sarbanes-Oxley Act of 2002, Commission rules require that a public company disclose whether or not its audit committee has an “audit committee financial expert” as a member. An “audit committee financial expert” is defined as a person who, based on his or her experience, possesses all of the following attributes:

•

An understanding of generally accepted accounting principles and financial statements;

•

An ability to assess the general application of such principles in connection with the accounting for estimates, accruals, and reserves;

•

Experience preparing, auditing, analyzing or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and level of complexity of issues that can reasonably be expected to be raised by our financial statements, or experience actively supervising one or more persons engaged in such activities;

•

An understanding of internal controls and procedures for financial reporting; and

•

An understanding of audit committee functions.

The board of directors of our general partner expects that one of the independent directors will satisfy the definition of “audit committee financial expert.” Mr. Michael J. Hall will serve as our audit committee financial expert.

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Index to Financial Statements

Election of our Directors

Our general partner’s limited liability company agreement establishes a board of directors that will be responsible for the oversight of our business and operations. C-Holdings, LLC has the authority to appoint our general partner’s directors.

Executive and Incentive Compensation

The executive officers of our general partner who also serve as executive officers of the general partner of ARLP will allocate a portion of the cost of their compensation to our business. For a discussion of the amounts paid to such executive officers see “—Alliance Resource Partners, L.P.—Executive Compensation.”

Alliance Holdings GP Long-Term Incentive Plan

We will adopt the Alliance Holdings GP, L.P. Long-Term Incentive Plan for the employees, directors and consultants of our general partner and its affiliates, including ARLP, who perform services for us. The long-term incentive plan will consist of two components: restricted units and phantom units. The long-term incentive plan will limit the number of units that may be delivered pursuant to awards to 5,215,000 units. Units forfeited or withheld to satisfy tax withholding obligations are available for delivery pursuant to other awards. The long-term incentive plan will be administered by the compensation committee of the board of directors of our general partner.

The board of directors of our general partner and the compensation committee of the board may terminate or amend the long-term incentive plan at any time with respect to any units for which a grant has not yet been made. Our board of directors and the compensation committee of the board also have the right to alter or amend the long-term incentive plan or any part of the long-term incentive plan from time to time, including increasing the number of units that may be granted, subject to unitholder approval as may be required by the exchange upon which the common units are listed at that time, if any. However, no change in any outstanding grant may be made that would materially reduce the benefits of the participant without the consent of the participant. The long-term incentive plan will expire upon its termination by the board of directors or the compensation committee or, if earlier, when no units remain available under the long-term incentive plan for awards. Upon termination of the long-term incentive plan, awards then outstanding will continue pursuant to the terms of their grants.

Restricted Units. A restricted unit is a common unit that vests over a period of time and that during such time is subject to forfeiture. In the future, the compensation committee may determine to make grants of restricted units under the long-term incentive plan to employees, directors and consultants containing such terms as the compensation committee determines. The compensation committee will determine the period over which restricted units granted to participants will vest. The compensation committee, in its discretion, may base its determination upon the achievement of specified financial objectives or other events. In addition, the restricted units will vest upon a change in control, as defined in the long-term incentive plan. Distributions made on restricted units may be subjected to the same vesting provisions as the restricted unit. If a grantee’s employment, consulting or membership on the board of directors terminates for any reason, the grantee’s restricted units will be automatically forfeited unless, and to the extent, the compensation committee or the terms of the award agreement provide otherwise.

Common units to be delivered as restricted units may be common units acquired by us in the open market, common units acquired by us from any other person or any combination of the foregoing. If we issue new common units upon the grant of the restricted units, the total number of common units outstanding will increase.

We intend the restricted units under the long-term incentive plan to serve as a means of incentive compensation for performance and not primarily as an opportunity to participate in the equity appreciation of our

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Index to Financial Statements

common units. Therefore, participants will not pay any consideration for the common units they receive, and we will receive no remuneration for the units.

Phantom Units. A phantom unit entitles the grantee to receive a common unit upon the vesting of the phantom unit or, in the discretion of the compensation committee, cash equivalent to the value of a common unit. In the future, the compensation committee may determine to make grants of phantom units under the plan to employees, consultants and directors containing such terms as the compensation committee determines. The compensation committee will determine the period over which phantom units granted to employees and members of our board will vest. The committee, in its discretion, may base its determination upon the achievement of specified financial objectives or other events. In addition, the phantom units will vest upon a change in control. If a grantee’s employment, consulting or membership on the board of directors terminates for any reason, the grantee’s phantom units will be automatically forfeited unless, and to the extent, the compensation committee or the terms of the award agreement provide otherwise.

The compensation committee, in its discretion, may grant distribution equivalent rights, or DERs, with respect to a phantom unit. DERs entitle the grantee to receive a cash payment equal to the cash distributions made on a common unit during the period the phantom unit is outstanding. The compensation committee will establish whether the DERs are paid currently, when the tandem phantom unit vests or on some other basis.

Common units to be delivered upon the vesting of phantom units may be common units acquired by us in the open market, common units acquired by us from any other person or any combination of the foregoing. If we issue new common units upon vesting of the phantom units, the total number of common units outstanding will increase.

We intend the issuance of any common units upon vesting of the phantom units under the plan to serve as a means of incentive compensation for performance and not primarily as an opportunity to participate in the equity appreciation of our common units. Therefore, plan participants will not pay any consideration for the common units they receive, and we will receive no remuneration for the units.

U.S. Federal Income Tax Consequences of Awards Under the Long-Term Incentive Plan. Generally, when phantom units or restricted units are granted, there are no income tax consequences for the participant or us. Upon the payment to the participant of common units and/or cash in respect of the award of phantom units or the release of restrictions on restricted units, including any distributions that have been made thereon, the participant recognizes compensation equal to the fair market value of the cash and/or units as of the date of delivery or release.

Compensation of Directors

Under our Directors’ Compensation Program, which we refer to as the Directors’ Plan, each non-employee director will be paid an annual retainer. The annual retainer is payable in common units to be paid on a quarterly basis in advance determined by dividing the pro rata annual retainer payable on such date by the closing sales price per common unit averaged over the immediately preceding ten trading days. Prior to the beginning of each plan year, each non-employee director may elect to defer under the Directors’ Plan all or a portion of his annual retainer until he ceases to be a member of the board of directors. A new election must be made for each plan year. For the annual retainer deferred by a director, a notional account is established and credited with “phantom” units equal to the number of common units that would have been paid but for his deferral election. In addition, when distributions are made with respect to common units, the notional account is credited with “phantom” distributions with respect to the phantom units then credited to the account that are equal in amount to the distributions made with respect to common units. Such phantom distributions are credited as additional phantom units. The board of directors may change or terminate the Directors’ Plan at any time; provided, however, that accrued benefits under the plan cannot be impaired.

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Index to Financial Statements

In addition, each non-employee director is entitled to participate in the Long-Term Incentive Plan. Under the Long-Term Incentive Plan such directors receive annual grants of restricted units, which vest in accordance with the procedures described below. Please see “Alliance Holdings GP Long-Term Incentive Plan” above.

Compensation Committee Interlocks and Insider Participation

With the exception of ARLP, none of our executive officers serves as a member of the board of directors or compensation committee of any entity that has one or more of its executive officers serving as a member of the board of directors or compensation committee of our general partner.

Code of Ethics. The board of directors of our general partner will adopt a code of ethics, the “Code of Ethical Conduct for Senior Financial Officers and Managers,” that applies to the chief executive officer, chief financial officer, principal accounting officer and senior financial and other managers. In addition to other matters, this code of ethics establishes policies to prevent wrongdoing and to promote honest and ethical conduct, including ethical handling of actual and apparent conflicts of interest, compliance with applicable laws, rules and regulations, full, fair, accurate, timely and understandable disclosure in public communications and prompt internal reporting violations of the code.

Web Access. We will provide access through a website to current information relating to governance, including a copy of the Code of Ethical Conduct for Senior Financial Officers and Managers and other matters impacting our governance principles. You will be able to contact our investor relations department for paper copies of these documents free of charge.

Alliance Resource Partners, L.P.

Directors and Executive Officers of Alliance Resource Partners

The following table sets forth certain information with respect to the executive officers and members of the board of directors of the general partner of Alliance Resource Partners as of March 1, 2006. Executive officers and directors are elected until death, resignation, retirement, disqualification or removal.


Name	Age	Position With our Managing General Partner
Joseph W. Craft III	55	President, Chief Executive Officer and Director
Robert G. Sachse	57	Executive Vice President and Vice Chairman of the Board
Thomas L. Pearson	52	Senior Vice President—Law and Administration, General Counsel and Secretary
Charles R. Wesley	51	Senior Vice President—Operations
Brian L. Cantrell	46	Senior Vice President and Chief Financial Officer
Gary J. Rathburn	55	Senior Vice President—Marketing
Michael J. Hall	61	Director and Member of the Audit* and Conflicts Committees
John J. MacWilliams	50	Director
Preston R. Miller, Jr.	57	Director and Member of the Compensation* Committee
John P. Neafsey	66	Chairman of the Board and Member of Audit, Compensation and Conflicts Committees
John H. Robinson	55	Director and Member of Audit, Compensation and Conflicts* Committees

*	Indicates Chairman of Committee

As described above, some of the directors and executive officers of our general partner, Alliance GP, LLC, also serve as directors and executive officers of ARLP’s managing general partner. To the extent that we have described the business experience of these individuals above, we have not repeated that information below.

Robert G. Sachse has been Executive Vice President and Vice Chairman since September 2005. Mr. Sachse has been Executive Vice President and Vice Chairman of ARLP’s managing general partner since August 2000.

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Index to Financial Statements

Prior to his current position, Mr. Sachse was Executive Vice President and Chief Operating Officer of MAPCO Inc. from 1996 to 1998 when MAPCO merged with The Williams Companies. Following the merger, Mr. Sachse had a two year non-compete consulting agreement with The Williams Companies. Mr. Sachse held various positions while with MAPCO Coal Inc. from 1982 to 1991, and was promoted to President of MAPCO Natural Gas Liquids in 1992. Mr. Sachse holds a Bachelor of Science degree in Business Administration from Trinity University and a Juris Doctor degree from the University of Tulsa.

Charles R. Wesley has been Senior Vice President—Operations since August 1996. He joined the company in 1974 when he began working for Webster County Coal Corporation as an engineering co-op student. In 1992, Mr. Wesley was named Vice President—Operations for Mettiki Coal Corporation. He has served the industry as past President of the West Kentucky Mining Institute and National Mine Rescue Association Post 11, and he has served on the Board of the Kentucky Mining Institute. Mr. Wesley holds a Bachelor of Science degree in Mining Engineering from the University of Kentucky.

Gary J. Rathburn has been Senior Vice President—Marketing since August 1996. He joined MAPCO Coal Inc. as Manager of Brokerage Coals in 1980. Since that time, he has managed all phases of the marketing group involving transportation and distribution, international sales and the brokering of coal. Prior to joining the company, Mr. Rathburn was employed by Eastern Associated Coal Corporation in its International Sales and Brokerage groups. Active in many industry-related groups, he was a Director of The National Coal Association and Chairman of the Coal Exporters Association for several years. Mr. Rathburn holds a Bachelor of Arts degree in Political Science from the University of Pittsburgh and has participated in industry-related programs at the World Trade Institute, Princeton University and the Colorado School of Mines.

John J. MacWilliams is a Partner of The Tremont Group, LLC, a private equity investment firm founded in January 2003, located in Newton, MA., which has a specialized expertise in the energy industry. Mr. MacWilliams is also a General Partner of The Beacon Group, LP, which he joined in 1993, and has served as a Director since June 1996. As part of The Beacon Group, he co-manages two private equity funds focusing on the energy industry. Mr. MacWilliams’ previous positions include serving as a General Partner of JP Morgan Partners, Executive Director of Goldman Sachs International in London, Vice President for Goldman Sachs & Co.’s Investment Banking Division in New York, and as an attorney at Davis Polk & Wardwell in New York. He also is a Director of Compagnie Generale de Geophysique. Mr. MacWilliams holds a Bachelor of Arts degree from Stanford University, Master of Science degree from Massachusetts Institute of Technology, and a Juris Doctor degree from Harvard Law School.

Preston R. Miller, Jr. is a Partner of The Tremont Group, LLC, a private equity investment firm founded in January 2003, located in Newton, MA., which has a specialized expertise in the energy industry. Mr. Miller is a General Partner of The Beacon Group, LP, which he joined in 1993 and has served as a Director since June 1996. As a part of The Beacon Group, he co-manages a private equity fund focusing on the energy industry. Mr. Miller’s previous positions include serving as a General Partner of JP Morgan Partners from June 2000 through December 2002, and was with Goldman Sachs & Co.’s from January 1979 through January 1993, most recently as Vice President in the Structured Finance Group in New York City, where he had global responsibility for coverage of the independent power industry, asset-backed power generation, and oil and gas financing. He also has a background in credit analysis, and was head of a revenue bond rating group at Standard & Poor’s Corp. Mr. Miller holds a Bachelor of Arts degree from Yale University and a Master of Public Administration degree from Harvard University. Mr. Miller is the chairman of the compensation committee.

John P. Neafsey has served as Chairman since June 1996. Mr. Neafsey is President of JN Associates, an investment consulting firm formed in 1993. Mr. Neafsey served as President and CEO of Greenwich Capital Markets from 1990 to 1993 and a Director since its founding in 1983. Positions that Mr. Neafsey held during a 23-year career at The Sun Company include Director; Executive Vice President responsible for Canadian operations, Sun Coal Company and Helios Capital Corporation; Chief Financial Officer; and other executive positions with numerous subsidiary companies. He is or has been active in a number of organizations, including

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Index to Financial Statements

the following: Director for The West Pharmaceutical Services Company and Chairman of Constar, Inc. and Lead Director of NES Rentals, Inc., Trustee Emeritus and Presidential Counselor, Cornell University, and Overseer of Cornell-Weill Medical Center. Mr. Neafsey holds Bachelor and Master of Science degrees in Engineering and a Master of Business Administration degree from Cornell University. Mr. Neafsey is a Member of the audit, conflicts and compensation committees.

John H. Robinson became a Director in December 1999. Mr. Robinson is Vice Chairman of Olsson Associates, an engineering consultancy. From 2003 to 2004, he was Chairman of EPC Global, Ltd., an engineering staffing company, and President of Metilinix, Inc., a system optimization software company. From 2000 to 2002, he was Executive Director of Amey plc, a British business process outsourcing company. Mr. Robinson served as Vice Chairman of Black & Veatch from 1998 to 2000. He began his career at Black & Veatch in 1973 and was a General Partner and Managing Partner prior to becoming Vice Chairman when the firm incorporated. Mr. Robinson is a Director of Coeur d’Alene Mining Corporation. Mr. Robinson holds Bachelor and Master of Science degrees in Engineering from the University of Kansas and is a graduate of the Owner-President-Management Program at the Harvard Business School. He is chairman of the conflicts committee and a member of the audit and compensation committees.

Audit Committee

The audit committee is comprised of three non-employee members of the board of directors (currently, Mr. Hall, Mr. Neafsey and Mr. Robinson). After reviewing the qualifications of the current members of the audit committee, and any relationships they may have with ARLP that might affect their independence, the board of directors has determined that all current audit committee members are “independent” as that concept is defined in Section 10A of the Exchange Act, all current audit committee members are “independent” as that concept is defined in the applicable rules of the Nasdaq National Market, all current audit committee members are financially literate, and Mr. Hall and Mr. Neafsey qualify as audit committee financial experts under the applicable rules promulgated pursuant to the Exchange Act.

Reimbursement of Expenses of ARLP’s Managing General Partner and its Affiliates

ARLP’s managing general partner does not receive any management fee or other compensation in connection with its management of ARLP. However, ARLP’s managing general partner and its affiliates, perform services for ARLP and are reimbursed by ARLP for all expenses incurred on ARLP’s behalf, including the costs of employee, officer and director compensation and benefits properly allocable to ARLP, as well as all other expenses necessary or appropriate to the conduct of ARLP’s business, and properly allocable to ARLP. ARLP’s partnership agreement provides that ARLP’s managing general partner will determine the expenses that are allocable to ARLP in any reasonable manner determined by ARLP’s managing general partner in its sole discretion.

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Index to Financial Statements

Executive Compensation

The following table sets forth certain compensation information for the chief executive officer and each of the four other most highly compensated executive officers of ARLP’s managing general partner in excess of $100,000 in 2005, 2004 and 2003. ARLP reimburses ARLP’s managing general partner and its affiliates for expenses incurred on ARLP’s behalf, including the cost of officer compensation allocable to ARLP.


	Annual Compensation					Other Annual Compensation(2)		Long-Term Compensation(3)		All Other Compensation(4)
Name and Principal Position	Year	Salary		Bonus(1)		Other Annual Compensation(2)		Long-Term Compensation(3)		All Other Compensation(4)
Joseph W. Craft III	2005	$	334,828	$	200,000	$	4,100	$	3,801,600	$	77,463
President, Chief Executive	2004		341,267		375,000		3,521		8,286,600		79,479
Officer and Director	2003		334,828		387,000		3,400		—		62,694

Thomas L. Pearson,	2005		210,257		200,000		8,060		760,320		45,565
Senior Vice President—Law	2004		203,520		225,000		—		1,473,746		39,435
and Administration, General	2003		199,680		166,000		—		—		31,481
Counsel and Secretary

Charles R. Wesley,	2005		235,857		245,000		—		1,182,720		54,631
Senior Vice President—	2004		229,612		300,000		825		1,657,320		75,320
Operations	2003		215,665		234,500		—		—		37,115

Gary J. Rathburn,	2005		184,257		200,000		7,300		781,440		43,816
Senior Vice President—	2004		177,020		222,000		—		1,508,939		38,790
Marketing	2003		173,680		171,000		—		—		30,602

Thomas M. Wynne	2005		169,100		200,000		—		549,120		28,661
Vice President—Operations	2004		164,631		222,000		—		1,154,205		45,377
	2003		153,600		150,000		—		—		17,448

(1)	Amounts awarded under the Short-Term Incentive Plan. Please see “Short-Term Incentive Plan” below.

(2)	Amounts reimbursed for income tax preparation and financial planning services.

(3)	The 2005 amounts represent the market value of the LTIP grants for 2003 that vested in November 2005. The 2004 amounts represent the market value of the LTIP grants for the years 2002, 2001 and 2000 that vested in November 2004.

(4)

Amounts represent (a) ARLP’s managing general partner’s matching contributions to its profit sharing and savings plan, (b) ARLP’s managing general partner’s contribution to its Supplemental Executive Retirement Plan (SERP), and (c) the amounts for Mr. Wesley and Mr. Wynne include a non Short-Term Incentive Plan bonus approved by the compensation committee.

Compensation of Directors

Under ARLP’s managing general partner’s Directors’ Plan each non-employee director was paid an annual retainer of $22,500 during 2005. The annual retainer is payable in common units to be paid on a quarterly basis in advance determined by dividing the pro rata annual retainer payable on such date by the closing sales price per common unit averaged over the immediately preceding ten trading days. Each non-employee director is eligible to participate in a deferred compensation plan that is administered by the compensation committee. Prior to the beginning of each plan year, each non-employee director may elect to defer all or a portion of his compensation until he ceases to be a member of the board of directors. A new election must be made for each plan year. For compensation deferred by a director, a notional account is established and credited with “phantom” units equal to the number of common units deferred. In addition, when distributions are made with respect to common units, the notional account is credited with “phantom” distributions with respect to phantom units that are equal in amount to the distributions made with respect to common units. The board of directors may change or terminate the deferred compensation plan at any time; provided, however, that accrued benefits under the deferred benefit plan cannot be impaired. Effective January 1, 2006, the annual retainer was increased to $23,500.

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Index to Financial Statements

Mr. Sachse has a consulting agreement with ARLP’s managing general partner with an indefinite term, subject to termination by either party upon receipt of ninety-day advance written notice of termination. The consulting agreement provides that Mr. Sachse will serve as Executive Vice President of ARLP’s managing general partner and devote his services on a part-time basis. In addition to compensation received under the Directors’ Plan described above and Long-Term Incentive Plan described below, Mr. Sachse is entitled to receive an annual fee of $150,000, payable monthly in arrears. Mr. Sachse also is entitled to receive quarterly payments of $7,500, payable in common units of ARLP.

Long-Term Incentive Plan

Effective January 1, 2000, ARLP’s managing general partner adopted the Long-Term Incentive Plan, or LTIP, for certain employees and directors of ARLP’s managing general partner and its affiliates who perform services for us. The summary of the LTIP contained herein does not purport to be complete, but outlines its material provisions.

The LTIP is administered by the compensation committee of ARLP’s managing general partner’s board of directors. Annual grant levels for designated participants are recommended by the president and chief executive officer of ARLP’s managing general partner, subject to the review and approval of the compensation committee. ARLP will reimburse ARLP’s managing general partner for all costs incurred pursuant to the programs described below. Grants are made of either restricted units, which are “phantom” units that entitle the grantee to receive a common unit or an equivalent amount of cash upon the vesting of a phantom unit, or options to purchase common units. Common units to be delivered upon the vesting of restricted units or to be issued upon exercise of a unit option will be acquired by ARLP’s managing general partner in the open market at a price equal to the then prevailing price, or directly from Alliance Resource Holdings, Inc. or any other third party, including units newly issued by ARLP, or use units already owned by ARLP’s managing general partner, or any combination of the foregoing. ARLP’s managing general partner is entitled to reimbursement by ARLP for the cost incurred in acquiring these common units or in paying cash in lieu of common units upon vesting of the restricted units. If ARLP issues new common units upon payment of the restricted units or unit options instead of purchasing them, the total number of common units outstanding will increase.

Restricted Units. Restricted units will vest over a period of time as determined by the compensation committee. However, if a grantee’s employment is terminated for any reason prior to the vesting of any restricted units, those restricted units will be automatically forfeited, unless the compensation committee, in its sole discretion, provides otherwise.

The issuance of the common units pursuant to the vesting of restricted units under the LTIP is intended to serve as a means of incentive compensation for performance and not primarily as an opportunity to participate in the equity appreciation in respect of the common units. Therefore, no consideration will be payable by the plan participants upon receipt of the common units, and ARLP receive no remuneration for these units. The compensation committee, in it discretion, may grant distribution equivalent rights with respect to restricted units.

Unit Options. ARLP has not made any grants of unit options. The compensation committee, in the future, may decide to make unit option grants to employees and directors containing the specific terms as the committee determines. When granted, unit options will have an exercise price set by the compensation committee which may be above, below or equal to the fair market value of a common unit on the date of grant.

ARLP’s managing general partner’s board of directors, in its discretion, may terminate the LTIP at any time with respect to any common units for which a grant has not previously been made. ARLP’s managing general

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Index to Financial Statements

partner’s board of directors will also have the right to alter or amend the LTIP or any part of it from time to time, subject to unitholder approval as required by the exchange upon which the common units may be listed at that time; provided, however, that no change in any outstanding grant may be made that would materially impair the rights of the participant without the consent of the affected participant. In addition, ARLP’s managing general partner may, in its discretion, establish such additional compensation and incentive arrangements as it deems appropriate to motivate and reward its employees. ARLP’s managing general partner is reimbursed for all compensation expenses incurred on ARLP’s behalf.

On December 22, 2005, the compensation committee executed a unanimous consent that, effective January 1, 2006, (a) all existing grants made under the LTIP prior to January 1, 2006 and subsequent thereto be settled, upon satisfaction of any applicable vesting requirements, in common units to be reduced by a cash settlement component equal to the minimum statutory income tax withholding requirement for each individual participant based upon the fair market value of the common units as of the date of payment, and (b) any existing and prospective LTIP grants of restricted units receive quarterly distributions as provided in the distribution equivalent rights provision of the LTIP. Therefore, each LTIP participant will have a contingent right to receive an amount equal to the cash distributions made by ARLP during the vesting period.

After adjusting for the two-for-one split of ARLP’s common units in September 2005, the aggregate number of units reserved for issuance under the LTIP is 1,200,000. Effective January 1, 2004, the compensation committee approved an amendment to the LTIP clarifying that any award that is forfeited, expires for any reason, or is paid or settled in cash, including the satisfaction of minimum statutory withholding requirements, rather than through the delivery of units will be available for future grant under the LTIP. Of the initial 1,200,000 units reserved for issuance under the LTIP, 1,092,780 units were granted in years 2000, 2001, 2002 and 2003. Of those grants, 43,650 units were forfeited and 421,452 units were settled in cash rather than delivery of units, resulting in the net issuance of 627,678 common units under those grants.

During 2004 and 2005 the compensation committee approved grants of 205,570 units and 114,390 units, respectively, which will vest December 31, 2006 and January 1, 2008, respectively, subject to the satisfaction of certain financial tests. As of December 31, 2005, 3,690 outstanding LTIP grants have been forfeited. Consequently, as of December 31, 2005, 256,052 units remain available for issuance in the future, assuming that all grants currently issued and outstanding for 2004 and 2005 are settled with common units and no forfeitures occur. Effective January 1, 2006 the compensation committee approved additional grants of 85,275 restricted units which vest January 1, 2009, subject to the satisfaction of certain financial tests that ARLP’s management expects ARLP will satisfy.

Long-Term Incentive Plan—Awards in Last Fiscal Year


	Number of Units(1)	Performance or Other Period Until Maturation or Payout(2)
Joseph W. Craft III	30,000	36 Months
Thomas L. Pearson	6,800	36 Months
Charles R. Wesley	11,150	36 Months
Gary J. Rathburn	6,800	36 Months
Thomas M. Wynne	6,000	36 Months

(1)	Units granted under the LTIP will vest January 1, 2008, subject to certain financial tests.

(2)	The number of units granted is not subject to minimum thresholds, targets or maximum payout conditions. However, the vesting of these grants is subject to meeting certain financial tests.

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Index to Financial Statements

Short-Term Incentive Plan

ARLP’s managing general partner maintains a STIP for management and other salaried employees. The STIP is designed to enhance the financial performance by rewarding management and selected salaried employees and those of ARLP’s managing general partner with cash awards for ARLP’s achieving an annual financial performance objective. The annual performance objective for each year is recommended by the president and chief executive officer of ARLP’s managing general partner and approved by the compensation committee of its board of directors prior to or during January of that year. The STIP is administered by the compensation committee. Individual participants and payments each year are determined by and in the discretion of the compensation committee, and ARLP’s managing general partner is able to amend the plan at any time. ARLP’s managing general partner is entitled to reimbursement by ARLP for the costs incurred under the STIP.

Supplemental Executive Retirement Plan

ARLP’s managing general partner maintains a Supplemental Executive Retirement Plan, or SERP, for certain officers and key employees. The purpose of the SERP is to enhance ARLP’s ability to retain specific officers and key employees, by providing them with the deferred compensation benefits contained in the SERP. The intent of the SERP is to provide each participant with retirement benefits that are comparable in value to those of similar retirement programs administered by other companies, as well as to align each participant’s supplemental benefits under the SERP with the interests of ARLP’s unitholders. Participants may elect for allocations under the SERP to be deemed to be invested in ARLP common units. The SERP is administered by the compensation committee. ARLP’s managing general partner is able to amend or terminate the plan at any time. ARLP’s managing general partner is entitled to reimbursement by ARLP for its costs incurred under the SERP.

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Index to Financial Statements

SECURITY OWNERSHIP OF CERTAIN

BENEFICIAL OWNERS AND MANAGEMENT

Alliance Holdings GP, L.P.

The following table sets forth certain information regarding the beneficial ownership of our common units prior to and as of the closing of this offering by:

•

each person who will beneficially own more than 5% of our common units;

•

each of the named executive officers of our general partner;

•

all of the directors of our general partner; and

•

all of the directors and executive officers of our general partner as a group.


	Common Units Beneficially Owned Prior to Offering			Common Units Beneficially Owned After Offering
Name of Beneficial Owner	Common Units	Percent		Common Units	Percent
Joseph W. Craft III(1)(2):
Units owned by Alliance Management Holdings, LLC	6,863,470	14.5	%	6,863,470	11.5	%
Units owned by AMH II, LLC	19,858,362	41.9		19,858,362	33.2
Units owned by Alliance Resource GP, LLC	20,641,168	43.6		20,641,168	34.4

Total for Joseph W. Craft III	47,363,000	100.0	%	47,363,000	79.1	%
Thomas L. Pearson(2)	—	—		—	—
Brian L. Cantrell(2)	—	—		5,000	*

All directors and executive officers of our general partner, as a group (3 persons)	47,363,000	100.0	%	47,368,000	79.1	%

*	Less than one percent (1%)

(1)

(2)	The address of Alliance Management Holdings, LLC, AMH II, LLC, Alliance Resource GP, LLC and each of Messrs. Craft, Pearson and Cantrell is 1717 South Boulder Avenue, Tulsa, Oklahoma, 74119.

Alliance GP, LLC

Our general partner is a wholly-owned subsidiary of C-Holdings, LLC, all of the equity of which is owned by Joseph W. Craft III, the President and Chief Executive Officer of our general partner. Through his indirect ownership of our general partner, Mr. Craft has the ability to elect, remove and replace the directors and officers of our general partner.

Alliance Resource Partners, L.P.

The following table sets forth certain information as of March 1, 2006 regarding the beneficial ownership of ARLP’s common units by:

•

each person known by ARM GP to beneficially own more than 5% of ARLP’s common units;

•

each of the named executive officers of ARM GP;

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Index to Financial Statements

•

all of the directors of ARM GP; and

•

all of the directors and executive officers of ARM GP as a group.

All information with respect to beneficial ownership has been furnished by the respective directors or officers, as the case may be. Each person has sole voting and dispositive power over the common units shown unless otherwise indicated below. ARLP had 36,426,306 common units outstanding at March 1, 2006.


Name of Beneficial Owner	Common Units Beneficially Owned(5)	Percent of Common Units Beneficially Owned
Alliance Resource GP, LLC(1)	15,310,622	42.03	%
Joseph W. Craft III(1)(2)	15,951,362	43.79	%
Robert G. Sachse(1)	29,382	*
Thomas L. Pearson(1)	50,198	*
Charles R. Wesley(1)	106,046	*
Brian L. Cantrell(1)	4,505	*
Gary J. Rathburn(1)	39,054	*
Michael J. Hall(1)	24,850	*
John J MacWilliams(3)	1,984	*
Preston R. Miller, Jr.(3)	1,984	*
John P. Neafsey(1)	42,635	*
John H. Robinson(4)	17,491	*

All directors and executive officers as a group (11 persons)	16,269,491	44.66	%

*	Less than one percent (1%)

(1)	The address of Alliance Resource GP, LLC and Messrs. Craft, Sachse, Pearson, Wesley, Cantrell, Rathburn, Hall and Neafsey is 1717 South Boulder Avenue, Tulsa, Oklahoma 74119.

(2)

Mr. Craft may be deemed to share beneficial ownership of 15,310,622 common units held by Alliance Resource GP, LLC through Alliance Resource Holdings II, Inc., of which he is the sole director and majority shareholder. Alliance Resource Holdings II, Inc. holds all of the outstanding shares of Alliance Resource Holdings, Inc., which holds all of the outstanding shares of Alliance Resource GP. Mr. Craft may be deemed to share beneficial ownership of 220,484 common units held by AMH II, LLC, of which he is the sole director and majority member. Mr. Craft also may be deemed to share beneficial ownership of 19,522 common units held by Alliance Management Holdings, LLC, of which he is the sole director. Mr. Craft also may be deemed to share beneficial ownership of an additional 27,000 common units held by a private foundation for which he serves as Trustee. Mr. Craft disclaims beneficial ownership of the common units held by the private foundation.

(3)	The address of Mr. MacWilliams and Mr. Miller is The Tremont Group, LLC, 275 Grove Street, Suite 2-400, Newton, Massachusetts 02466.

(4)	The address of Mr. Robinson is 121 West 48th Street, Suite 1006, Kansas City, Missouri 64112.

(5)	The amounts set forth do not include any restricted units granted under the LTIP, which units vest at various dates ranging from December 31, 2006 through January 1, 2008, subject to certain financial tests.

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Index to Financial Statements

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

Our Relationship with ARLP

We own 100% of Alliance Resource Management GP, LLC, the managing general partner of ARLP. Our cash flows currently consist of distributions from ARLP related to the following partnership interests:

•

our ownership of a 1.98% general partner interest in ARLP, which we hold through our ownership interests in Alliance Resource Management GP, LLC;

•

15,550,628 common units of ARLP, representing approximately 42.7% of the total common units of ARLP;

•

the incentive distribution rights in ARLP, which we likewise hold through our ownership interests in Alliance Resource Management GP, LLC and which entitle us to receive specified percentages of the cash distributed by ARLP as ARLP’s per unit distribution increases; and

•

a 0.001% managing interest in Alliance Coal, LLC.

ARLP is required by its partnership agreement to distribute all cash on hand at the end of each quarter, less appropriate reserves determined by the board of directors of its general partner. Since its initial public offering in 1999, ARLP has increased its quarterly distribution by 84.0%, from $0.25 per unit, or $1.00 per unit on an annualized basis, to, as of the distribution for the quarter ending December 31, 2005, $0.46 per unit, or $1.84 per unit on an annualized basis. Based on ARLP’s current quarterly distribution of $0.46 per unit and the number of its common units outstanding at December 31, 2005, we would be entitled to receive a quarterly cash distribution of $11.4 million (or $45.8 million on an annualized basis), which consists of $0.4 million from our 1.98% general partner interest, $3.9 million from our ownership of the incentive distribution rights and $7.1 million from the common units of ARLP that we currently own.

Our general partner will be reimbursed for direct and indirect expenses incurred on our behalf. Some of the non-independent directors of our general partner also serve as directors of ARLP’s managing general partner.

The Contribution Agreement

Prior to the closing of this offering, the partnership interests we will own in ARLP, including the 1.98% general partner interest, the incentive distribution rights and 15,550,628 common units, are held, directly and indirectly, by Alliance Management Holdings, LLC, AMH II, LLC and Alliance Resource GP, LLC, which is a wholly-owned subsidiary of Alliance Resource Holdings II, Inc. Alliance Management Holdings, LLC, AMH II, LLC and Alliance Resource Holdings II, Inc. are referred to as the “management investors” in this prospectus and are owned by Joseph W. Craft III and other officers and employees of ARLP. Mr. Craft owns approximately 32.2% of Alliance Management Holdings, LLC, approximately 57.3% of AMH II, LLC and approximately 57.3% of Alliance Resource Holdings II, Inc. Mr. Craft is the President, Chief Executive Officer and the Chairman of the board of directors of our general partner. Alliance Resource Holdings II, Inc. owns 100% of the outstanding interests of ARLP’s special general partner, Alliance Resource GP, LLC, and prior to this offering, Alliance Management Holdings, LLC and AMH II, LLC owned a 25.9% interest and a 74.1% interest, respectively, in ARLP’s managing general partner, Alliance Resource Management GP, LLC.

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Index to Financial Statements

The Contribution Agreement also provides for the dissolution of Alliance Management Holdings, LLC and AMH II, LLC within 30 days of the closing of this offering. As a result of this dissolution, the owners of the dissolving entities will receive a portion of the cash and common units held by those entities. Prior to the completion of the transactions contemplated by this Contribution Agreement, all of our limited partner interests and our general partner are owned by C-Holdings, LLC, an entity wholly owned by Mr. Craft.

Registration Rights

In connection with the contribution agreement, we have agreed to register for sale under the Securities Act and applicable state securities laws (subject to certain limitations) any common units proposed to be sold by the owners of ARLP’s managing general partner, ARLP’s special general partner or any of their respective affiliates. These registration rights require us to file one registration statement for each of these groups. We have also agreed to include any securities held by the owners of ARLP’s managing general partner, ARLP’s special general partner or any of their respective affiliates in any registration statement that we file to offer securities for cash, except an offering relating solely to an employee benefit plan and other similar exceptions. We are obligated to pay all expenses incidental to the registration, excluding underwriting discounts and commissions. These registration rights are in addition to the registration rights that we have agreed to provide our general partner and its affiliates pursuant to our limited partnership agreement. Please read “Units Eligible for Future Sale.”

Related Party Transactions of ARLP

Alliance Holdings GP, L.P. Credit Facility

Our credit facility will limit our ability to pay distributions in the event we are not in compliance with its terms.

River View Coal Reserves.

On April 12, 2006, ARLP announced that Alliance Coal, LLC, its wholly-owned subsidiary, acquired from a subsidiary of Alliance Resource Holdings II, Inc. the rights to approximately 99.3 million tons of high sulfur coal reserves in Union County, located in western Kentucky. Alliance Coal, LLC paid approximately $1.6 million for these rights. As a result of the purchase of all of the members’ interests of River View Coal, LLC, or River View, ARLP gained control of approximately 89.7 million tons of coal by lease and approximately 9.6 million tons of coal through direct ownership in the Kentucky No. 7, No. 9 and No. 11 coal seams, along with related surface properties and other assets. The acquisition of the River View reserves increases ARLP’s total coal reserve holdings by approximately 18% to approximately 642 million tons. The River View reserve area encompasses approximately 24,600 acres located in Union County, Kentucky. ARLP intends to develop the River View mine as an underground mining complex utilizing continuous mining units employing room-and-pillar mining techniques. ARLP estimates the River View mining complex will be designed to produce annually up to 3.5 million tons of coal. Total capital expenditures required to develop the River View reserves are currently estimated to be in the range of $110 to $130 million over a four-year period. It is currently anticipated that the River View complex will begin production in the 2008-2009 time frame and employ as many as 300 workers.

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Index to Financial Statements

Administrative Services

Tunnel Ridge

The Tunnel Ridge transactions described above are related-party transactions and, as such, were reviewed by the board of directors of ARLP’s managing general partner and its conflicts committee. Based upon these reviews, it was determined that these transactions reflect market-clearing terms and conditions customary in the coal industry. As a result, the board of directors of ARLP’s managing general partner and its conflicts committee approved the Tunnel Ridge transactions as fair and reasonable to ARLP and determined that the transactions were on terms at least as favorable to ARLP as could have been obtained from unaffiliated third parties as a result of arm’s length negotiations.

Warrior Acquisition

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Index to Financial Statements

existing operations. As a condition to not exercising its right of first refusal, ARLP requested that ARH Warrior Holdings, Inc. enter into a put and call arrangement for Warrior. ARLP and ARH Warrior Holdings, Inc., with the approval of the conflicts committee of ARLP’s managing general partner, entered into the Put/Call Agreement in January 2001. The Put/Call Agreement and related transactions described above are related-party transactions and, as such, were reviewed by the board of directors of ARLP’s managing general partner and its conflicts committee. Based upon these reviews, it was determined that these transactions reflect market-clearing terms and conditions customary in the coal industry. As a result, the board of directors of ARLP’s managing general partner and its conflicts committee approved these transactions as fair and reasonable to ARLP and determined that the transactions were on terms at least as favorable to ARLP as could have been obtained from unaffiliated third parties as a result of arm’s length negotiations. Concurrently, ARH Warrior Holdings, Inc. acquired Warrior in January 2001 for $10.0 million.

SGP Land

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Index to Financial Statements

ended December 31, 2005 and 2003, respectively. The 2004 annual minimum royalty obligation of $300,000 was paid in January 2005. As of December 31, 2005, MC Mining has recouped, as earned royalties, all advance minimum royalty payments made under these lease terms except for $600,000.

Special General Partner

ARLP has previously entered into and has maintained agreements with two banks to provide letters of credit in an aggregate amount of $25.0 million. At December 31, 2005, ARLP had $24.8 million in outstanding letters of credit. ARLP’s special general partner guarantees these letters of credit. Historically, ARLP has compensated ARLP’s special general partner a guarantee fee equal to 0.30% per annum of the face amount of the letters of credit outstanding. ARLP’s special general partner agreed to waive the guarantee fee in exchange for a parent guarantee from ARLP’s intermediate partnership and Alliance Coal on the mineral lease and sublease with Dotiki and Warrior. Since the guarantee is made on behalf of entities within the consolidated ARLP, the guarantee has no fair value under Financial Accounting Standards Board (FASB) Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others and does not impact the consolidated financial statements. ARLP paid approximately $31,300 in guarantee fees to its special general partner for the year ended December 31, 2003.

Indemnification of Directors and Officers

Under our limited partnership agreement and subject to specified limitations, we will indemnify to the fullest extent permitted by Delaware law, from and against all losses, claims, damages or similar events any director or officer, or while serving as a director of officer, any person who is or was serving as a tax matters member or as a director, officer, tax matters member, employee, partner, manager, fiduciary or trustee of our partnership or any of our affiliates. Additionally, we will indemnify to the fullest extent permitted by law, from and against all losses, claims, damages or similar events any person who is or was an employee (other than an officer) or agent of our partnership at the time of the occurrence giving rise to the indemnity being sought.

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Index to Financial Statements

Our General Partner’s Limited Liability Company Agreement

Our general partner’s management and operations are governed by its limited liability company agreement, which is filed as an exhibit to the registration statement of which this prospectus is a part. The limited liability company agreement establishes a board of directors that will be responsible for the oversight of our business and operations. C-Holdings, LLC, which is wholly-owned by Joseph W. Craft III, has the authority to appoint our general partner’s directors.

Administrative Services Agreement

Our general partner will manage our operations and activities. In connection with the closing of this offering, we will enter into an administrative services agreement between Alliance Resource Management GP, LLC, ARLP, Alliance Coal, LLC, Alliance GP, LLC, Alliance Holdings GP, L.P. and Alliance Resource Holdings II, Inc. Under the administrative services agreement, certain personnel of our general partner and its affiliates, including our executive officers, will perform administrative and commercial services for us and for ARLP and Alliance Resource Holdings II, Inc. and their respective affiliates. The services performed by these personnel will include but not be limited to day-to-day operations, human resources, information technology and financial and accounting services. We will reimburse our general partner for our pro rata portion of the services rendered by these employees on our behalf. We will adopt policies and procedures to protect and prevent inappropriate disclosure by shared personnel of commercial and other non-public information relating to us, ARLP and Alliance Resource Holdings II, Inc.

ARLP Omnibus Agreement

Upon completion of this offering, we will become party to an existing omnibus agreement currently among ARLP, its general partners and Alliance Resource Holdings, Inc., which governs potential competition among ARLP and the other parties to the agreement. This omnibus agreement was entered into in connection with ARLP’s August 1999 initial public offering and was first amended in May 2002. Pursuant to the terms of the amended omnibus agreement, we will agree, and cause our controlled affiliates to agree, for so long as management controls ARLP’s managing general partner, not to engage in the business of mining, marketing or transporting coal in the United States, unless ARLP is first offered the opportunity to engage in the potential activity or acquire a potential business, and the board of directors of ARLP’s managing general partner, with the concurrence of its conflicts committee, elects to cause ARLP not to pursue such opportunity or acquisition. The ARLP omnibus agreement will provide, among other things, that ARLP will be presumed to desire to acquire the assets until such time as it advises us that it has abandoned the pursuit of such business opportunity, and we may not pursue the acquisition of such assets prior to that time. This restriction will not apply to:

•

any business owned or operated by us and our affiliates at the closing of the offering;

•

any acquisition by us or our affiliates, the majority value of which does not constitute a restricted business, provided ARLP is offered the opportunity to purchase the restricted business following its acquisition; or

•

any business conducted by us or our affiliates with the approval of ARLP’s board of directors or its conflicts committee.

Except as provided above, we and our affiliates will not be prohibited from engaging in activities that directly compete with ARLP. In addition, our affiliates will not be prohibited from engaging in activities that compete directly with us.

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Index to Financial Statements

CONFLICTS OF INTEREST AND FIDUCIARY DUTIES

Conflicts of Interest

General. Conflicts of interest exist and may arise in the future as a result of the relationships among us, ARLP and our and its respective general partners and affiliates. Joseph W. Craft III indirectly owns our general partner and a majority of the outstanding interests of Alliance Resource GP, LLC which holds a 0.01% general partner interest in ARLP as well as a 0.01% general partner interest in Alliance Resource Operating Partners, L.P., which holds interests in ARLP’s operating subsidiaries. Mr. Craft is the President, Chief Executive Officer and a member of the board of directors of Alliance Resource Management GP, LLC, the managing general partner of ARLP, and also owns 100% of C-Holdings, LLC. Mr. Craft is a director of our general partner and has the continuing right to be a director of our general partner. Mr. Craft has been involved with ARLP since its inception in May 1999.

The directors and officers of ARLP’s managing general partner have fiduciary duties to manage ARLP in a manner beneficial to us, its owner. At the same time, ARLP’s managing general partner has a fiduciary duty to manage ARLP in a manner beneficial to ARLP and its limited partners. The board of directors or the conflicts committee of the board of directors of ARLP’s managing general partner will resolve any such conflict and has broad latitude to consider the interests of all parties to the conflict. The resolution of these conflicts may not always be in our best interest or that of our unitholders.

Conflicts Between Our General Partner and its Affiliates and Our Partners. Whenever a conflict arises between our general partner or its affiliates, on the one hand, and us or any of our other partners, on the other hand, our general partner will resolve that conflict. Our partnership agreement contains provisions that modify and limit our general partner’s fiduciary duties to our unitholders. Our partnership agreement also restricts the remedies available to unitholders for actions taken that, without those limitations, might constitute breaches of our general partner’s fiduciary duty to us.

Our general partner will not be in breach of its obligations under the partnership agreement or its duties to us or our unitholders if the resolution of the conflict is:

•

approved by the audit and conflicts committee, although our general partner is not obligated to seek such approval;

•

approved by the vote of a majority of the outstanding units, excluding any units owned by our general partner or any of its affiliates;

•

on terms no less favorable to us than those generally being provided to or available from unrelated third parties; or

•

fair and reasonable to us, taking into account the totality of the relationships among the parties involved, including other transactions that may be particularly favorable or advantageous to us.

Our general partner may, but is not required to, seek the approval of such resolution from the audit and conflicts committee of its board of directors. If our general partner does not seek approval from the audit and conflicts committee and its board of directors determines that the resolution or course of action taken with respect to the conflict of interest satisfies either of the standards set forth in the third and fourth bullet points above, then it will be presumed that, in making its decision, the board of directors acted in good faith, and in any proceeding brought by or on behalf of any limited partner or the partnership, the person bringing or prosecuting such proceeding will have the burden of overcoming such presumption. Unless the resolution of a conflict is specifically provided for in our partnership agreement, our general partner or the audit and conflicts committee may consider any factors it determines in good faith to consider when resolving a conflict. When our partnership agreement requires someone to act in good faith, it requires that person to believe that he is acting in the best interests of the partnership.

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Index to Financial Statements

Conflicts of interest could arise in the situations described below, among others.

Actions taken by our general partner may affect the amount of cash available for distribution to unitholders.

The amount of cash that is available for distribution to our unitholders is affected by decisions of our general partner regarding such matters as:

•

amount and timing of cash expenditures;

•

assets sales or acquisitions;

•

borrowings;

•

the issuance of additional units; and

•

the creation, reduction or increase of reserves in any quarter.

The fiduciary duties of our general partner’s officers and directors may conflict with those of ARLP’s general partner’s officers and directors.

ARLP will have the first right to pursue certain business opportunities.

Pursuant to the ARLP omnibus agreement to which we will become party to in connection with the closing of this offering, we will agree to certain business opportunity arrangements to address potential conflicts that may arise between us and ARLP. If a business opportunity in respect of any coal mining, marketing and transportation assets is presented to us, our general partner or ARLP or its general partners, then ARLP will have the first right to acquire such assets. The ARLP omnibus agreement will provide, among other things, that ARLP will be presumed to desire to acquire the assets until such time as it advises us that it has abandoned the pursuit of such business opportunity, and we may not pursue the acquisition of such assets prior to that time. Please read “—ARLP Omnibus Agreement.”

ARLP and the management investors are not limited in their ability to compete with us, which could cause conflicts of interest and limit our ability to acquire additional assets or businesses which in turn could adversely affect our results of operations and cash available for distribution to our unitholders.

Neither our partnership agreement nor the ARLP omnibus agreement will prohibit ARLP or affiliates of the management investors from owning assets or engaging in businesses that compete directly or indirectly with us or one another. In addition, ARLP and its affiliates or affiliates of our general partner, may acquire, construct or dispose of additional assets related to the mining, marketing and transportation of coal or other assets in the future, without any obligation to offer us the opportunity to purchase or construct any of those assets.

We will reimburse our general partner and its affiliates for expenses.

We will reimburse our general partner and its affiliates for costs incurred in managing and operating us, including costs incurred in rendering staff and support services to us. The partnership agreement provides that our general partner will determine the expenses that are allocable to us in any reasonable manner determined by our general partner in its sole discretion. Please read “Certain Relationships and Related Party Transactions.”

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Our general partner intends to limit its liability regarding our obligations.

Our general partner intends to limit its liability under contractual arrangements so that the other party has recourse only to our assets, and not against our general partner or its assets or any affiliate of our general partner or its assets. Our partnership agreement provides that any action taken by our general partner to limit its liability or our liability is not a breach of our general partner’s fiduciary duties, even if we could have obtained more favorable terms without the limitation on liability.

Unitholders will have no right to enforce obligations of our general partner and its affiliates under agreements with us.

Any agreements between us on the one hand, and our general partner and its affiliates, on the other, will not grant to the unitholders, separate and apart from us, the right to enforce the obligations of our general partner and its affiliates in our favor.

Contracts between us, on the one hand, and our general partner and its affiliates, on the other, will not be the result of arm’s-length negotiations.

Our partnership agreement allows our general partner to determine any amounts to reimburse itself or its affiliates for any services rendered to us. Our general partner may also enter into additional contractual arrangements with any of its affiliates on our behalf. Neither our partnership agreement nor any of the other agreements, contracts and arrangements between us, on the one hand, and our general partner and its affiliates, on the other, are or will be the result of arm’s-length negotiations.

Our general partner will determine, in good faith, the terms of any of these transactions entered into after the sale of the units offered in this offering.

Our units are subject to our general partner’s limited call right.

If at any time our general partner and its affiliates own more than 85% of the units, our general partner will have the right, but not the obligation, which it may assign to any of its affiliates or to us, to acquire all, but not less than all, of the units held by unaffiliated persons at a price not less than their then-current market price. As a result, unitholders may be required to sell their units at an undesirable time or price and may not receive any return on their investment. At the completion of this offering and assuming no exercise of the option to purchase additional common units, the management investors and Joseph W. Craft III will own approximately 80.0% of our outstanding units. Please read “Description of Our Partnership Agreement—Limited Call Right.”

We may not choose to retain separate counsel for ourselves or for the holders of our units.

The attorneys, independent auditors and others who have performed services for us regarding the offering have been retained by our general partner, its affiliates and us and may continue to be retained by our general partner, its affiliates and us after the offering. Attorneys, independent auditors and others who will perform services for us in the future will be selected by our general partner or our audit and conflicts committee and may also perform services for our general partner and its affiliates. We may, but are not required to, retain separate counsel for ourselves or the holders of units in the event of a conflict of interest arising between our general partner and its affiliates, on the one hand, and us or the holders of units, on the other, after the sale of the units offered in this prospectus, depending on the nature of the conflict. We do not intend to do so in most cases.

Acquisitions of Competing Businesses; Potential Future Conflicts. From time to time, we or our affiliates may acquire entities whose businesses compete with us or ARLP. In addition, future conflicts of interest may arise among us and any entities whose general partner interests we or our affiliates acquire or between ARLP and such entities. It is not possible to predict the nature or extent of these potential future conflicts of interest at this time, nor is it possible to determine how we will address and resolve any such future conflicts of interest. However, the resolution of these conflicts may not always be in our best interest or those of our unitholders. We do not currently intend to take any action which would limit the ability of ARLP to pursue its business strategy.

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Index to Financial Statements

Fiduciary Duties

Our general partner is accountable to us and our unitholders as a fiduciary. Fiduciary duties owed to unitholders by our general partner are prescribed by law and the partnership agreement. The Delaware Revised Uniform Limited Partnership Act, which we refer to in this prospectus as the Delaware Act, provides that Delaware limited partnerships may, in their partnership agreements, restrict, eliminate or otherwise modify the fiduciary duties otherwise owed by a general partner to limited partners and the partnership.

Our partnership agreement contains various provisions modifying and restricting the fiduciary duties that might otherwise be owed by our general partner. We have adopted these provisions to allow our general partner to take into account the interests of other parties in addition to our interests when resolving conflicts of interest. These modifications are detrimental to the unitholders because they restrict the remedies available to unitholders for actions that, without those limitations, might constitute breaches of fiduciary duties, as described below. The following is a summary of the material restrictions of the fiduciary duties owed by our general partner to the limited partners:

State law fiduciary duty standards

Fiduciary duties are generally considered to include an obligation to act in good faith and with due care and loyalty. The duty of care, in the absence of a provision in a partnership agreement providing otherwise, would generally require a general partner to act for the partnership in the same manner as a prudent person would act on his own behalf. The duty of loyalty, in the absence of a provision in a partnership agreement providing otherwise, would generally prohibit a general partner of a Delaware limited partnership from taking any action or engaging in any transaction where a conflict of interest is present.

Partnership agreement modified standards

Our partnership agreement contains provisions that waive or consent to conduct by our general partner and its affiliates that might otherwise raise issues about compliance with fiduciary duties or applicable law. For example, our partnership agreement provides that when our general partner is acting in its capacity as our general partner, as opposed to in its individual capacity, it must act in “good faith” and will not be subject to any other standard under applicable law. In addition, when our general partner is acting in its individual capacity, as opposed to in its capacity as our general partner, it may act without any fiduciary obligation to us or the unitholders whatsoever. These standards reduce the obligations to which our general partner would otherwise be held. A merger, consolidation or conversion of us requires the prior consent of the general partner. In addition, our partnership agreement provides that, to the maximum extent permitted by law, our general partner will have no duty or obligation to consent to any merger, consolidation or conversion of us and may decline to do so free of any fiduciary duty or obligation whatsoever to us, or any of our unitholders. Further, in declining to consent to a merger, consolidation or conversion, our general partner will not be required to act in good faith or pursuant to any other standard imposed by our partnership agreement, any other agreement, under the Delaware Limited Partnership Act or any other law, rule or regulation or at equity.

Our partnership agreement generally provides that affiliated transactions and resolutions of conflicts of interest not involving a

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Index to Financial Statements

vote of unitholders and that are not approved by the audit and conflicts committee of the board of directors of our general partner must be:

•

on terms no less favorable to us than those generally being provided to or available from unrelated third parties; or

•

“fair and reasonable” to us, taking into account the totality of the relationships between the parties involved (including other transactions that may be particularly favorable or advantageous to us).

If our general partner does not seek approval from the conflicts committee and its board of directors determines that the resolution or course of action taken with respect to the conflict of interest satisfies either of the standards set forth in the bullet points above, then it will be presumed that, in making its decision, the general partner acted in good faith, and in any proceeding brought by or on behalf of any limited partner or the partnership, the person bringing or prosecuting such proceeding will have the burden of overcoming such presumption. These standards reduce the obligations to which our general partner would otherwise be held.

In addition to the other more specific provisions limiting the obligations of our general partner, our partnership agreement further provides that our general partner and its officers and directors will not be liable for monetary damages to us or our limited partners for errors of judgment or for any acts or omissions unless there has been a final and non-appealable judgment by a court of competent jurisdiction determining that the general partner or its officers and directors acted in bad faith or engaged in fraud, willful misconduct or, in case of a criminal matter, acted with knowledge that its conduct was criminal.

Rights and remedies of unitholders

The Delaware Act generally provides that a limited partner may institute legal action on behalf of the partnership to recover damages from a third party where a general partner has refused to institute the action or where an effort to cause a general partner to do so is not likely to succeed. These actions include actions against a general partner for breach of its fiduciary duties or of the partnership agreement. In addition, the statutory or case law of some jurisdictions may permit a limited partner to institute legal action on behalf of himself and all other similarly situated limited partners to recover damages from a general partner for violations of its fiduciary duties to the limited partners.

In order to become one of our limited partners, a unitholder is required to agree to be bound by the provisions in the partnership agreement, including the provisions discussed above. This is in accordance with the policy of the Delaware Act favoring the principle of freedom of contract and the enforceability of partnership agreements. The failure of a limited partner to sign a partnership agreement does not render the partnership agreement unenforceable against that person.

We are required to indemnify our general partner and its officers, directors, and managers, to the fullest extent permitted by law, against liabilities, costs and expenses incurred by our general partner or these other

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Index to Financial Statements

persons. This indemnification is required unless there has been a final and non-appealable judgment by a court of competent jurisdiction determining that these persons acted in bad faith or engaged in fraud, willful misconduct or, in case of a criminal matter, acted with knowledge that its conduct was criminal. Indemnification is also required for criminal proceedings unless our general partner or these other persons acted with knowledge that their conduct was unlawful. Thus, our general partner could be indemnified for its negligent or grossly negligent acts if it met the requirements set forth above. In the opinion of the Commission, indemnification provisions that purport to include indemnification for liabilities arising under the Securities Act are contrary to public policy and are, therefore, unenforceable. If you have questions regarding the fiduciary duties of our general partner, you should consult with your own counsel. Please read “Description of Our Partnership Agreement—Indemnification.”

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Index to Financial Statements

DESCRIPTION OF OUR COMMON UNITS

Generally, our common units represent limited partner interests that entitle the holders to participate in our cash distributions and to exercise the rights and privileges available to limited partners under our partnership agreement. For a description of the relative rights and preferences of holders of common units and our general partner in and to cash distributions, please read “Our Cash Distribution Policy and Restrictions on Distributions.”

Our common units have been approved for listing on the Nasdaq National Market under the symbol “AHGP.” Any additional common units we issue will also be listed on the Nasdaq National Market.

Transfer Agent and Registrar

American Stock Transfer & Trust Company will serve as registrar and transfer agent for our common units. We pay all fees charged by the transfer agent for transfers of units, except the following that must be paid by unitholders:

•

surety bond premiums to replace lost or stolen certificates, taxes and other governmental charges;

•

special charges for services requested by a holder of a common unit; and

•

other similar fees or charges.

There is no charge to unitholders for disbursements of our cash distributions. We will indemnify the transfer agent, its agents and each of their stockholders, directors, officers and employees against all claims and losses that may arise out of acts performed or omitted for its activities in that capacity, except for any liability due to any gross negligence or intentional misconduct of the indemnified person or entity.

The transfer agent may resign, by notice to us, or be removed by us. The resignation or removal of the transfer agent will become effective upon our appointment of a successor transfer agent and registrar and its acceptance of the appointment. If no successor has been appointed and has accepted the appointment within 30 days after notice of the resignation or removal, our general partner may act as the transfer agent and registrar until a successor is appointed.

Transfer of Common Units

By transfer of our common units in accordance with our partnership agreement, each transferee of our common units will be admitted as a unitholder with respect to the common units transferred when such transfer and admission is reflected in our books and records. Additionally, each transferee of our common units:

•

represents that the transferee has the capacity, power and authority to become bound by our partnership agreement;

•

automatically agrees to be bound by the terms and conditions of, and is deemed to have executed, our partnership agreement; and

•

gives the consents and approvals contained in our partnership agreement, such as the approval of all transactions and agreements that we are entering into in connection with our formation and this offering.

We may, at our discretion, treat the nominee holder of a common unit as the absolute owner. In that case, the beneficial holder’s rights are limited solely to those that it has against the nominee holder as a result of any agreement between the beneficial owner and the nominee holder.

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Common units are securities and are transferable according to the laws governing transfers of securities. In addition to other rights acquired upon transfer, the transferor gives the transferee the right to become a substituted limited partner in our partnership for the transferred common units.

Until a common unit has been transferred on our books, we and the transfer agent, notwithstanding any notice to the contrary, may treat the record holder of the common unit as the absolute owner for all purposes, except as otherwise required by law or stock exchange regulations.

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Index to Financial Statements

DESCRIPTION OF OUR PARTNERSHIP AGREEMENT

The following is a summary of the material provisions of our partnership agreement. The form of our partnership agreement is included as Appendix A in this prospectus.

We summarize the following provisions of our partnership agreement elsewhere in this prospectus:

•

with regard to distributions of available cash, please read “Our Cash Distribution Policy and Restrictions on Distributions”;

•

with regard to the fiduciary duties of our general partner, please read “Conflicts of Interest and Fiduciary Duties”;

•

with regard to rights of holders of units, please read “Description of Our Common Units”; and

•

with regard to allocations of taxable income, taxable loss and other matters, please read “Material Tax Consequences.”

Organization and Duration

We were formed on November 10, 2005 and have a perpetual existence.

Purpose

Under our partnership agreement, we are permitted to engage, directly or indirectly, in any business activity that is approved by our general partner and that lawfully may be conducted by a limited partnership organized under Delaware law and, in connection therewith, to exercise all of the rights and powers conferred upon us pursuant to the agreements relating to such business activity; provided, however, that our general partner may not cause us to engage, directly or indirectly, in any business activity that our general partner determines would cause us to be treated as an association taxable as a corporation or otherwise taxable as an entity for federal income tax purposes.

Although our general partner has the ability to cause us, our affiliates or our subsidiaries to engage in activities other than the ownership of partnership interests in ARLP, our general partner has no current plans to do so and may decline to do so free of any fiduciary duty or obligation whatsoever to us or the limited partners, including any duty to act in good faith or in the best interest of us or our limited partners. Our general partner is authorized in general to perform all acts it determines to be necessary or appropriate to carry out our purposes and to conduct our business. For a further description of limits on our business, please read “Certain Relationships and Related Party Transactions.”

Power of Attorney

Each limited partner, and each person who acquires a unit from a unitholder, by accepting the unit, automatically grants to our general partner and, if appointed, a liquidator, a power of attorney to, among other things, execute and file documents required for our qualification, continuance or dissolution. The power of attorney also grants the authority to amend, and to make consents and waivers under, our partnership agreement. For more information on the approvals required to authorize amendments to our partnership agreement, please read “—Amendments to Our Partnership Agreement.”

Capital Contributions

Unitholders are not obligated to make additional capital contributions, except as described below under “—Limited Liability.”

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Index to Financial Statements

Limited Liability

Assuming that a limited partner does not participate in the control of our business within the meaning of the Delaware Act and that he otherwise acts in conformity with the provisions of our partnership agreement, his liability under the Delaware Act will be limited, subject to possible exceptions, to the amount of capital he is obligated to contribute to us for his common units plus his share of any undistributed profits and assets. If it were determined, however, that the right, or exercise of the right, by the limited partners as a group:

•

to remove or replace the general partner;

•

to approve some amendments to the partnership agreement; or

•

to take other action under the partnership agreement;

constituted “participation in the control” of our business for the purposes of the Delaware Act, then our limited partners could be held personally liable for our obligations under the laws of Delaware, to the same extent as our general partner. This liability would extend to persons who transact business with us and reasonably believe that the limited partner is a general partner. Neither our partnership agreement nor the Delaware Act specifically provides for legal recourse against our general partner if a limited partner were to lose limited liability through any fault of our general partner. While this does not mean that a limited partner could not seek legal recourse, we know of no precedent for this type of a claim in Delaware case law.

Under the Delaware Act, a limited partnership may not make a distribution to a partner if, after the distribution, all liabilities of the limited partnership, other than liabilities to partners on account of their partnership interests and liabilities for which the recourse of creditors is limited to specific property of the partnership, would exceed the fair value of the assets of the limited partnership. For the purpose of determining the fair value of the assets of a limited partnership, the Delaware Act provides that the fair value of property subject to liability for which recourse of creditors is limited shall be included in the assets of the limited partnership only to the extent that the fair value of that property exceeds the nonrecourse liability. The Delaware Act provides that a limited partner who receives a distribution and knew at the time of the distribution that the distribution was in violation of the Delaware Act shall be liable to the limited partnership for the amount of the distribution for three years. Under the Delaware Act, a substituted limited partner of a limited partnership is liable for the obligations of his assignor to make contributions to the partnership, except that such person is not obligated for liabilities unknown to him at the time he became a limited partner and that could not be ascertained from the partnership agreement.

Limitations on the liability of limited partners for the obligations of a limited partner have not been clearly established in many jurisdictions. While we currently have no operations distinct from ARLP, if in the future, by our ownership in an operating company or otherwise, it were determined that we were conducting business in any state without compliance with the applicable limited partnership or limited liability company statute, or that the right or exercise of the right by the limited partners as a group to remove or replace the general partner, to approve some amendments to our partnership agreement, or to take other action under our partnership agreement constituted “participation in the control” of our business for purposes of the statutes of any relevant jurisdiction, then the limited partners could be held personally liable for our obligations under the law of that jurisdiction to the same extent as the general partner under the circumstances. We will operate in a manner that the general partner considers reasonable and necessary or appropriate to preserve the limited liability of the limited partners.

Voting Rights

The following is a summary of the unitholder vote required for the matters specified below. The holders of a majority of the outstanding units, represented in person or by proxy, will constitute a quorum unless any action by the unitholders requires approval by holders of a greater percentage of the units, in which case the quorum will be the greater percentage. In voting their units, affiliates of our general partner will have no fiduciary duty or

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obligation whatsoever to us or the limited partners, including any duty to act in good faith or in the best interests of us or the limited partners.

Issuance of additional units

No approval right.

Amendment of our partnership agreement

Certain amendments may be made by our general partner without the approval of our unitholders. Other amendments generally require the approval of a majority of our outstanding units. Please read “—Amendments to Our Partnership Agreement.”

Merger of our partnership or the sale of all or substantially all of our assets

A majority of our outstanding units in certain circumstances. Please read “—Merger, Sale or Other Disposition of Assets.”

Dissolution of our partnership

A majority of our outstanding units. Please read “—Termination or Dissolution.”

Continuation of our business upon dissolution

A majority of our outstanding units. Please read “—Termination or Dissolution.”

Withdrawal of our general partner

Under most circumstances, the approval of a majority of the units, excluding units held by our general partner and its affiliates, is required for the withdrawal of the general partner prior to March 31, 2016 in a manner that would cause a dissolution of our partnership. Please read “—Withdrawal or Removal of Our General Partner.”

Removal of our general partner

Not less than 66²/3 of the outstanding units, including units held by our general partner and its affiliates. Please read “—Withdrawal or Removal of Our General Partner.”

Transfer of the general partner interest

Our general partner may transfer all, but not less than all, of its general partner interest in us without a vote of our unitholders to (i) an affiliate (other than an individual) or (ii) another entity in connection with its merger or consolidation with or into, or sale of all or substantially all of its assets to, such entity. The approval of a majority of the units, excluding units held by the general partner and its affiliates, is required in other circumstances for a transfer of the general partner interest to a third party prior to March 31, 2016. Please read “—Transfer of General Partner Interest.”

Transfer of ownership interests in our general partner

No approval required at any time. Please read “—Transfer of Ownership Interests in Our General Partner.”

Issuance of Additional Securities

Our partnership agreement authorizes us to issue an unlimited number of additional limited partner interests and other equity securities on terms and conditions as our general partner will determine without the approval of our unitholders.

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Index to Financial Statements

It is possible that we will fund acquisitions through the issuance of additional units or other equity securities. Holders of any additional units we issue will be entitled to share equally with the then-existing holders of units in our cash distributions. In addition, the issuance of additional partnership interests may dilute the value of the interests of the then-existing holders of units in our net assets.

In accordance with Delaware law and the provisions of our partnership agreement, we may also issue additional partnership interests that, as determined by our general partner, may have special voting rights to which units are not entitled.

Amendments to Our Partnership Agreement

General

Amendments to our partnership agreement may be proposed only by or with the consent of our general partner. However, our general partner will have no duty or obligation to propose any amendment and may decline to do so free of any fiduciary duty or obligation whatsoever to us or the limited partners, including any duty to act in good faith or in the best interests of us or the limited partners. To adopt a proposed amendment, other than the amendments discussed below, our general partner is required to seek written approval of the holders of the number of units required to approve the amendment or call a meeting of the limited partners to consider and vote upon the proposed amendment. Except as described below, an amendment must be approved by a majority of our outstanding units.

Prohibited Amendments

No amendment may be made that would:

(1) enlarge the obligations of any limited partner without its consent, unless approved by at least a majority of the type or class of limited partner interests so affected; or

(2) enlarge the obligations of, restrict in any way any action by or rights of, or reduce in any way the amounts distributable, reimbursable or otherwise payable by us to our general partner or any of its affiliates without the consent of our general partner, which may be given or withheld at its option.

The provision of our partnership agreement preventing the amendments having the effects described in clauses (1) or (2) above can be amended upon the approval of the holders of at least 90% of the outstanding units.

No Unitholder Approval

Our general partner may generally make amendments to our partnership agreement without the approval of any limited partner to reflect:

(1) a change in the name of the partnership, the location of the partnership’s principal place of business, the partnership’s registered agent or its registered office;

(2) the admission, substitution, withdrawal or removal of partners in accordance with our partnership agreement;

(3) a change that of our general partner determines to be necessary or appropriate for the partnership to qualify or to continue our qualification as a limited partnership or a partnership in which the limited partners have limited liability under the laws of any state or to ensure that the partnership will not be treated as an association taxable as a corporation or otherwise taxed as an entity for federal income tax purposes;

(4) a change in our fiscal year or taxable year and related changes, including a change in the dates on which distributions are to be made;

(5) an amendment that is necessary, in the opinion of our counsel, to prevent the partnership or our general partner or its directors, officers, agents or trustees, from in any manner being subjected to the

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provisions of the Investment Company Act of 1940, the Investment Advisors Act of 1940, or “plan asset” regulations adopted under the Employee Retirement Income Security Act of 1974, whether or not substantially similar to plan asset regulations currently applied or proposed;

(6) an amendment that our general partner determines to be necessary or appropriate for the authorization of additional partnership securities or rights to acquire partnership securities;

(7) any amendment expressly permitted in our partnership agreement to be made by our general partner acting alone;

(8) an amendment effected, necessitated or contemplated by a merger agreement that has been approved under the terms of our partnership agreement;

(9) any amendment that of our general partner determines to be necessary or appropriate for the formation by the partnership of, or its investment in, any corporation, partnership or other entity, as otherwise permitted by our partnership agreement;

(10) certain mergers or conveyances set forth in our partnership agreement;

(11) an amendment effected, necessitated or contemplated by an amendment to ARLP’s partnership agreement that requires ARLP unitholders to provide a statement, certificate or other proof of evidence to ARLP regarding whether such unitholder is subject to United States federal income tax on the income generated by ARLP; and

(12) any other amendments substantially similar to any of the matters described in (1) through (11) above.

In addition, our general partner may make amendments to our partnership agreement without the approval of any limited partner or assignee if our general partner determines, at its option, that those amendments:

(1) do not adversely affect our limited partners (or any particular class of limited partners) in any material respect;

(2) are necessary or appropriate to satisfy any requirements, conditions or guidelines contained in any opinion, directive, order, ruling or regulation of any federal or state agency or judicial authority or contained in any federal or state statute;

(3) are necessary or appropriate to facilitate the trading of limited partner interests or to comply with any rule, regulation, guideline or requirement of any securities exchange on which the limited partner interests are or will be listed for trading;

(4) are necessary or advisable for any action taken by our general partner relating to splits or combinations of units under the provisions of our partnership agreement; or

(5) are required to effect the intent of the provisions of our partnership agreement or are otherwise contemplated by our partnership agreement.

Finally, our partnership agreement specifically permits our general partner to authorize the general partner of ARLP to limit or modify the incentive distribution rights held by us if our general partner determines that such limitation or modification does not adversely affect our limited partners (or any particular class of limited partners) in any material respect.

Opinion of Counsel and Unitholder Approval

Our general partner will not be required to obtain an opinion of counsel that an amendment will not result in a loss of limited liability to the limited partners or result in none of us, ARLP or ARLP’s intermediate or operating partnerships being treated as an entity for federal income tax purposes in connection with any of the amendments described under “—No Unitholder Approval.” No other amendments to our partnership agreement

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will become effective without the approval of holders of at least 90% of the outstanding units unless we first obtain an opinion of counsel to the effect that the amendment will not affect the limited liability under applicable law of any of our limited partners. Any amendment that reduces the voting percentage required to take any action must be approved by the affirmative vote of limited partners constituting not less than the voting requirement sought to be reduced.

Merger, Sale or Other Disposition of Assets

Our partnership agreement generally prohibits our general partner, without the prior approval of a majority of our outstanding units, from causing us to, among other things, sell, exchange or otherwise dispose of all or substantially all of our assets in a single transaction or a series of related transactions, including by way of merger, consolidation or other combination, or approving on our behalf the sale, exchange or other disposition of all or substantially all of the assets of ARLP and its subsidiaries. Our general partner may, however, mortgage, pledge, hypothecate or grant a security interest in all or substantially all of our assets without that approval. Our general partner may also sell all or substantially all of our assets under a foreclosure or other realization upon those encumbrances without that approval.

A merger, consolidation or conversion of us requires the prior consent of the general partner. In addition, our partnership agreement provides that, to the maximum extent permitted by law, our general partner will have no duty or obligation to consent to any merger, consolidation or conversion of us and may decline to do so free of any fiduciary duty or obligation whatsoever to us, or any of our unitholders. Further, in declining to consent to a merger, consolidation or conversion, our general partner will not be required to act in good faith or pursuant to any other standard imposed by our partnership agreement, any other agreement, under the Delaware Limited Partnership Act or any other law, rule or regulation or at equity.

If conditions specified in our partnership agreement are satisfied, our general partner may merge us or any of our subsidiaries into, or convey some or all of our assets to, a newly formed entity if the sole purpose of that merger or conveyance is to effect a mere change in our legal form into another limited liability entity. The unitholders are not entitled to dissenters’ rights of appraisal under our partnership agreement or applicable Delaware law in the event of a merger or consolidation, a sale of substantially all of our assets or any other transaction or event.

Termination or Dissolution

We will continue as a limited partnership until terminated under our partnership agreement. We will dissolve upon:

(1) the withdrawal or removal of our general partner or any other event that results in its ceasing to be our general partner other than by reason of a transfer of its general partner interest in accordance with our partnership agreement or withdrawal or removal following approval and admission of a successor.

(2) the election of our general partner to dissolve us, if approved by the holders of a majority of our outstanding units;

(3) the entry of a decree of judicial dissolution of our partnership; or

(4) there being no limited partners, unless we are continued without dissolution in accordance with applicable Delaware law;

Upon a dissolution under clause (1) above, the holders of a majority of our outstanding units may also elect, within specific time limitations, to continue our business on the same terms and conditions described in our partnership agreement by appointing as a successor general partner an entity approved by the holders of a majority of our outstanding units, subject to receipt by us of an opinion of counsel to the effect that:

•

the action would not result in the loss of limited liability of any limited partner; and

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Index to Financial Statements

•

neither our partnership nor ARLP would be treated as an association taxable as a corporation or otherwise be taxable as an entity for federal income tax purposes upon the exercise of that right to continue.

Liquidation and Distribution of Proceeds

Upon our dissolution, unless we are continued as a new limited partnership, the liquidator authorized to wind up our affairs will, acting with all the powers of our general partner that the liquidator deems necessary or desirable in its good faith judgment, liquidate our assets. The proceeds of the liquidation will be applied as follows:

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first, towards the payment of all of our creditors and the settlement of or creation of a reserve for contingent liabilities; and

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then, to all partners in accordance with the positive balance in the respective capital accounts.

If the liquidator determines that a sale would be impractical or would cause a loss to our partners, it may defer liquidation or distribution of our assets for a reasonable period of time or distribute assets in kind to our partners.

Withdrawal or Removal of Our General Partner

Except as described below, our general partner has agreed not to withdraw voluntarily as our general partner prior to March 31, 2016 without obtaining the approval of a majority of our outstanding units, excluding those held by our general partner and its affiliates, and furnishing an opinion of counsel regarding limited liability and tax matters. On or after March 31, 2016, our general partner may withdraw as general partner without first obtaining approval of any unitholder by giving 90 days’ written notice, and that withdrawal will not constitute a violation of our partnership agreement. In addition, our general partner may withdraw without unitholder approval upon 90 days’ notice to our limited partners if at least 50% of our outstanding common units are held or controlled by one person and its affiliates other than our general partner and its affiliates.

Upon the voluntary withdrawal of our general partner, the holders of a majority of our outstanding units, excluding the units held by the withdrawing general partner and its affiliates, may elect a successor to the withdrawing general partner. If a successor is not elected, or is elected but an opinion of counsel regarding limited liability and tax matters cannot be obtained, we will be dissolved, wound up and liquidated, unless within 90 days after that withdrawal, the holders of a majority of our outstanding units, excluding the units held by the withdrawing general partner and its affiliates, agree to continue our business by appointing a successor general partner.

Our general partner may not be removed unless that removal is approved by not less than 66²/3% of our outstanding units, including units held by our general partner and its affiliates, and we receive an opinion of counsel regarding limited liability and tax matters. Any removal of our general partner is also subject to the approval of a successor general partner by a majority of our outstanding units, including those held by our general partner and its affiliates. The ownership of more than 33¹/3% of the outstanding units by our general partner and its affiliates would give it the practical ability to prevent its removal. Upon completion of this offering, management investors and Joseph W. Craft III will own approximately 80.0% of the outstanding units.

In addition, we will be required to reimburse the departing general partner for all amounts due the departing general partner, including, without limitation, all employee-related liabilities, including severance liabilities, incurred for the termination of any employees employed by the departing general partner or its affiliates for our benefit.

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Index to Financial Statements

Transfer of General Partner Interest

Except for transfer by our general partner of all, but not less than all, of its general partner interest in us to:

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an affiliate of the general partner (other than an individual); or

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another entity as part of the merger or consolidation of the general partner with or into another entity or the transfer by the general partner of all or substantially all of its assets to another entity,

our general partner may not transfer all or any part of its general partner interest in us to another entity prior to March 31, 2016 without the approval of a majority of the common units outstanding, excluding common units held by our general partner and its affiliates. As a condition of this transfer, the transferee must assume the rights and duties of our general partner, agree to be bound by the provisions of the partnership agreement, and furnish an opinion of counsel regarding limited liability and tax matters.

On or after March 31, 2016, our general partner may transfer all or any of its general partner interest in us without obtaining approval of any unitholder.

Transfer of Ownership Interests in Our General Partner

At any time, C-Holdings, LLC, as the sole member of our general partner, may sell or transfer all or part of its ownership interest in the general partner without the approval of our unitholders.

Change of Management Provisions

Our partnership agreement contains specific provisions that are intended to discourage a person or group from attempting to remove our general partner as general partner or otherwise change management. If any person or group other than our general partner and its affiliates acquires beneficial ownership of 20% or more of any class of units, that person or group loses voting rights on all of its units. This loss of voting rights does not apply to (i) any person or group that acquires the units from our general partner or its affiliates, (ii) any transferees of that person or group approved by our general partner or (iii) any person or group that acquires 20% of any class of units with the prior approval of the board of directors of our general partner.

Limited Call Right

If at any time our general partner and its affiliates hold 85% or more of the outstanding limited partner interests of any class, our general partner will have the right, but not the obligation, which it may assign in whole or in part to any of its affiliates or us, to acquire all, but not less than all, of the remaining limited partner interests of the class held by unaffiliated persons as of a record date to be selected by our general partner, on at least ten but not more than 60 days’ notice. The purchase price in the event of this purchase is the greater of:

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the current market price of the limited partner interests of the class as of the date three days prior to the date that notice is mailed; and

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the highest price paid by either our general partner or any of its affiliates for any limited partners interests of the class purchased within the 90 days preceding the date that notice is mailed.

As a result of our general partner’s right to purchase outstanding limited partner interests, a holder of limited partner interests may have his limited partner interests purchased at an undesirable time or price. The tax consequences to a unitholder of the exercise of this call right are the same as a sale by that unitholder of his units in the market. Please read “Material Tax Consequences—Disposition of Units.”

Upon completion of this offering, the management investors and Joseph W. Craft III will own 47,863,000 of our common units, representing approximately 80.0% of our outstanding common units.

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Index to Financial Statements

Meetings; Voting

Except as described below regarding a person or group owning 20% or more of units then outstanding, unitholders on the record date will be entitled to notice of, and to vote at, meetings of our limited partners and to act upon matters for which approvals may be solicited. Units that are owned by non-citizen assignees will be voted by our general partner and our general partner will distribute the votes on those units in the same ratios as the votes of limited partners on other units are cast.

Our general partner does not anticipate that any meeting of unitholders will be called in the foreseeable future. Any action that is required or permitted to be taken by our unitholders may be taken either at a meeting of the unitholders or, if authorized by our general partner, without a meeting if consents in writing describing the action so taken are signed by holders of the number of units as would be necessary to authorize or take that action at a meeting. Meetings of the unitholders may be called by our general partner or by unitholders owning at least 20% of the outstanding units. Unitholders may vote either in person or by proxy at meetings. The holders of a majority of the outstanding units, represented in person or by proxy, will constitute a quorum unless any action by the unitholders requires approval by holders of a greater percentage of the units, in which case the quorum will be the greater percentage.

Each record holder of a unit has a vote according to his percentage interest in us, although additional limited partner interests having special voting rights could be issued. Please read “—Issuance of Additional Securities” above. However, if at any time any person or group, other than our general partner and its affiliates, acquires, in the aggregate, beneficial ownership of 20% or more of any class of units then outstanding, that person or group will lose voting rights on all of its units and the units may not be voted on any matter and will not be considered to be outstanding when sending notices of a meeting of unitholders, calculating required votes, determining the presence of a quorum or for other similar purposes. For more information on persons and groups to which this loss of voting rights does not apply, please read “—Change of Management Provisions” above. Common units held in nominee or street name account will be voted by the broker or other nominee in accordance with the instruction of the beneficial owner unless the arrangement between the beneficial owner and his nominee provides otherwise.

Any notice, demand, request, report or proxy material required or permitted to be given or made to record holders of units under our partnership agreement will be delivered to the record holder by us or by the transfer agent.

Status as Limited Partner

By transfer of common units in accordance with our partnership agreement, each transferee of common units shall be admitted as a limited partner with respect to the transferred units when such transfer and admission is reflected in our books and records. Except as described under “—Limited Liability,” the common units will be fully paid, and unitholders will not be required to make additional contributions.

Non-Citizen Assignees; Redemption

If we are or become subject to federal, state or local laws or regulations that, in the reasonable determination of our general partner, create a substantial risk of cancellation or forfeiture of any property that we have an interest in because of the nationality, citizenship or other related status of any limited partner, our general partner may require any such limited partner to furnish information about his nationality, citizenship or related status. If a limited partner fails to furnish information about his nationality, citizenship or other related status within 30 days after a request for the information or our general partner determines after receipt of the information that the limited partner is not an eligible citizen, the limited partner may be treated as a non-citizen assignee and the limited partner’s units may be redeemed at their current market price. A non-citizen assignee is entitled to an interest equivalent to that of a limited partner for the right to share in allocations and distributions from us,

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Index to Financial Statements

including liquidating distributions. A non-citizen assignee does not have the right to direct the voting of his units and may not receive distributions in kind upon our liquidation.

Indemnification

Under our partnership agreement, in most circumstances, we will indemnify the following persons, to the fullest extent permitted by law, from and against all losses, claims, damages or similar events:

(1) our general partner;

(2) any departing general partner;

(3) any person who is or was an affiliate of our general partner or any departing general partner;

(4) any person who is or was a member, partner, officer, director, fiduciary or trustee of any entity described in (1), (2) or (3) above;

(5) any person who is or was serving as an officer, director, member, partner, fiduciary or trustee of another person at the request of any entity described in (1), (2) or (3) above; and

(6) any person designated by our general partner.

Any indemnification under these provisions will only be out of our assets. Unless it otherwise agrees, our general partner will not be personally liable for, or have any obligation to contribute or loan funds or assets to us to enable us to effectuate any, indemnification. We may purchase insurance against liabilities asserted against and expenses incurred by persons for our activities, regardless of whether we would have the power to indemnify the person against liabilities under the partnership agreement.

Reimbursement of Expenses

Our partnership agreement requires us to reimburse our general partner for all direct and indirect expenses it incurs or payments it makes on our behalf and all other expenses allocable to us or otherwise incurred by our general partner in connection with operating our business. These expenses include salary, bonus, incentive compensation and other amounts paid to persons who perform services for us or on our behalf and expenses allocated to our general partner by its affiliates. The general partner is entitled to determine in good faith the expenses that are allocable to us.

Books and Reports

Our general partner is required to keep appropriate books of our business at our principal offices. The books will be maintained for both tax and financial reporting purposes on an accrual basis. For tax and fiscal reporting purposes, our fiscal year is the calendar year.

We will furnish or make available to record holders of units, within 120 days after the close of each fiscal year, an annual report containing audited financial statements and a report on those financial statements by our independent public accountants. Except for our fourth quarter, we will also furnish or make available summary financial information within 90 days after the close of each quarter.

We will furnish each record holder of a unit with information reasonably required for tax reporting purposes within 90 days after the close of each calendar year. This information is expected to be furnished in summary form so that some complex calculations normally required of partners can be avoided. Our ability to furnish this summary information to unitholders will depend on the cooperation of unitholders in supplying us with specific information. Every unitholder will receive information to assist him in determining his federal and state tax liability and filing his federal and state income tax returns, regardless of whether he supplies us with information.

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Index to Financial Statements

Right to Inspect Our Books and Records

A limited partner can, for a purpose reasonably related to the limited partner’s interest as a limited partner, upon reasonable demand stating the purpose of such demand and at his own expense, obtain:

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information regarding the status of our business and financial condition;

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a copy of our tax returns;

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a current list of the name and last known address of each partner;

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copies of our partnership agreement, our certificate of limited partnership, amendments to either of them and any related powers of attorney;

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information as to the amount of cash and a description and statement of the agreed value of any other property or services, contributed or to be contributed by each partner and the date on which each became a partner; and

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any other information regarding our affairs as is just and reasonable.

Our general partner may, and intends to, keep confidential from the limited partners trade secrets and other information the disclosure of which our general partner believes in good faith is not in our best interest or which we are required by law or by agreements with third parties to keep confidential.

Registration Rights

Under our partnership agreement, we have agreed to register for resale under the Securities Act and applicable state securities laws any units or other partnership securities proposed to be sold by our general partner or any of its affiliates or their assignees if an exemption from the registration requirements is not otherwise available. We are obligated to pay all expenses incidental to the registration, excluding underwriting discounts and commissions. Please read “Units Eligible for Future Sale.”

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Index to Financial Statements

ALLIANCE RESOURCE PARTNERS, L.P.’S CASH DISTRIBUTION POLICY

Following is a description of the relative rights and preferences of holders of ARLP’s common units and ARLP’s general partners in and to cash distributions.

Distributions of Available Cash

General. ARLP distributes all of its “available cash” to its unitholders and its general partner within 45 days following the end of each fiscal quarter.

Definition of Available Cash. Available cash of ARLP is defined in ARLP’s partnership agreement and generally means, with respect to any fiscal quarter, all cash on hand at the end of such quarter:

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less the amount of cash reserves that are necessary or appropriate in the reasonable discretion of the managing general partner of ARLP to:

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provide for the proper conduct of its business;

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comply with applicable law or any debt instrument or other agreement; or

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provide funds for distributions to ARLP’s unitholders and its general partners in respect of any one or more of the next four quarters;

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plus all of ARLP’s cash on hand on the date of determination of available cash for the quarter resulting from working capital borrowings of ARLP made after the end of the quarter. Working capital borrowings are generally borrowings that are made under ARLP’s credit facilities and in all cases are used solely for working capital purposes or to pay distributions to ARLP’s partners.

Operating Surplus and Capital Surplus

General. All cash distributed to ARLP’s unitholders is characterized as distributions from either “operating surplus” or “capital surplus.” ARLP distributes available cash from operating surplus differently than its available cash from capital surplus.

Definition of Operating Surplus. ARLP’s operating surplus for any period generally means:

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its cash balance on the closing date of its initial public offering in 1999; plus

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$20.0 million (as described below); plus

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all of ARLP’s cash receipts since the closing of its initial public offering, excluding cash from borrowings that are not working capital borrowings, sales of equity and debt securities and sales or other dispositions of assets outside the ordinary course of business; less

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all of ARLP’s operating expenses (other than reclamation and mine closing costs) after the closing of its initial public offering, including the repayment of working capital borrowings and maintenance capital expenditures; less

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the amount of ARLP’s cash reserves that the managing general partner of ARLP deems necessary or advisable to provide funds for future operating expenditures.

Definition of Capital Surplus. Generally, ARLP’s capital surplus will be generated only by:

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borrowings other than working capital borrowings;

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sales of ARLP’s of debt and equity securities; and

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ARLP’s sales or other disposition of assets for cash, other than inventory, accounts receivable and other current assets sold in the ordinary course of business or as part of normal retirements or replacements of assets.

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Index to Financial Statements

Characterization of Cash Distributions. ARLP treats all of its available cash distributed as coming from its operating surplus until the sum of all available cash distributed since it began operations equals the operating surplus as of the end of the quarter before the distribution. ARLP treats any amount distributed in excess of operating surplus, regardless of its source, as capital surplus. As reflected above, operating surplus includes $20.0 million in addition to its cash balance on the closing date of its initial public offering in 1999, cash receipts from its operations and cash from working capital borrowings. This amount does not reflect actual cash on hand that is available for distribution to its unitholders. Rather, it is a provision that will enables ARLP, if it chooses, to distribute as operating surplus up to $50.0 million of cash we receive in the future from non-operating sources, such as asset sales, issuances of securities, and long-term borrowings, that would otherwise be distributed as capital surplus. ARLP has not made, and does not anticipate that it will make, any distributions from capital surplus.

Incentive Distribution Rights

ARLP’s incentive distribution rights represent the contractual right to receive a specified percentage of quarterly distributions of available cash from operating surplus after the minimum quarterly distribution has been paid by ARLP. Please read “—Distributions of Available Cash from Operating Surplus” below. ARLP’s managing general partner owns all of the incentive distribution rights.

Distributions of Available Cash from Operating Surplus

ARLP is required to make distributions of its available cash from operating surplus for any quarter in the following manner:

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Thereafter, 50% to all unitholders of ARLP, in accordance with their percentage interests, 2% to the general partners, pro rata, and 48% to the managing general partner.

Distributions of Available Cash from Capital Surplus

ARLP will make distributions of its available cash from capital surplus, if any, in the following manner:

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First, 98% to all of its unitholders, pro rata, and 2% to its general partners until ARLP distributes for each ARLP common unit, an amount of available cash from capital surplus equal to its initial public offering price;

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Second, 98% to its common unitholders, pro rata, and 2% to its general partners, pro rata, until ARLP distributes for each ARLP common unit, an amount of available cash from capital surplus equal to any unpaid arrearages in payment of the minimum quarterly distribution on the common units; and

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Thereafter, ARLP will make all distributions of its available cash from capital surplus as if they were from operating surplus.

ARLP’s partnership agreement treats a distribution of capital surplus as the repayment of the initial unit price from the initial public offering, which is a return of capital.

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Index to Financial Statements

If ARLP combines its units into fewer units or subdivide its units into a greater number of units, ARLP will proportionately adjust its minimum quarterly distribution and its target cash distribution levels by multiplying each amount by a fraction. This fraction is determined as follows:

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the numerator is the unrecovered initial public unit price of the common units immediately after giving effect to the repayment; and

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the denominator is the unrecovered initial unit price of the common units immediately before the repayment.

The unrecovered initial unit price is generally the initial public offering price per unit less any distributions from capital surplus.

A “payback” of the unit price from the initial public offering occurs when the unrecovered initial unit price of the common units is zero. At that time, the minimum quarterly distribution and the target distribution levels each will have been reduced to zero. All distributions of available cash from all sources after that time will be treated as if they were from operating surplus. Because the minimum quarterly distribution and the target distribution levels will have been reduced to zero, ARLP’s managing general partner, in its capacity as holder of the incentive distribution rights, will then be entitled to receive 48% of all distributions of available cash. This is in addition to any distributions to which it may be entitled as a holder of units or its general partner interest.

Distributions from capital surplus will not reduce the minimum quarterly distribution or target distribution levels for the quarter in which they are distributed. ARLP does not anticipate that there will be significant distributions from capital surplus.

For example, if a two-for-one split of the common units of ARLP should occur, the unrecovered initial unit price of ARLP would each be reduced to 50% of its initial level. ARLP will not make any adjustment by reason of its issuance of additional units for cash or property.

ARLP may also adjust the minimum quarterly distribution and target distribution levels if legislation is enacted or if existing law is modified or interpreted in a manner that causes ARLP, its intermediate partnership or its operating subsidiary to become taxable as a corporation or otherwise subject to taxation as an entity for federal, state or local income tax purposes. In this event, the minimum quarterly distribution and target distribution levels for each quarter after that time would be reduced to amounts equal to the product of:

(1) the minimum quarterly distribution and each of the target distribution levels; multiplied by

(2) one minus the sum of:

(x) the highest marginal federal corporate income tax rate which could apply; plus

(y) any increase in the effective overall state and local income tax rate that would have been applicable to ARLP, the intermediate partnership or the operating subsidiary in the preceding calendar year as a result of the new imposition of the entity level tax, after taking into account the benefit of any deduction allowable for federal income tax purposes for the payment of state and local income taxes, but only to the extent of the increase in rates resulting from that legislation or interpretation.

Distributions of Cash Upon Liquidation

General. Following the beginning of ARLP’s dissolution and during the process of selling all of its assets, ARLP will sell or otherwise dispose of assets and the partners’ capital account balances will be adjusted to reflect any resulting gain or loss. ARLP’s dissolution and the process of selling all of its assets is referred to as “liquidation.” The proceeds of liquidation will first be applied to the payment of ARLP’s creditors in the order of priority provided in the partnership agreement and by law. After that, ARLP will distribute the proceeds to the unitholders and its general partners in accordance with their capital account balances, as so adjusted.

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Index to Financial Statements

Any further net gain recognized upon liquidation will be allocated in a manner that takes into account the incentive distribution rights of ARLP’s managing general partner.

Manner of Adjustments for Gain. The manner of the adjustment for gain is set forth in ARLP’s partnership agreement in the following manner:

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First, to the general partners and the holders of units of ARLP who have negative balances in their capital accounts to the extent of and in proportion to those negative balances;

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Second, 98% to the common unitholders of ARLP, pro rata, and 2% to the general partners of ARLP, until the capital account for each common unit is equal to the sum of:

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its unrecovered initial unit price for that common unit; plus

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the amount of the minimum quarterly distribution of ARLP for the quarter during which its liquidation occurs;

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Third, 98% to all unitholders of ARLP, pro rata, and 2% to the general partners of ARLP, until it allocates under this paragraph an amount per ARLP unit equal to:

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the sum of the excess of the first target cash distribution per ARLP unit over the minimum quarterly distribution per ARLP unit for each quarter of ARLP’s existence; less

•

the cumulative amount per ARLP unit of any distributions of ARLP’s available cash from operating surplus in excess of the minimum quarterly distribution per ARLP unit that it distributed 98% to its unitholders, pro rata, and 2% to its general partners, pro rata, for each quarter of its existence;

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Fourth, 85% to all unitholders of ARLP, pro rata, 13% to the managing general partner and 2% to the general partners of ARLP, pro rata, until ARLP allocates under this paragraph an amount per ARLP unit equal to:

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the sum of the excess of the second target cash distribution per ARLP unit over the first target cash distribution per ARLP unit for each quarter of ARLP’s existence; less

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the cumulative amount per ARLP unit of any distributions of ARLP’s available cash from operating surplus in excess of the first target cash distribution per ARLP unit that it distributed 85% to the unitholders of ARLP, pro rata, 13% to the holders of the incentive distribution rights of ARLP, pro rata, and 2% to the general partners of ARLP, pro rata, for each quarter of its existence;

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Fifth, 75% to all unitholders of ARLP, pro rata, 23% to the managing general partner and 2% to the general partners of ARLP, pro rata, until ARLP allocates under this paragraph an amount per ARLP unit equal to:

•

the sum of the excess of the third target cash distribution per ARLP unit over the second target cash distribution per ARLP unit for each quarter of its existence; less

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the cumulative amount per ARLP unit of any distributions of ARLP’s available cash from operating surplus in excess of the second target cash distribution per ARLP unit that it distributed 75% to the unitholders of ARLP, pro rata, 23% to the holders of the incentive distribution rights of ARLP, pro rata, and 2% to the general partners, pro rata, of ARLP for each quarter of its existence; and

•

Thereafter, 50% to all unitholders of ARLP, pro rata, 48% to the holders of the managing general partner and 2% to the general partners of ARLP, pro rata.

Manner of Adjustments for Losses. Upon ARLP’s liquidation, ARLP will generally allocate any loss to its general partner and its unitholders in the following manner:

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First, 98% to the holders of common units of ARLP in proportion to the positive balances in their capital accounts and 2% to the general partners of ARLP, pro rata, until the capital accounts of the common unitholders of ARLP have been reduced to zero; and

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Index to Financial Statements

•

Second, thereafter, 100% to the general partners of ARLP, pro rata.

Adjustments to Capital Accounts upon the Issuance of Additional Units. ARLP will make adjustments to its capital accounts upon its issuance of additional units. These adjustments will be based on the fair market value of the interests or the property distributed. ARLP will allocate any gain or loss resulting from the adjustments to the unitholders and the general partners in the same manner as gain or loss is allocated upon liquidation. In the event that positive interim adjustments are made to the capital accounts, any later negative adjustments to the capital accounts resulting from the issuance of additional Alliance Resource Partners’ interests, ARLP’s distributions of property or upon our liquidation, will be allocated in a manner which results, to the extent possible, in the capital account balances of the general partners’ capital account balances if no earlier positive adjustments to the capital accounts have been made.

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Index to Financial Statements

MATERIAL PROVISIONS OF

ALLIANCE RESOURCE PARTNERS, L.P.’S PARTNERSHIP AGREEMENT

The following is a summary of material provisions of ARLP’s partnership agreement. For more information on distributions of ARLP’s available cash, please read “Alliance Resource Partners’ Cash Distribution Policy.”

Purpose

ARLP’s purpose under its partnership agreement is to serve as a partner of ARLP’s intermediate partnership and engage in any business activities that may be engaged in its intermediate partnership or that is approved by its managing general partner. The partnership agreement of its intermediate partnership provides that it may, directly or indirectly, engage in:

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its operations as conducted immediately before our initial public offering;

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any other activity approved by the managing general partner to the extent the managing general partner reasonably determines that the activity generates “qualifying income” as this term is defined in Section 7704 of the Internal Revenue Code; or

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any activity that enhances the operations of an activity described above.

Power of Attorney

Each limited partner, and each person who acquires a unit from a unitholder and executes and delivers a transfer application, grants to ARLP’s managing general partner and, if appointed, a liquidator, a power of attorney to, among other things, execute and file documents required for ARLP’s qualification, continuance or dissolution. The power of attorney also grants the authority for the amendment of, and to make consents and waivers under, ARLP’s partnership agreement.

Reimbursements of ARLP’s Managing General Partner

ARLP’s managing general partner does not receive any compensation for its services as ARLP’s managing general partner. It is, however, entitled to be reimbursed for all of its costs incurred in managing and operating ARLP’s business. ARLP’s partnership agreement provides that its managing general partner will determine the expenses that are allocable to us in any reasonable manner determined by its managing general partner in its sole discretion.

Issuance of Additional Securities

ARLP’s partnership agreement authorizes it to issue an unlimited number of additional limited partner interests and other equity securities for the consideration and on the terms and conditions established by its managing general partner in its sole discretion, without the approval of any limited partners.

It is possible that ARLP will fund acquisitions through the issuance of additional common units or other equity securities. Holders of any additional common units ARLP issues will be entitled to share equally with the then-existing holders of its common units in its cash distributions. In addition, the issuance of additional partnership interests may dilute the value of the interests of the then-existing holders of common units in ARLP’s net assets.

In accordance with Delaware law and the provisions of its partnership agreement, ARLP may also issue additional partnership securities that, in the sole discretion of its managing general partner, may have special voting rights to which common units are not entitled.

ARLP’s general partners will have the right, which they may from time to time assign in whole or in part to any of their affiliates, to purchase ARLP’s common units or other equity securities whenever, and on the same

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Index to Financial Statements

terms that, ARLP issues those securities to persons other than its general partner and their affiliates, to the extent necessary to maintain their percentage interests, that existed immediately prior to each issuance. The holders of ARLP’s common units will not have preemptive rights to acquire additional common units or other partnership interests.

Amendments to ARLP’s Partnership Agreement

Amendments to ARLP’s partnership agreement may be proposed only by, or with the consent of, ARLP’s managing general partner. In general, proposed amendments must be approved by holders of at least a majority of ARLP’s outstanding units. Any amendment that materially and adversely affects the rights or preferences of any type or class of outstanding units in relation to other classes or units will require the approval of at least a majority of the type or class of units so affected. Any amendment that reduces the voting percentage required to take any action is required to be approved by the affirmative vote of limited partners constituting not less than the voting requirement sought to be reduced. However, in some circumstances, more particularly described in ARLP’s partnership agreement, ARLP’s managing general partner may make amendments to ARLP’s partnership agreement without the approval of ARLP’s limited partners or assignees:

Liquidation and Distribution of Proceeds

Upon ARLP’s dissolution, unless it is reconstituted and continued as a new limited partnership, the person authorized to wind up ARLP’s affairs (the liquidator) will, acting with all the powers of ARLP’s managing general partner that the liquidator deems necessary or desirable in its good faith judgment, liquidate ARLP’s assets. The proceeds of the liquidation will be applied as follows:

•

first, towards the payment of all of ARLP’s creditors and the creation of a reserve for contingent liabilities; and

•

then, to all partners in accordance with the positive balance in the respective capital accounts.

Under some circumstances and subject to some limitations, the liquidator may defer liquidation or distribution of ARLP’s assets for a reasonable period of time. If the liquidator determines that a sale would be impractical or would cause a loss to ARLP’s partners, ARLP’s managing general partner may distribute assets in kind to ARLP’s partners.

Withdrawal or Removal of ARLP’s General Partners; Transfer of the Ownership of the General Partners

ARLP’s managing general partner has agreed not to withdraw voluntarily as ARLP’s or its intermediate partnership’s managing general partner or as the managing member of ARLP’s operating subsidiary prior to September 30, 2009 without obtaining the approval of the holders of a majority of ARLP’s outstanding common units, excluding those held by ARLP’s general partners and their affiliates, and furnishing an opinion of counsel regarding limited liability and tax matters.

On or after September 30, 2009, ARLP’s managing general partner may withdraw as managing general partner without first obtaining approval of any unitholder by giving 90 days’ written notice, and that withdrawal will not constitute a violation of ARLP’s partnership agreement. In addition, ARLP’s managing general partner may withdraw without unitholder approval upon 90 days’ notice to ARLP’s limited partners if at least 50% of ARLP’s outstanding common units are held or controlled by one person and its affiliates other than its general partner and its affiliates. ARLP’s special general partner may withdraw as a general partner without unitholder approval at any time upon 90 days’ written notice and furnishing an opinion of counsel regarding limited liability and tax matters. If ARLP’s special general partner is removed or withdraws and no successor is appointed, the managing general partner will continue ARLP’s business.

Upon the voluntary withdrawal of ARLP’s managing general partner, the holders of a majority of ARLP’s outstanding common units may elect a successor to that withdrawing managing general partner. If a successor is

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not elected, or is elected but an opinion of counsel regarding limited liability and tax matters cannot be obtained, ARLP will be dissolved, wound up and liquidated, unless within 180 days after that withdrawal, the holders of a majority of its outstanding units agree to continue ARLP’s business and to appoint a successor managing general partner.

Neither of ARLP’s general partners may be removed unless that removal is approved by the vote of the holders of not less than two-thirds of ARLP’s outstanding units, including units held by its general partners and their affiliates, and ARLP receives an opinion of counsel regarding limited liability and tax matters. Any removal of ARLP’s managing general partner is also subject to the approval of a successor managing general partner by the vote of the holders of a majority of ARLP’s outstanding common units, including those held by its general partner and its affiliates.

While ARLP’s partnership agreement limits the ability of ARLP’s general partners to withdraw, it allows either general partner to transfer its general partner interest to an affiliate or to a third party in conjunction with a merger or sale of all or substantially all of the assets of ARLP’s general partners. In addition, ARLP’s partnership agreement expressly permits the sale, in whole or in part, of the ownership of ARLP’s general partners. ARLP’s special general partner may also transfer, in whole or in part, the common units it owns. ARLP’s managing general partner may transfer, with minor limitations, the incentive distribution rights to an affiliate or another person as part of its merger or consolidation with or into, or sale of all or substantially all of its assets to, that person without the prior approval of unitholders.

Change of Management Provisions

ARLP’s partnership agreement contains specific provisions that are intended to discourage a person or group from attempting to remove ARLP’s managing general partner or otherwise change management.

Limited Call Right

If at any time ARLP’s general partners and their affiliates own 80% or more of the issued and outstanding limited partner interests of any class, its managing general partner will have the right to acquire all, but not less than all, of the outstanding limited partner interests of that class that are held by non-affiliated persons. The record date for determining ownership of the limited partner interests would be selected by ARLP’s managing general partner on at least 10 but not more than 60 days’ notice. The purchase price in the event of a purchase under these provisions would be the greater of (i) the current market price (as defined in ARLP’s partnership agreement) of the limited partner interests of the class as of the date three days prior to the mailing of written notice of its election to purchase the units and (ii) the highest cash price paid by either of ARLP’s general partners or any of their affiliates for any limited partner interests of the class purchased within the 90 days preceding the date ARLP’s managing general partner mails notice of its election to purchase the units.

Indemnification

Under its partnership agreement, in most circumstances, ARLP will indemnify:

•

ARLP’s general partners;

•

any departing general partner;

•

any person who is or was an affiliate of a general partner or any departing general partner;

•

any person who is or was a member, partner, officer, director, employee, agent or trustee of a general partner or any departing general partner or any affiliate of a general partner or any departing general partner; or

•

any person who is or was serving at the request of a general partner or any departing general partner or an affiliate of a general partner or any departing general partner as an officer, director, employee, member, partner, agent or trustee of another person.

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Index to Financial Statements

Any indemnification under these provisions will only be out of ARLP’s assets. ARLP’s general partners shall not be personally liable for, or have any obligation to contribute or loan funds or assets to ARLP to enable ARLP to effectuate any indemnification. ARLP is authorized to purchase insurance against liabilities asserted against and expenses incurred by persons for its activities, regardless of whether it would have the power to indemnify the person against liabilities under its partnership agreement.

Registration Rights

Under its partnership agreement, ARLP has agreed to register for resale under the Securities Act and applicable state securities laws any common units or other partnership securities proposed to be sold by its general partners or any of their affiliates or their assignees if an exemption from the registration requirements is not otherwise available. ARLP is obligated to pay all expenses incidental to the registration, excluding underwriting discounts and commissions.

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Index to Financial Statements

UNITS ELIGIBLE FOR FUTURE SALE

After the sale of the units offered by this prospectus, the management investors and Joseph W. Craft III will hold an aggregate 47,863,000 of our units, representing approximately 80.0% of our outstanding units. The sale of these units could have an adverse impact on the price of the units or on any trading market that may develop.

The units sold in this offering will generally be freely transferable without restriction or further registration under the Securities Act, except that any units held by an “affiliate” of ours may not be resold publicly except in compliance with the registration requirements of the Securities Act or under an exemption under Rule 144 or otherwise. Rule 144 permits securities acquired by an affiliate of the issuer to be sold into the market in an amount that does not exceed, during any three-month period, the greater of:

•

1% of the total number of the securities outstanding; or

•

the average weekly reported trading volume of the units for the four calendar weeks prior to the sale.

Sales under Rule 144 are also subject to specific manner of sale provisions, holding period requirements, notice requirements, and the availability of current public information about us. A person who is not deemed to have been an affiliate of ours at any time during the three months preceding a sale, and who has beneficially owned his units for at least two years, would be entitled to sell units under Rule 144 without regard to the current public information requirements, volume limitations, manner of sale provisions, and notice requirements of Rule 144.

The partnership agreement provides that we may issue an unlimited number of partnership securities without a vote of the unitholders. Such units may be issued on the terms and conditions established by our general partner. Any issuance of additional units would result in a corresponding decrease in the proportionate ownership interest in us represented by, and could adversely affect the cash distributions to, and market price of, units then outstanding. Please read “Description of Our Partnership Agreement—Issuance of Additional Securities.”

Under the partnership agreement, our general partner and its affiliates have the right to cause us to register under the Securities Act and applicable state securities laws the offer and sale of any units that they hold. Subject to the terms and conditions of the partnership agreement, these registration rights allow our general partner and its affiliates or their assignees holding any units to require registration of any of these units and to include any of these units in a registration by us of other units, including units offered by us or by any unitholder. Our general partner will continue to have these registration rights for two years following its withdrawal or removal as our general partner. In connection with any registration of this kind, we will indemnify each unitholder participating in the registration and its officers, directors, and controlling persons from and against any liabilities under the Securities Act or any applicable state securities laws arising from the registration statement or prospectus. We will bear all costs and expenses incidental to any registration, excluding any underwriting discounts and commissions. Except as described below, our general partner and its affiliates may sell their units in private transactions at any time, subject to compliance with applicable laws.

We, certain of our affiliates, the management investors, the executive officers and directors of our general partner and participants in our directed unit program have agreed not to sell any units they beneficially own for a period of 180 days (or 90 days for participants in our directed unit program who are not executive officers or directors of our general partner) from the date of this prospectus. Please read “Underwriting” for a description of these lock-up provisions.

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Index to Financial Statements

MATERIAL TAX CONSEQUENCES

This section is a discussion of the material tax considerations that may be relevant to prospective unitholders who are individual citizens or residents of the United States and, unless otherwise noted in the following discussion, is the opinion of Vinson & Elkins L.L.P., tax counsel to the general partner and us, insofar as it relates to matters of United States federal income tax law and legal conclusions with respect to those matters. This section is based upon current provisions of the Internal Revenue Code, existing and proposed regulations and current administrative rulings and court decisions, all of which are subject to change. Later changes in these authorities may cause the tax consequences to vary substantially from the consequences described below. Unless the context otherwise requires, references in this section to “us” or “we” are references to Alliance Holdings GP.

The following discussion does not comment on all federal income tax matters affecting us or the unitholders. Moreover, the discussion focuses on unitholders who are individual citizens or residents of the United States and has only limited application to corporations, estates, trusts, nonresident aliens or other unitholders subject to specialized tax treatment, such as tax-exempt institutions, foreign persons, individual retirement accounts (IRAs), real estate investment trusts (REITs) or mutual funds. Accordingly, we urge each prospective unitholder to consult, and depend on, his own tax advisor in analyzing the federal, state, local and foreign tax consequences particular to him of the ownership or disposition of units.

All statements as to matters of law and legal conclusions, but not as to factual matters, contained in this section, unless otherwise noted, are the opinion of Vinson & Elkins L.L.P. and are based on the accuracy of the representations made by us.

No ruling has been or will be requested from the IRS regarding any matter affecting us or prospective unitholders. Instead, we will rely on opinions of Vinson & Elkins L.L.P. Unlike a ruling, an opinion of counsel represents only that counsel’s best legal judgment and does not bind the IRS or the courts. Accordingly, the opinions and statements made here may not be sustained by a court if contested by the IRS. Any contest of this sort with the IRS may materially and adversely impact the market for our units and the prices at which our units trade. In addition, the costs of any contest with the IRS, principally legal, accounting and related fees, will result in a reduction in cash available for distribution to our unitholders and our general partner and thus will be borne indirectly by our unitholders and our general partner. Furthermore, the tax treatment of us, or of an investment in us, may be significantly modified by future legislative or administrative changes or court decisions. Any modifications may or may not be retroactively applied.

For the reasons described below, Vinson & Elkins L.L.P. has not rendered an opinion with respect to the following specific federal income tax issues: (1) the treatment of a unitholder whose units are loaned to a short seller to cover a short sale of units (please read “—Tax Consequences of Unit Ownership—Treatment of Short Sales”); (2) whether our monthly convention for allocating taxable income and losses is permitted by existing Treasury Regulations (please read “—Disposition of Units—Allocations Between Transferors and Transferees”); and (3) whether our method for depreciating Section 743 adjustments is sustainable in certain cases (please read “—Tax Consequences of Unit Ownership—Section 754 Election”).

Partnership Status

A partnership is not a taxable entity and incurs no federal income tax liability. Instead, each partner of a partnership is required to take into account his share of items of income, gain, loss and deduction of the partnership in computing his federal income tax liability, regardless of whether cash distributions are made to him by the partnership. Distributions by a partnership to a partner are generally not taxable unless the amount of cash distributed is in excess of the partner’s adjusted basis in his partnership interest.

Section 7704 of the Internal Revenue Code provides that publicly traded partnerships will, as a general rule, be taxed as corporations. However, an exception, referred to as the “Qualifying Income Exception,” exists with

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Index to Financial Statements

respect to publicly traded partnerships of which 90% or more of the gross income for every taxable year consists of “qualifying income.” Qualifying income includes income and gains derived from mining, transportation and marketing of coal and our allocable share of such income from ARLP. Other types of qualifying income include interest (other than from a financial business), dividends, gains from the sale of real property and gains from the sale or other disposition of capital assets held for the production of income that otherwise constitutes qualifying income. We estimate that less than 4% of our current income is not qualifying income; however, this estimate could change from time to time. Based upon and subject to this estimate, the factual representations made by us and the general partner and a review of the applicable legal authorities, Vinson & Elkins L.L.P. is of the opinion that at least 90% of our current gross income constitutes qualifying income.

No ruling has been or will be sought from the IRS and the IRS has made no determination as to our status for federal income tax purposes or whether our operations generate “qualifying income” under Section 7704 of the Internal Revenue Code. Moreover, no ruling has been or will be sought from the IRS and the IRS has made no determination as to ARLP’s status for federal income tax purposes or whether its operations generate “qualifying income” under Section 7704 of the Internal Revenue Code. Instead, we will rely on the opinion of Vinson & Elkins L.L.P. that, based upon the Internal Revenue Code, its regulations, published revenue rulings and court decisions and the representations described below, we will be classified as a partnership.

In rendering its opinion, Vinson & Elkins L.L.P. has relied on factual representations made by us and our general partner. The representations made by us and our general partner upon which Vinson & Elkins L.L.P. has relied are:

•

Neither we, nor ARLP, will elect to be treated as a corporation; and

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For each taxable year, more than 90% of our gross income will be income that Vinson & Elkins L.L.P. has opined or will opine is “qualifying income” within the meaning of Section 7704(d) of the Internal Revenue Code.

If we fail to meet the Qualifying Income Exception, other than a failure that is determined by the IRS to be inadvertent and that is cured within a reasonable time after discovery, we will be treated as if we had transferred all of our assets, subject to liabilities, to a newly formed corporation, on the first day of the year in which we fail to meet the Qualifying Income Exception, in return for stock in that corporation, and then distributed that stock to the unitholders in liquidation of their interests in us. This contribution and liquidation should be tax-free to unitholders and us so long as we, at that time, do not have liabilities in excess of the tax basis of our assets. Thereafter, we would be treated as a corporation for federal income tax purposes.

If we were taxable as a corporation in any taxable year, either as a result of a failure to meet the Qualifying Income Exception or otherwise, our items of income, gain, loss and deduction would be reflected only on our tax return rather than being passed through to the unitholders, and our net income would be taxed to us at corporate rates. Moreover, if ARLP were taxable as a corporation in any given year, our share of ARLP’s items of income, gain, loss and deduction would not be passed through to us, and ARLP would pay tax on its income at corporate rates. In addition, any distribution made to a unitholder would be treated as either taxable dividend income, to the extent of our current or accumulated earnings and profits, or, in the absence of earnings and profits, a nontaxable return of capital, to the extent of the unitholder’s tax basis in his units, or taxable capital gain, after the unitholder’s tax basis in his units is reduced to zero. Accordingly, taxation of either us or ARLP as a corporation would result in a material reduction in a unitholder’s cash flow and after-tax return and thus would likely result in a substantial reduction of the value of the units.

The discussion below is based on Vinson & Elkins L.L.P.’s opinion that we and ARLP will be classified as a partnership for federal income tax purposes.

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Limited Partner Status

Unitholders who have become limited partners of Alliance Holdings GP will be treated as partners of Alliance Holdings GP for federal income tax purposes. Also:

•

assignees who have executed and delivered transfer applications, and are awaiting admission as limited partners; and

•

unitholders whose units are held in street name or by a nominee and who have the right to direct the nominee in the exercise of all substantive rights attendant to the ownership of their units

will be treated as partners of Alliance Holdings GP for federal income tax purposes. As there is no direct authority addressing assignees of units who are entitled to execute and deliver transfer applications and thereby become entitled to direct the exercise of attendant rights, but who fail to execute and deliver transfer applications, Vinson & Elkins L.L.P.’s opinion does not extend to these persons. Furthermore, a purchaser or other transferee of units who does not execute and deliver a transfer application may not receive some federal income tax information or reports furnished to record holders of units unless the units are held in a nominee or street name account and the nominee or broker has executed and delivered a transfer application for those units.

A beneficial owner of units whose units have been transferred to a short seller to complete a short sale would appear to lose his status as a partner with respect to those units for federal income tax purposes. Please read “—Tax Consequences of Unit Ownership—Treatment of Short Sales.”

Income, gains, deductions or losses would not appear to be reportable by a unitholder who is not a partner for federal income tax purposes, and any cash distributions received by a unitholder who is not a partner for federal income tax purposes would therefore be fully taxable as ordinary income. These holders are urged to consult their own tax advisors with respect to their status as partners in Alliance Holdings GP for federal income tax purposes.

Tax Consequences of Unit Ownership

Flow-through of Taxable Income. We will not pay any federal income tax. Instead, each unitholder will be required to report on his income tax return his share of our income, gains, losses and deductions without regard to whether corresponding cash distributions are received by him. Consequently, we may allocate income to a unitholder even if he has not received a cash distribution. Each unitholder will be required to include in income his allocable share of our income, gains, losses and deductions for our taxable year ending with or within his taxable year. Our taxable year ends on December 31.

Treatment of Distributions. Distributions by us to a unitholder generally will not be taxable to the unitholder for federal income tax purposes to the extent of his tax basis in his units immediately before the distribution. Our cash distributions in excess of a unitholder’s tax basis generally will be considered to be gain from the sale or exchange of the units, taxable in accordance with the rules described under “—Disposition of Units” below. Any reduction in a unitholder’s share of our liabilities for which no partner, including the general partner, bears the economic risk of loss, known as “nonrecourse liabilities,” will be treated as a distribution of cash to that unitholder. To the extent our distributions cause a unitholder’s “at risk” amount to be less than zero at the end of any taxable year, he must recapture any losses deducted in previous years. Please read “—Limitations on Deductibility of Losses.”

A decrease in a unitholder’s percentage interest in us because of our issuance of additional units will decrease his share of our nonrecourse liabilities, and thus will result in a corresponding deemed distribution of cash. A non-pro rata distribution of money or property may result in ordinary income to a unitholder, regardless of his tax basis in his units, if the distribution reduces the unitholder’s share of our “unrealized receivables,” including depreciation recapture, and/or substantially appreciated “inventory items,” both as defined in the

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Internal Revenue Code, and collectively, “Section 751 Assets.” To that extent, he will be treated as having been distributed his proportionate share of the Section 751 Assets and having exchanged those assets with us in return for the non-pro rata portion of the actual distribution made to him. This latter deemed exchange will generally result in the unitholder’s realization of ordinary income, which will equal the excess of (1) the non-pro rata portion of that distribution over (2) the unitholder’s tax basis for the share of Section 751 Assets deemed relinquished in the exchange.

Ratio of Taxable Income to Distributions. We estimate that a purchaser of units in this offering who owns those units from the date of closing of this offering through the record date for distributions for the period ending December 31, 2007, will be allocated, on a cumulative basis, an amount of federal taxable income for that period that will be 50% or less of the cash distributed with respect to that period. We anticipate that after the taxable year ending December 31, 2007, the ratio of allocable taxable income to cash distributions to the unitholders will increase. Our ratio of taxable income to cash distributions will be much greater than the ratio applicable to holders of common units in ARLP because remedial allocations of deductions to us from ARLP will be very limited and our ownership of incentive distribution rights will cause more taxable income to be allocated to us from ARLP. Moreover, if ARLP is successful in increasing distributable cash flow over time, our income allocations from incentive distribution rights will increase, and, therefore, our ratio of taxable income to cash distributions will further increase. These estimates are based upon the assumption that the current rate of distributions from ARLP will approximate the amount required to make a quarterly distribution of $0.185 per common unit and other assumptions with respect to capital expenditures, cash flow, net working capital and anticipated cash distributions. These estimates and assumptions are subject to, among other things, numerous business, economic, regulatory, competitive and political uncertainties beyond our control. Further, the estimates are based on current tax law and tax reporting positions that we will adopt and with which the IRS could disagree. Accordingly, we cannot assure you that these estimates will prove to be correct. The actual ratio of taxable income to distributions could be higher or lower than our estimate of 50%, and any differences could be material and could materially affect the value of the units. For example, the ratio of allocable taxable income to cash distributions to a purchaser of common units in this offering will be greater than 50% with respect to the period described above if:

•

ARLP’s gross income from operations exceeds the amount required to make the minimum quarterly distribution on all ARLP’s units, yet ARLP only distributes the minimum quarterly distribution on all its units or

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ARLP makes a future offering of common units and uses the proceeds of the offering in a manner that does not produce substantial additional deductions during the period described above, such as to repay indebtedness outstanding at the time of this offering or to acquire property that is not eligible for depreciation or amortization for federal income tax purposes or that is depreciable or amortizable at a rate significantly slower than the rate applicable to ARLP’s assets at the time of this offering.

Basis of Units. A unitholder’s initial tax basis for his units will be the amount he paid for the units plus his share of our nonrecourse liabilities. That basis will be increased by his share of our income and by any increases in his share of our nonrecourse liabilities. That basis will be decreased, but not below zero, by distributions from us, by the unitholder’s share of our losses, by any decreases in his share of our nonrecourse liabilities and by his share of our expenditures that are not deductible in computing taxable income and are not required to be capitalized. A unitholder will have no share of our debt that is recourse to the general partner, but will have a share, generally based on his share of profits, of our nonrecourse liabilities. Please read “—Disposition of Units—Recognition of Gain or Loss.”

Limitations on Deductibility of Losses. The deduction by a unitholder of his share of our losses will be limited to the tax basis in his units and, in the case of an individual unitholder or a corporate unitholder, if more than 50% of the value of the corporate unitholder’s stock is owned directly or indirectly by five or fewer individuals or some tax-exempt organizations, to the amount for which the unitholder is considered to be “at risk” with respect to our activities, if that is less than his tax basis. A unitholder must recapture losses deducted in

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previous years to the extent that distributions cause his at risk amount to be less than zero at the end of any taxable year. Losses disallowed to a unitholder or recaptured as a result of these limitations will carry forward and will be allowable to the extent that his tax basis or at risk amount, whichever is the limiting factor, is subsequently increased. Upon the taxable disposition of a unit, any gain recognized by a unitholder can be offset by losses that were previously suspended by the at risk limitation but may not be offset by losses suspended by the basis limitation. Any excess loss above that gain previously suspended by the at risk or basis limitations is no longer utilizable.

In general, a unitholder will be at risk to the extent of the tax basis of his units, excluding any portion of that basis attributable to his share of our nonrecourse liabilities, reduced by any amount of money he borrows to acquire or hold his units, if the lender of those borrowed funds owns an interest in us, is related to the unitholder or can look only to the units for repayment. A unitholder’s at risk amount will increase or decrease as the tax basis of the unitholder’s units increases or decreases, other than tax basis increases or decreases attributable to increases or decreases in his share of our nonrecourse liabilities.

The passive loss limitations generally provide that individuals, estates, trusts and some closely-held corporations and personal service corporations can deduct losses from passive activities, which are generally corporate or partnership activities in which the taxpayer does not materially participate, only to the extent of the taxpayer’s income from those passive activities. As a general rule, the passive loss limitations are applied separately with respect to each publicly traded partnership. However, the application of the passive loss limitations to tiered publicly traded partnerships is uncertain. We will take the position that any passive losses we generate that are reasonably allocable to our investment in ARLP will only be available to offset our passive income generated in the future that is reasonably allocable to our investment in ARLP and will not be available to offset income from other passive activities or investments, including other investments in private businesses. Moreover, because the passive loss limitations are applied separately with respect to each publicly traded partnership, any passive losses we generate will not be available to offset your income from other passive activities or investments, including your investments in other publicly traded partnerships, such as ARLP, or salary or active business income. Further, your share of our net income may be offset by any suspended passive losses from your investment in us, but may not be offset by your current or carryover losses from other passive activities, including those attributable to other publicly traded partnerships. Passive losses that are not deductible because they exceed a unitholder’s share of income we generate may be deducted in full when he disposes of his entire investment in us in a fully taxable transaction with an unrelated party.

The IRS could take the position that for purposes of applying the passive loss limitation rules to tiered publicly traded partnerships, such as ARLP and us, the related entities are treated as one publicly traded partnership. In that case, any passive losses we generate would be available to offset income from your investments in ARLP. However, passive losses that are not deductible because they exceed a unitholder’s share of income we generate would not be deductible in full until a unitholder disposes of his entire investment in both us and ARLP in a fully taxable transaction with an unrelated party.

The passive activity loss rules are applied after other applicable limitations on deductions, including the at risk rules and the basis limitation.

Limitations on Interest Deductions. The deductibility of a non-corporate taxpayer’s “investment interest expense” is generally limited to the amount of that taxpayer’s “net investment income.” Investment interest expense includes:

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interest on indebtedness properly allocable to property held for investment;

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our interest expense attributed to portfolio income; and

•

the portion of interest expense incurred to purchase or carry an interest in a passive activity to the extent attributable to portfolio income.

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The computation of a unitholder’s investment interest expense will take into account interest on any margin account borrowing or other loan incurred to purchase or carry a unit. Net investment income includes gross income from property held for investment and amounts treated as portfolio income under the passive loss rules, less deductible expenses, other than interest, directly connected with the production of investment income, but generally does not include gains attributable to the disposition of property held for investment. The IRS has indicated that net passive income earned by a publicly traded partnership will be treated as investment income to its unitholders. In addition, the unitholder’s share of our portfolio income will be treated as investment income.

Entity Level Collections. If we are required or elect under applicable law to pay any federal, state, local or foreign income tax on behalf of any unitholder or the general partner or any former unitholder, we are authorized to pay those taxes from our funds. That payment, if made, will be treated as a distribution of cash to the partner on whose behalf the payment was made. If the payment is made on behalf of a person whose identity cannot be determined, we are authorized to treat the payment as a distribution to all current unitholders. We are authorized to amend the partnership agreement in the manner necessary to maintain uniformity of intrinsic tax characteristics of units and to adjust later distributions, so that after giving effect to these distributions, the priority and characterization of distributions otherwise applicable under the partnership agreement is maintained as nearly as is practicable. Payments by us as described above could give rise to an overpayment of tax on behalf of an individual partner in which event the partner would be required to file a claim in order to obtain a credit or refund.

Allocation of Income, Gain, Loss and Deduction. In general, if we have a net profit, our items of income, gain, loss and deduction will be allocated among the unitholders in accordance with their percentage interests in us. If we have a net loss for the entire year, that loss will be allocated first to the unitholders in accordance with their percentage interests in us to the extent of their positive capital accounts and, second, to the general partner.

Specified items of our income, gain, loss and deduction will be allocated to account for the difference between the tax basis and fair market value of our assets at the time of this offering, referred to in this discussion as “Contributed Property.” The effect of these allocations to a unitholder purchasing units in this offering will be essentially the same as if the tax basis of our assets were equal to their fair market value at the time of this offering. In addition, items of recapture income will be allocated to the extent possible to the partner who was allocated the deduction giving rise to the treatment of that gain as recapture income in order to minimize the recognition of ordinary income by some unitholders. Finally, although we do not expect that our operations will result in the creation of negative capital accounts, if negative capital accounts nevertheless result, items of our income and gain will be allocated in an amount and manner to eliminate the negative balance as quickly as possible.

An allocation of items of our income, gain, loss or deduction, other than an allocation required by the Internal Revenue Code to eliminate the difference between a partner’s “book” capital account, credited with the fair market value of Contributed Property, and “tax” capital account, credited with the tax basis of Contributed Property, referred to in this discussion as the “Book-Tax Disparity,” will generally be given effect for federal income tax purposes in determining a partner’s share of an item of income, gain, loss or deduction only if the allocation has substantial economic effect. In any other case, a partner’s share of an item will be determined on the basis of his interest in us, which will be determined by taking into account all the facts and circumstances, including:

•

his relative contributions to us;

•

the interests of all the partners in profits and losses;

•

the interest of all the partners in cash flow; and

•

the rights of all the partners to distributions of capital upon liquidation.

Vinson & Elkins L.L.P. is of the opinion that, with the exception of the issues described in “—Tax Consequences of Unit Ownership—Section 754 Election” and “—Disposition of Units—Allocations Between

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Transferors and Transferees,” allocations under our partnership agreement will be given effect for federal income tax purposes in determining a partner’s share of an item of income, gain, loss or deduction.

Treatment of Short Sales. A unitholder whose units are loaned to a “short seller” to cover a short sale of units may be considered as having disposed of those units. If so, he would no longer be a partner for those units during the period of the loan and may recognize gain or loss from the disposition. As a result, during this period:

•

any of our income, gain, loss or deduction with respect to those units would not be reportable by the unitholder;

•

any cash distributions received by the unitholder as to those units would be fully taxable; and

•

all of these distributions would appear to be ordinary income.

Vinson & Elkins L.L.P. has not rendered an opinion regarding the treatment of a unitholder where units are loaned to a short seller to cover a short sale of units; therefore, unitholders desiring to assure their status as partners and avoid the risk of gain recognition from a loan to a short seller are urged to modify any applicable brokerage account agreements to prohibit their brokers from borrowing their units. The IRS has announced that it is actively studying issues relating to the tax treatment of short sales of partnership interests. Please read “—Disposition of Units—Recognition of Gain or Loss.”

Alternative Minimum Tax. Each unitholder will be required to take into account his distributive share of any items of our income, gain, loss or deduction for purposes of the alternative minimum tax. The current minimum tax rate for noncorporate taxpayers is 26% on the first $175,000 of alternative minimum taxable income in excess of the exemption amount and 28% on any additional alternative minimum taxable income. Prospective unitholders are urged to consult with their tax advisors as to the impact of an investment in units on their liability for the alternative minimum tax.

Tax Rates. In general, the highest effective United States federal income tax rate for individuals is currently 35.0% and the maximum United States federal income tax rate for net capital gains of an individual is currently 15.0% if the asset disposed of was held for more than 12 months at the time of disposition.

Section 754 Election. We will make the election permitted by Section 754 of the Internal Revenue Code. That election is irrevocable without the consent of the IRS. The election will generally permit us to adjust a unit purchaser’s tax basis in our assets (“inside basis”) under Section 743(b) of the Internal Revenue Code to reflect his purchase price. This election does not apply to a person who purchases units directly from us. The Section 743(b) adjustment belongs to the purchaser and not to other unitholders. For purposes of this discussion, a unitholder’s inside basis in our assets will be considered to have two components: (1) his share of our tax basis in our assets (“common basis”) and (2) his Section 743(b) adjustment to that basis.

Treasury regulations under Section 743 of the Internal Revenue Code require, if the remedial allocation method is adopted (which we will adopt), a portion of the Section 743(b) adjustment attributable to recovery property to be depreciated over the remaining cost recovery period for the Section 704(c) built-in gain. Under Treasury Regulation Section 1.167(c)-1(a)(6), a Section 743(b) adjustment attributable to property subject to depreciation under Section 167 of the Internal Revenue Code, rather than cost recovery deductions under Section 168, is generally required to be depreciated using either the straight-line method or the 150% declining balance method. Under our partnership agreement, the general partner is authorized to take a position to preserve the uniformity of units even if that position is not consistent with these Treasury Regulations. Please read “—Uniformity of Units.”

Although Vinson & Elkins L.L.P. is unable to opine as to the validity of this approach because there is no clear authority on this issue, we intend to depreciate the portion of a Section 743(b) adjustment attributable to unrealized appreciation in the value of Contributed Property, to the extent of any unamortized Book-Tax

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Index to Financial Statements

Disparity, using a rate of depreciation or amortization derived from the depreciation or amortization method and useful life applied to the common basis of the property, or treat that portion as non-amortizable to the extent attributable to property the common basis of which is not amortizable. This method is consistent with the regulations under Section 743 of the Internal Revenue Code but is arguably inconsistent with Treasury Regulation Section 1.167(c)-1(a)(6), which is not expected to directly apply to a material portion of our assets. To the extent this Section 743(b) adjustment is attributable to appreciation in value in excess of the unamortized Book-Tax Disparity, we will apply the rules described in the Treasury Regulations and legislative history. If we determine that this position cannot reasonably be taken, we may take a depreciation or amortization position under which all purchasers acquiring units in the same month would receive depreciation or amortization, whether attributable to common basis or a Section 743(b) adjustment, based upon the same applicable rate as if they had purchased a direct interest in our assets. This kind of aggregate approach may result in lower annual depreciation or amortization deductions than would otherwise be allowable to some unitholders. Please read “—Uniformity of Units.”

A Section 754 election is advantageous if the transferee’s tax basis in his units is higher than the units’ share of the aggregate tax basis of our assets immediately prior to the transfer. In that case, as a result of the election, the transferee would have, among other items, a greater amount of depreciation and depletion deductions and his share of any gain or loss on a sale of our assets would be less. Conversely, a Section 754 election is disadvantageous if the transferee’s tax basis in his units is lower than those units’ share of the aggregate tax basis of our assets immediately prior to the transfer. Thus, the fair market value of the units may be affected either favorably or unfavorably by the election. A basis adjustment is required regardless of whether a Section 754 election is made in the case of a transfer of an interest in us if we have a substantial built-in loss immediately after the transfer or if we distribute property and have a substantial basis reduction. Generally, a built-in loss or a basis reduction is substantial if it exceeds $250,000.

The calculations involved in the Section 754 election are complex and will be made on the basis of assumptions as to the value of our assets and other matters. For example, the allocation of the Section 743(b) adjustment among our assets must be made in accordance with the Internal Revenue Code. The IRS could seek to reallocate some or all of any Section 743(b) adjustment allocated by us to our tangible assets or the tangible assets owned by ARLP to goodwill instead. Goodwill, as an intangible asset, is generally amortizable over a longer period of time or under a less accelerated method than our tangible assets. We cannot assure you that the determinations we make will not be successfully challenged by the IRS and that the deductions resulting from them will not be reduced or disallowed altogether. Should the IRS require a different basis adjustment to be made, and should, in our opinion, the expense of compliance exceed the benefit of the election, we may seek permission from the IRS to revoke our Section 754 election. If permission is granted, a subsequent purchaser of units may be allocated more income than he would have been allocated had the election not been revoked.

Tax Treatment of Operations

Accounting Method and Taxable Year. We use the year ending December 31 as our taxable year and the accrual method of accounting for federal income tax purposes. Each unitholder will be required to include in income his share of our income, gain, loss and deduction for our taxable year ending within or with his taxable year. In addition, a unitholder who has a taxable year ending on a date other than December 31 and who disposes of all of his units following the close of our taxable year but before the close of his taxable year must include his share of our income, gain, loss and deduction in income for his taxable year, with the result that he will be required to include in income for his taxable year his share of more than one year of our income, gain, loss and deduction. Please read “—Disposition of Units—Allocations Between Transferors and Transferees.”

Tax Basis, Depreciation and Amortization. The tax basis of our assets and ARLP’s assets will be used for purposes of computing depreciation and cost recovery deductions and, ultimately, gain or loss on the disposition of these assets. The tax basis of our assets owned by us at the time of this offering will be greater to the extent such assets have been recently acquired. The federal income tax burden associated with the difference between

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Index to Financial Statements

the fair market value of our assets and their tax basis immediately prior to this offering will be borne by the unitholders immediately prior to this offering. Please read “—Tax Consequences of Unit Ownership—Allocation of Income, Gain, Loss and Deduction.”

To the extent allowable, we may elect to use the depreciation and cost recovery methods that will result in the largest deductions being taken in the early years after assets are placed in service. We are not entitled to any amortization deductions with respect to any goodwill we own at formation. Property we subsequently acquire or construct may be depreciated using accelerated methods permitted by the Internal Revenue Code.

If we or ARLP dispose of depreciable property by sale, foreclosure or otherwise, all or a portion of any gain, determined by reference to the amount of depreciation previously deducted and the nature of the property, may be subject to the recapture rules and taxed as ordinary income rather than capital gain. Similarly, a unitholder who has taken cost recovery or depreciation deductions with respect to property we own or ARLP owns will likely be required to recapture some or all of those deductions as ordinary income upon a sale of his interest in us. Please read “—Tax Consequences of Unit Ownership—Allocation of Income, Gain, Loss and Deduction” and “—Disposition of Units—Recognition of Gain or Loss.”

The costs incurred in selling our units (called “syndication expenses”) must be capitalized and cannot be deducted currently, ratably or upon our termination. There are uncertainties regarding the classification of costs as organization expenses, which may be amortized by us, and as syndication expenses, which may not be amortized by us. The underwriting discounts and commissions we incur will be treated as syndication expenses.

Valuation and Tax Basis of Our Properties. The federal income tax consequences of the ownership and disposition of units will depend in part on our estimates of the relative fair market values, and the tax bases, of our assets and ARLP’s assets. Although we may from time to time consult with professional appraisers regarding valuation matters, we will make many of the relative fair market value estimates ourselves. These estimates and determinations of basis are subject to challenge and will not be binding on the IRS or the courts. If the estimates of fair market value or basis are later found to be incorrect, the character and amount of items of income, gain, loss or deductions previously reported by unitholders might change, and unitholders might be required to adjust their tax liability for prior years and incur interest and penalties with respect to those adjustments.

Coal Depletion. In general, ARLP is entitled to depletion deductions with respect to coal mined from its underlying mineral property. ARLP generally is entitled to the greater of cost depletion limited to the basis of the property or percentage depletion based on the gross income of its property. The percentage depletion rate for coal is 10%.

Depletion deductions ARLP claims generally will reduce the tax basis of the underlying mineral property. Depletion deductions can, however, exceed the total tax basis of the mineral property. The excess of ARLP’s percentage depletion deductions over the adjusted tax basis of the property at the end of the taxable year is subject to tax preference treatment in computing the alternative minimum tax. Please read “—Tax Consequences of Unit Ownership—Alternative Minimum Tax.” Upon the disposition of the mineral property, a portion of the gain, if any, equal to the lesser of the deductions for depletion which reduce the adjusted tax basis of the mineral property plus deductible development and mining exploration expenses, or the amount of gain recognized upon the disposition, will be treated as ordinary income to ARLP and us. In addition, a corporate unitholder’s allocable share of our share of the amount allowable as a percentage depletion deduction for any property will be reduced by 20% of the excess, if any, of that partner’s allocable share of the amount of percentage depletion deductions for the taxable year over the adjusted tax basis of the mineral property as of the close of the taxable year.

Mining Exploration and Development Expenditures. ARLP has elected to currently deduct mining exploration expenditures that it pays or incurs to determine the existence, location, extent or quality of coal deposits prior to the time the existence of coal in commercially marketable quantities has been disclosed.

Our share of amounts ARLP deducts for mine exploration expenditures must be recaptured and included in our taxable income at the time a mine reaches the production stage, unless ARLP elects to reduce future

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Index to Financial Statements

depletion deductions by the amount of that recapture. A mine reaches the producing stage when the major part of the coal production is obtained from working mines other than those opened for the purpose of development or the principal activity of the mine is the production of developed coal rather than the development of additional coal for mining. This recapture is accomplished through the disallowance of both cost and percentage depletion deductions on the particular mine reaching the producing stage. This disallowance of depletion deductions continues until the amount of adjusted exploration expenditures with respect to the mine have been fully recaptured. This recapture is not applied to the full amount of the previously deducted exploration expenditures. Instead, these expenditures are reduced by the amount of percentage depletion, if any, that was lost as a result of deducting these exploration expenditures.

ARLP will also generally deduct currently mine development expenditures incurred in making coal accessible for extraction, after the exploration process has disclosed the existence of coal in commercially marketable quantities. To increase the allowable percentage depletion deduction for a mine or mines, ARLP may however, elect to defer mine development expenses and deduct them on a ratable basis as the coal benefited by such expenses is sold. This election can be made on a mine-by-mine and year-by-year basis.

Mine exploration and development expenditures are subject to recapture as ordinary income to the extent of any gain upon a sale or other disposition of our property or of your common units. See “—Disposition of Common Units.” Corporate unitholders are subject to an additional rule that requires them to capitalize a portion of their otherwise deductible mine exploration and development expenditures. Corporate unitholders, other than some S corporations, are required to reduce their otherwise deductible exploration expenditures by 30%. These capitalized mine exploration and development expenditures must be amortized over a 60 month period, beginning in the month paid or incurred, using a straight-line method and may not be treated as part of the basis of the property for purposes of computing depletion.

When computing the alternative minimum tax, mine exploration and development expenditures are capitalized and deducted over a ten year period. Unitholders may avoid this alternative minimum tax adjustment of their mine exploration and development expenditures by electing to capitalize all or part of the expenditures and deducting them over ten years for regular income tax purposes. You may select the specific amount of these expenditures for which you wish to make this election.

Sales of Coal Reserves. If any of ARLP’s coal reserves are sold or otherwise disposed of in a taxable transaction, ARLP will recognize gain or loss measured by the difference between the amount realized (including the amount of any indebtedness assumed by the purchaser upon such disposition or to which such property is subject) and the adjusted tax basis of the property sold. Generally, the character of any gain or loss recognized upon that disposition will depend upon whether the coal reserves or the mined coal sold are held by ARLP:

•

for sale to customers in the ordinary course of business (i.e., ARLP is a “dealer” with respect to that property),

•

for use in a trade or business within the meaning of Section 1231 of the Internal Revenue Code or

•

as a capital asset within the meaning of Section 1221 of the Internal Revenue Code.

In determining dealer status with respect to coal reserves and other types of real estate, the courts have identified a number of factors for distinguishing between a particular property held for sale in the ordinary course of business and one held for investment. Any determination must be based on all the facts and circumstances surrounding the particular property and sale in question.

ARLP intends to hold its coal reserves primarily for use in a trade or business. Although ARLP’s managing general partner may consider strategic sales of coal reserves consistent with achieving long-term capital appreciation, the managing general partner does not anticipate frequent sales. Thus, the managing general partner

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Index to Financial Statements

does not believe ARLP will be viewed as a dealer. However, in light of the factual nature of this question, we cannot assure you that ARLP will not be viewed by the IRS as a “dealer” in coal reserves.

If ARLP is not a dealer with respect to its coal reserves and ARLP has held the reserves for more than a one-year period primarily for use in its trade or business, the character of any gain or loss realized from a disposition of such coal reserves will be determined under Section 1231 of the Internal Revenue Code. If ARLP has not held the coal reserves for more than one year at the time of the sale, gain or loss from the sale will be taxable as ordinary income.

A unitholder’s distributive share of any Section 1231 gain or loss allocated to us will be aggregated with any other gains and losses realized by that unitholder from the disposition of property used in the trade or business, as defined in Section 1231(b) of the Internal Revenue Code, and from the involuntary conversion of such properties and of capital assets held in connection with a trade or business or a transaction entered into for profit for the requisite holding period. If a net gain results, all such gains and losses will be long-term capital gains and losses; if a net loss results, all such gains and losses will be ordinary income and losses. Net Section 1231 gains will be treated as ordinary income to the extent of prior net Section 1231 losses of the taxpayer or predecessor taxpayer for the five most recent prior taxable years to the extent such losses have not previously been offset against Section 1231 gains. Losses are deemed recaptured in the chronological order in which they arose.

If ARLP is not a dealer with respect to its coal reserves and that property is not used in a trade or business, the coal reserves will be a “capital asset” within the meaning of Section 1221 of the Internal Revenue Code. ARLP will recognize gain or loss from the disposition of those coal reserves, which will be taxable as capital gain or loss, and the character of such capital gain or loss as long-term or short-term will be based upon our holding period in such property at the time of its sale. The requisite holding period for long-term capital gain is more than one year.

Upon a disposition of coal reserves, a portion of the gain, if any, equal to the lesser of (i) the depletion deductions that reduced the tax basis of the disposed mineral property plus deductible development and mining exploration expenses, or (ii) the amount of gain recognized on the disposition, will be treated as ordinary income to us.

Disposition of Units

Recognition of Gain or Loss. Gain or loss will be recognized on a sale of units equal to the difference between the amount realized and the unitholder’s tax basis for the units sold. A unitholder’s amount realized will be measured by the sum of the cash or the fair market value of other property received by him plus his share of our nonrecourse liabilities. Because the amount realized includes a unitholder’s share of our nonrecourse liabilities, the gain recognized on the sale of units could result in a tax liability in excess of any cash received from the sale.

Prior distributions from us in excess of cumulative net taxable income for a unit that decreased a unitholder’s tax basis in that unit will, in effect, become taxable income if the unit is sold at a price greater than the unitholder’s tax basis in that unit, even if the price received is less than his original cost.

Except as noted below, gain or loss recognized by a unitholder, other than a “dealer” in units, on the sale or exchange of a unit held for more than one year will generally be taxable as capital gain or loss. Capital gain recognized by an individual on the sale of units held more than 12 months will generally be taxed at a maximum rate of 15%. However, a portion of this gain or loss will be separately computed and taxed as ordinary income or loss under Section 751 of the Internal Revenue Code to the extent attributable to assets giving rise to depreciation recapture or other “unrealized receivables” or to “inventory items” we own or ARLP owns. The term “unrealized receivables” includes potential recapture items, including depreciation recapture. Ordinary income attributable to unrealized receivables, inventory items and depreciation recapture may exceed net taxable gain realized upon the

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Index to Financial Statements

sale of a unit and may be recognized even if there is a net taxable loss realized on the sale of a unit. Thus, a unitholder may recognize both ordinary income and a capital loss upon a sale of units. Deductions for mine exploration and development expenditures are also subject to recapture as ordinary income to the extent of any gain recognized on the sale of disposition of units. Net capital losses may offset capital gains and no more than $3,000 of ordinary income, in the case of individuals, and may only be used to offset capital gains in the case of corporations.

The IRS has ruled that a partner who acquires interests in a partnership in separate transactions must combine those interests and maintain a single adjusted tax basis for all those interests. Upon a sale or other disposition of less than all of those interests, a portion of that tax basis must be allocated to the interests sold using an “equitable apportionment” method. Treasury Regulations under Section 1223 of the Internal Revenue Code allow a selling unitholder who can identify units transferred with an ascertainable holding period to elect to use the actual holding period of the units transferred. Thus, according to the ruling, a unitholder will be unable to select high or low basis units to sell as would be the case with corporate stock, but, according to the regulations, may designate specific units sold for purposes of determining the holding period of units transferred. A unitholder electing to use the actual holding period of units transferred must consistently use that identification method for all subsequent sales or exchanges of units. A unitholder considering the purchase of additional units or a sale of units purchased in separate transactions is urged to consult his tax advisor as to the possible consequences of this ruling and application of the regulations.

Specific provisions of the Internal Revenue Code affect the taxation of some financial products and securities, including partnership interests, by treating a taxpayer as having sold an “appreciated” partnership interest, one in which gain would be recognized if it were sold, assigned or terminated at its fair market value, if the taxpayer or related persons enter(s) into:

•

a short sale;

•

an offsetting notional principal contract; or

•

a futures or forward contract with respect to the partnership interest or substantially identical property.

Moreover, if a taxpayer has previously entered into a short sale, an offsetting notional principal contract or a futures or forward contract with respect to the partnership interest, the taxpayer will be treated as having sold that position if the taxpayer or a related person then acquires the partnership interest or substantially identical property. The Secretary of the Treasury is also authorized to issue regulations that treat a taxpayer that enters into transactions or positions that have substantially the same effect as the preceding transactions as having constructively sold the financial position.

Allocations Between Transferors and Transferees. In general, our taxable income and losses will be determined annually, will be prorated on a monthly basis and will be subsequently apportioned among the unitholders in proportion to the number of units owned by each of them as of the opening of the applicable exchange on the first business day of the month, which we refer to in this prospectus as the “Allocation Date.” However, gain or loss realized on a sale or other disposition of our assets other than in the ordinary course of business will be allocated among the unitholders on the Allocation Date in the month in which that gain or loss is recognized. As a result, a unitholder transferring units may be allocated income, gain, loss and deduction realized after the date of transfer.

The use of this method may not be permitted under existing Treasury Regulations. Accordingly, Vinson & Elkins L.L.P. is unable to opine on the validity of this method of allocating income and deductions between unitholders. If this method is not allowed under the Treasury Regulations, or only applies to transfers of less than all of the unitholder’s interest, our taxable income or losses might be reallocated among the unitholders. We are authorized to revise our method of allocation between unitholders, as well as unitholders whose interests vary during a taxable year, to conform to a method permitted under future Treasury Regulations.

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A unitholder who owns units at any time during a quarter and who disposes of them prior to the record date set for a cash distribution for that quarter will be allocated items of our income, gain, loss and deductions attributable to that quarter but will not be entitled to receive that cash distribution.

Notification Requirements. A unitholder who sells any of his units, other than through a broker, generally is required to notify us in writing of that sale within 30 days after the sale (or, if earlier, January 15 of the year following the sale). A purchaser of units who purchases units is required to notify us in writing of that purchase within 30 days after the purchase, unless a broker or nominee will satisfy such requirement. We are required to notify the IRS of any such transfers of units and to furnish specified information to the transferor and transferee. Failure to notify us of a transfer of units may, in some cases, lead to the imposition of penalties.

Constructive Termination. We will be considered to have been terminated for tax purposes if there is a sale or exchange of 50% or more of the total interests in our capital and profits within a 12-month period. A constructive termination results in the closing of our taxable year for all unitholders. In the case of a unitholder reporting on a taxable year other than a fiscal year ending December 31, the closing of our taxable year may result in more than 12 months of our taxable income or loss being includable in his taxable income for the year of termination. A constructive termination could result in an increase in the amount of taxable income to be allocated to our unitholders if our termination results in a termination of ARLP. Although the amount of increase cannot be estimated because it depends upon numerous factors including the timing of the termination, the amount could be material. We would be required to make new tax elections after a termination, including a new election under Section 754 of the Internal Revenue Code, and a termination would result in a deferral of our deductions for depreciation. A termination could also result in penalties if we were unable to determine that the termination had occurred. Moreover, a termination might either accelerate the application of, or subject us to, any tax legislation enacted before the termination. A termination currently would not affect our classification as a partnership for federal income tax purposes, but instead, we would be treated as a new partnership for tax purposes.

Uniformity of Units

Because we cannot match transferors and transferees of units, we must maintain uniformity of the economic and tax characteristics of the units to a purchaser of these units. In the absence of uniformity, we may be unable to completely comply with a number of federal income tax requirements, both statutory and regulatory. A lack of uniformity can result from a literal application of Treasury Regulation Section 1.167(c)-1(a)(6). Any non-uniformity could have a negative impact on the value of the units. Please read “—Tax Consequences of Unit Ownership—Section 754 Election.”

We intend to depreciate the portion of a Section 743(b) adjustment attributable to unrealized appreciation in the value of Contributed Property, to the extent of any unamortized Book-Tax Disparity, using a rate of depreciation or amortization derived from the depreciation or amortization method and useful life applied to the common basis of that property, or treat that portion as nonamortizable, to the extent attributable to property the common basis of which is not amortizable, consistent with the regulations under Section 743 of the Internal Revenue Code, even though that position may be inconsistent with Treasury Regulation Section 1.167(c)-1(a)(6), which is not expected to directly apply to a material portion of our assets. Please read “—Tax Consequences of Unit Ownership—Section 754 Election.” To the extent that the Section 743(b) adjustment is attributable to appreciation in value in excess of the unamortized Book-Tax Disparity, we will apply the rules described in the Treasury Regulations and legislative history. If we determine that this position cannot reasonably be taken, we may adopt a depreciation and amortization position under which all purchasers acquiring units in the same month would receive depreciation and amortization deductions, whether attributable to a common basis or Section 743(b) adjustment, based upon the same applicable rate as if they had purchased a direct interest in our property. If this position is adopted, it may result in lower annual depreciation and amortization deductions than would otherwise be allowable to some unitholders and risk the loss of depreciation and amortization deductions not taken in the year that these deductions are otherwise allowable. This position will not be adopted if we

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determine that the loss of depreciation and amortization deductions will have a material adverse effect on the unitholders. If we choose not to utilize this aggregate method, we may use any other reasonable depreciation and amortization method to preserve the uniformity of the intrinsic tax characteristics of any units that would not have a material adverse effect on the unitholders. The IRS may challenge any method of depreciating the Section 743(b) adjustment described in this paragraph. If this challenge were sustained, the uniformity of units might be affected, and the gain from the sale of units might be increased without the benefit of additional deductions. Please read “—Disposition of Units—Recognition of Gain or Loss.”

Tax-Exempt Organizations and Other Investors

Ownership of units by employee benefit plans, other tax-exempt organizations, non-resident aliens, foreign corporations and other foreign persons raises issues unique to those investors and, as described below, may have substantially adverse tax consequences to them.

Employee benefit plans and most other organizations exempt from federal income tax, including individual retirement accounts and other retirement plans, are subject to federal income tax on unrelated business taxable income. Virtually all of our income allocated to a unitholder that is a tax-exempt organization will be unrelated business taxable income and will be taxable to them.

Non-resident aliens and foreign corporations, trusts or estates that own units will be considered to be engaged in business in the United States because of the ownership of units. As a consequence, they will be required to file federal tax returns to report their share of our income, gain, loss or deduction and pay federal income tax at regular rates on their share of our net income or gain. Moreover, under rules applicable to publicly traded partnerships, we will withhold at the highest applicable effective tax rate from cash distributions made quarterly to foreign unitholders. Each foreign unitholder must obtain a taxpayer identification number from the IRS and submit that number to our transfer agent on a Form W-8BEN or applicable substitute form in order to obtain credit for these withholding taxes. A change in applicable law may require us to change these procedures.

In addition, because a foreign corporation that owns units will be treated as engaged in a United States trade or business, that corporation may be subject to the United States branch profits tax at a rate of 30%, in addition to regular federal income tax, on its share of our income and gain, as adjusted for changes in the foreign corporation’s “U.S. net equity,” which are effectively connected with the conduct of a United States trade or business. That tax may be reduced or eliminated by an income tax treaty between the United States and the country in which the foreign corporate unitholder is a “qualified resident.” In addition, this type of unitholder is subject to special information reporting requirements under Section 6038C of the Internal Revenue Code.

Under a published ruling of the IRS, the IRS has taken the position that a foreign unitholder who sells or otherwise disposes of a unit will be subject to federal income tax on gain realized on the sale or disposition of that unit to the extent the gain is effectively connected with a United States trade or business of the foreign unitholder that is attributable to appreciated personal property. Moreover, a foreign unitholder is subject to federal income tax on gain realized on the sale or disposition of a unit to the extent that such gain is attributable to appreciated United States real property interests; however, a foreign unitholder will not be subject to federal income tax under this rule unless such foreign unitholder has owned more than 5% in value of our units during the five-year period ending on the date of the sale or disposition, provided the units are regularly traded on an established securities market at the time of the sale or disposition.

Administrative Matters

Information Returns and Audit Procedures. We intend to furnish to each unitholder, within 90 days after the close of each calendar year, specific tax information, including a Schedule K-1, which describes his share of our income, gain, loss and deduction for our preceding taxable year. In preparing this information, which will not be reviewed by counsel, we will take various accounting and reporting positions, some of which have been

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mentioned earlier, to determine his share of income, gain, loss and deduction. We cannot assure you that those positions will yield a result that conforms to the requirements of the Internal Revenue Code, Treasury Regulations or administrative interpretations of the IRS. Neither we nor Vinson & Elkins L.L.P. can assure prospective unitholders that the IRS will not successfully contend in court that those positions are impermissible. Any challenge by the IRS could negatively affect the value of the units.

The IRS may audit our federal income tax information returns. Adjustments resulting from an IRS audit may require each unitholder to adjust a prior year’s tax liability, and possibly may result in an audit of his return. Any audit of a unitholder’s return could result in adjustments not related to our returns as well as those related to our returns.

Partnerships generally are treated as separate entities for purposes of federal tax audits, judicial review of administrative adjustments by the IRS and tax settlement proceedings. The tax treatment of partnership items of income, gain, loss and deduction are determined in a partnership proceeding rather than in separate proceedings with the partners. The Internal Revenue Code requires that one partner be designated as the “Tax Matters Partner” for these purposes. The partnership agreement names Alliance GP, LLC as our Tax Matters Partner.

The Tax Matters Partner will make some elections on our behalf and on behalf of unitholders. In addition, the Tax Matters Partner can extend the statute of limitations for assessment of tax deficiencies against unitholders for items in our returns. The Tax Matters Partner may bind a unitholder with less than a 1% profits interest in us to a settlement with the IRS unless that unitholder elects, by filing a statement with the IRS, not to give that authority to the Tax Matters Partner. The Tax Matters Partner may seek judicial review, by which all the unitholders are bound, of a final partnership administrative adjustment and, if the Tax Matters Partner fails to seek judicial review, judicial review may be sought by any unitholder having at least a 1% interest in profits or by any group of unitholders having in the aggregate at least a 5% interest in profits. However, only one action for judicial review will go forward, and each unitholder with an interest in the outcome may participate.

A unitholder must file a statement with the IRS identifying the treatment of any item on his federal income tax return that is not consistent with the treatment of the item on our return. Intentional or negligent disregard of this consistency requirement may subject a unitholder to substantial penalties.

Nominee Reporting. Persons who hold an interest in us as a nominee for another person are required to furnish to us:

•

the name, address and taxpayer identification number of the beneficial owner and the nominee;

•

whether the beneficial owner is:

(1) a person that is not a United States person;

(2) a foreign government, an international organization or any wholly owned agency or instrumentality of either of the foregoing; or

(3) a tax-exempt entity;

•

the amount and description of units held, acquired or transferred for the beneficial owner; and

•

specific information including the dates of acquisitions and transfers, means of acquisitions and transfers, and acquisition cost for purchases, as well as the amount of net proceeds from sales.

Brokers and financial institutions are required to furnish additional information, including whether they are United States persons and specific information on units they acquire, hold or transfer for their own account. A penalty of $50 per failure, up to a maximum of $100,000 per calendar year, is imposed by the Internal Revenue Code for failure to report that information to us. The nominee is required to supply the beneficial owner of the units with the information furnished to us.

Accuracy-related Penalties. An additional tax equal to 20% of the amount of any portion of an underpayment of tax that is attributable to one or more specified causes, including negligence or disregard of

194

Index to Financial Statements

rules or regulations, substantial understatements of income tax and substantial valuation misstatements, is imposed by the Internal Revenue Code. No penalty will be imposed, however, for any portion of an underpayment if it is shown that there was a reasonable cause for that portion and that the taxpayer acted in good faith regarding that portion.

For individuals, a substantial understatement of income tax in any taxable year exists if the amount of the understatement exceeds the greater of 10% of the tax required to be shown on the return for the taxable year or $5,000. The amount of any understatement subject to penalty generally is reduced if any portion is attributable to a position adopted on the return:

(1) for which there is, or was, “substantial authority,” or

(2) as to which there is a reasonable basis and the pertinent facts of that position are disclosed on the return.

If any item of income, gain, loss or deduction included in the distributive shares of unitholders for a given year might result in that kind of an “understatement” of income relating to such a transaction for which no “substantial authority” exists, we will disclose the pertinent facts on our return. In addition, we will make a reasonable effort to furnish sufficient information for unitholders to make adequate disclosure on their returns and to take other actions as may be appropriate to permit unitholders to avoid liability for penalties. More stringent rules would apply to an understatement of tax resulting from an ownership of units if we were classified as a “tax shelter.” We believe we will not be classified as a tax shelter.

A substantial valuation misstatement exists if the value of any property, or the adjusted basis of any property, claimed on a tax return is 200% or more of the amount determined to be the correct amount of the valuation or adjusted basis. No penalty is imposed unless the portion of the underpayment attributable to a substantial valuation misstatement exceeds $5,000 ($10,000 for most corporations). If the valuation claimed on a return is 400% or more than the correct valuation, the penalty imposed increases to 40%.

Reportable Transactions. If we were to engage in a “reportable transaction,” we (and possibly you and others) would be required to make a detailed disclosure of the transaction to the IRS. A transaction may be a reportable transaction based upon any of several factors, including the fact that it is a type of tax avoidance transaction publicly identified by the IRS as a “listed transaction” or that it produces certain kinds of losses in excess of $2 million. Our participation in a reportable transaction could increase the likelihood that our federal income tax information return (and possibly your tax return) would be audited by the IRS. Please read “—Information Returns and Audit Procedures” above.

Moreover, if we were to participate in a reportable transaction with a significant purpose to avoid or evade tax, or in any listed transaction, you may be subject to the following provisions of the American Jobs Creation Act of 2004:

•

accuracy-related penalties with a broader scope, significantly narrower exceptions, and potentially greater amounts than described above at “—Accuracy-related Penalties;”

•

for those persons otherwise entitled to deduct interest on federal tax deficiencies, nondeductibility of interest on any resulting tax liability; and

•

in the case of a listed transaction, an extended statute of limitations.

We do not expect to engage in any reportable transactions.

State, Local, Foreign and Other Tax Considerations

In addition to federal income taxes, you likely will be subject to other taxes, such as state and local income taxes, unincorporated business taxes, and estate, inheritance or intangible taxes that may be imposed by the

195

Index to Financial Statements

various jurisdictions in which we or ARLP do business or own property or in which you are a resident. Although an analysis of those various taxes is not presented here, each prospective unitholder should consider their potential impact on his investment in us. Although you may not be required to file a return and pay taxes in some jurisdictions because your income from that jurisdiction falls below the filing and payment requirement, you will be required to file income tax returns and to pay income taxes in many other jurisdictions in which we may do business or own property and may be subject to penalties for failure to comply with those requirements. In some jurisdictions, tax losses may not produce a tax benefit in the year incurred and may not be available to offset income in subsequent taxable years. Some jurisdictions may require us, or we may elect, to withhold a percentage of income from amounts to be distributed to a unitholder who is not a resident of the jurisdiction. Withholding, the amount of which may be greater or less than a particular unitholder’s income tax liability to the jurisdiction, generally does not relieve a nonresident unitholder from the obligation to file an income tax return. Amounts withheld will be treated as if distributed to unitholders for purposes of determining the amounts distributed by us. Please read “—Tax Consequences of Unit Ownership—Entity Level Collections.” Based on current law and our estimate of our future operations, the general partner anticipates that any amounts required to be withheld will not be material.

It is the responsibility of each unitholder to investigate the legal and tax consequences, under the laws of pertinent jurisdictions, of his investment in us. Accordingly, each prospective unitholder is urged to consult, and depend upon, his tax counsel or other advisor with regard to those matters. Further, it is the responsibility of each unitholder to file all state, local and foreign, as well as United States federal tax returns, that may be required of him. Vinson & Elkins L.L.P. has not rendered an opinion on the state, local or foreign tax consequences of an investment in us.

196

Index to Financial Statements

SELLING UNITHOLDERS

If the underwriters exercise all or any portion of their option to purchase additional common units, we will issue up to 1,875,000 additional common units, and we will use the net proceeds from the sale of those units to redeem an equal number of units from our current equity owners listed in the table below, who may be deemed to be selling unitholders in this offering. The redemption price per common unit will be equal to the price per common unit (net of underwriting discounts) sold to the underwriters upon exercise of their option to purchase additional common units.

The following table sets forth information concerning the ownership of common units by our current equity owners who could be deemed to be selling unitholders in this offering. The numbers in the table are presented assuming:

•

the underwriters’ option to purchase additional units is not exercised; and

•

the underwriters exercise their option to purchase additional units in full, and we use our net proceeds from that sale to redeem an equal number of units from our current equity owners.

The number of common units sold by each of the selling unitholders upon any exercise of the underwriters’ option to purchase additional units may be allocated pro rata among the selling unitholders in proportion to their percentage ownership of common units or by any other method upon which they mutually agree.


	Units owned immediately after this offering			Units owned immediately after exercise of underwriters’ option
Name of Selling Unitholder	Assuming underwriters’ option is not exercised	Percent		Assuming underwriters’ option is exercised in full	Percent
Joseph W. Craft III(1):
Units owned by Alliance Management Holdings, LLC	6,863,470	11.5	%	6,381,878	10.7	%
Units owned by AMH II, LLC	19,858,362	33.2		18,464,954	30.8	%
Units owned by Alliance Resource GP, LLC	20,641,168	34.5		20,641,168	34.5	%
Units acquired by Mr. Craft	500,000	0.8		500,000	0.8	%

Total for Joseph W. Craft III	47,863,000	80.0	%	45,988,000	76.8	%

*	Less than one percent (1%)

(1)

197

Index to Financial Statements

INVESTMENT IN US BY EMPLOYEE BENEFIT PLANS

An investment in our units by an employee benefit plan is subject to additional considerations because the investments of these plans are subject to the fiduciary responsibility and prohibited transaction provisions of ERISA, and restrictions imposed by Section 4975 of the Internal Revenue Code. For these purposes, the term “employee benefit plan” includes, but is not limited to, qualified pension, profit-sharing and stock bonus plans, Keogh plans, simplified employee pension plans and tax deferred annuities or IRAs established or maintained by an employer or employee organization. Among other things, consideration should be given to:

•

whether the investment is prudent under Section 404(a)(l)(B) of ERISA;

•

whether in making the investment, that plan will satisfy the diversification requirements of Section 404(a)(l)(C) of ERISA; and

•

whether the investment will result in recognition of unrelated business taxable income (please read “Material Tax Consequences—Tax-Exempt Organizations and Other Investors”) by the plan and, if so, the potential after-tax investment return.

In addition, the person with investment discretion with respect to the assets of an employee benefit plan, often called a fiduciary, should determine whether an investment in our units is authorized by the appropriate governing instrument and is a proper investment for the plan.

Section 406 of ERISA and Section 4975 of the Internal Revenue Code prohibit employee benefit plans, and IRAs that are not considered part of an employee benefit plan, from engaging in specified transactions involving “plan assets” with parties that are “parties in interest” under ERISA or “disqualified persons” under the Internal Revenue Code with respect to the plan. Therefore, a fiduciary of an employee benefit plan or an IRA accountholder that is considering an investment in our units should consider whether the entity’s purchase or ownership of such units would or could result in the occurrence of such a prohibited transaction.

In addition to considering whether the purchase of units is or could result in a prohibited transaction, a fiduciary of an employee benefit plan should consider whether the plan will, by investing in our units, be deemed to own an undivided interest in our assets, with the result that our general partner also would be a fiduciary of the plan and our operations would be subject to the regulatory restrictions of ERISA, including fiduciary standard and its prohibited transaction rules, as well as the prohibited transaction rules of the Internal Revenue Code.

The Department of Labor regulations provide guidance with respect to whether the assets of an entity in which employee benefit plans acquire equity interests would be deemed “plan assets” under some circumstances. Under these regulations, an entity’s assets would not be considered to be “plan assets” if, among other things:

•

the equity interests acquired by employee benefit plans are publicly offered securities; i.e., the equity interests are widely held by 100 or more investors independent of the issuer and each other, freely transferable and registered under some provisions of the federal securities laws;

•

the entity is an “operating company;” i.e., it is primarily engaged in the production or sale of a product or service other than the investment of capital either directly or through a majority owned subsidiary or subsidiaries; or

•

there is no significant investment by benefit plan investors, which is defined to mean that less than 25% of the value of each class of equity interest, disregarding some interests held by our general partner, its affiliates, and some other persons, is held by the employee benefit plans referred to above, IRAs and other employee benefit plans not subject to ERISA, including governmental plans.

Our assets should not be considered “plan assets” under these regulations because it is expected that the investment will satisfy the requirements in the first bullet point above.

Plan fiduciaries contemplating a purchase of units should consult with their own counsel regarding the consequences under ERISA and the Internal Revenue Code in light of the serious penalties imposed on persons who engage in prohibited transactions or other violations.

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Index to Financial Statements

UNDERWRITING

Lehman Brothers Inc. is acting as representative of the underwriters and as sole book-running manager. Under the terms of an Underwriting Agreement, which will be filed as an exhibit to the registration statement, each of the underwriters named below has severally agreed to purchase from us the respective number of common units shown opposite its name below:


Underwriters		Number of Common Units
Lehman Brothers Inc.		3,187,500
Citigroup Global Markets Inc.		2,937,500
A.G. Edwards & Sons, Inc.		1,250,000
UBS Securities LLC		1,250,000
Wachovia Capital Markets, LLC		1,250,000
Raymond James & Associates, Inc.		937,500
RBC Capital Markets Corporation		937,500
Credit Suisse Securities (USA) LLC		375,000
Stifel, Nicolaus & Company, Incorporated		375,000

Total		12,500,000

Joseph W. Craft III or an entity controlled by him will purchase 500,000 common units in this offering directly from the underwriters at our direction at a price equal to the public offering price. The underwriters will not receive any discount or commission on the sale of these 500,000 common units.

The underwriting agreement provides that the underwriters’ obligation to purchase common units depends on the satisfaction of the conditions contained in the underwriting agreement including:

•

the obligation to purchase all of the common units offered hereby, if any of the common units are purchased;

•

the representations and warranties made by us to the underwriters are true;

•

there has been no material change in the condition of us or in the financial markets; and

•

we deliver customary closing documents to the underwriters.

Commissions and Expenses

The following table summarizes the underwriting discounts and commissions we will pay to the underwriters. These amounts are shown assuming both no exercise and full exercise of the underwriters’ option to purchase additional common units. The underwriting fee is the difference between the initial public offering price and the amount the underwriters pay to us for the common units and excluding the structuring fee described below.


	No Exercise		Full Exercise
Per common unit	$	1.50	$	1.50
Total	$	18,000,000	$	20,812,500

The representative of the underwriters has advised us that the underwriters propose to offer the common units directly to the public at the public offering price on the cover of this prospectus and to selected dealers, who may include the underwriters, at such offering price less a selling concession not in excess of $0.90 per common unit. After the offering, the representative may change the offering price and other selling terms.

The expenses of the offering that are payable by us, other than underwriting discounts and commissions, are estimated to be $5.0 million. The underwriters have agreed to reimburse us for $375,000 of these expenses ($433,594 if the underwriters exercise their option to purchase additional common units in full). The estimated $5.0 million of expenses excludes the structuring fee described below.

199

Index to Financial Statements

We will pay structuring fees equal to an aggregate of $750,000 or ($867,188 if the underwriters exercise their option to purchase additional common units in full) to Lehman Brothers Inc. for evaluation, analysis and structuring of our partnership.

Option to Purchase Additional Common Units

We have granted the underwriters an option exercisable for 30 days after the date of this prospectus, to purchase, from time to time, in whole or in part, up to an aggregate of 1,875,000 common units at the public offering price less underwriting discounts and commissions. This option may be exercised if the underwriters sell more than 12,500,000 common units in connection with this offering. To the extent that this option is exercised, each underwriter will be obligated, subject to certain conditions, to purchase its pro rata portion of these additional common units based on the underwriter’s percentage underwriting commitment in the offering as indicated in the table at the beginning of this Underwriting Section.

Lock-Up Agreements

We, certain of our affiliates, the management investors and the owners of the management investors, the executive officers and directors of our general partner and our general partner have agreed that, without the prior written consent of Lehman Brothers Inc., we and they will not, subject to some exceptions, directly or indirectly, offer, announce the intention to sell, sell, contract to sell, sell an option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of any common units or any securities which may be converted into or exchanged for any common units or enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of the common units, make any demand for or exercise any right or file or cause to be filed a registration statement with respect to the registration of any common units or securities convertible, exercisable or exchangeable into common units or any of our other securities or publicly disclose the intention to do any of the foregoing for a period of 180 days from the date of this prospectus other than permitted transfers.

The 180-day restricted period described in the preceding paragraph will be extended if:

•

during the last 17 days of the 180-day restricted period we issue an earnings release or announce material news or a material event; or

•

prior to the expiration of the 180-day restricted period, we announce that we will release earnings results during the 16-day period beginning on the last day of the 180-day period,

in which case the restrictions described in the preceding paragraph will continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the announcement of the material news or material event.

Lehman Brothers Inc., in its sole discretion, may release the common units subject to lock-up agreements in whole or in part at any time with or without notice. When determining whether or not to release common units from lock-up agreements, Lehman Brothers Inc. will consider, among other factors, the unitholders’ reasons for requesting the release, the number of common units for which the release is being requested and market conditions at the time.

Offering Price Determination

Prior to this offering, there has been no public market for our common units. The initial public offering price was negotiated between the representative and us. In determining the initial public offering price of our common units, the representative will consider:

•

the history and prospects for the industry in which we compete,

•

our financial information,

•

the ability of our management and our business potential and earning prospects,

200

Index to Financial Statements

•

the prevailing securities markets at the time of this offering, and

•

the recent market prices of, and the demand for, publicly traded common units of generally comparable entities.

Indemnification

We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act and liabilities incurred in connection with the directed unit program referred to below, and to contribute to payments that the underwriters may be required to make for these liabilities.

Directed Unit Program

At our request, the underwriters have reserved for sale at the initial public offering price up to 550,000 common units offered hereby for officers, directors, employees and certain other persons associated with us. The number of common units available for sale to the general public will be reduced to the extent such persons purchase such reserved common units. The common units reserved for sale under the directed unit program will be subject to a 90 day lock-up agreement (or 180 days if they are sold to executive officers or directors of our general partner). Any reserved common units not so purchased will be offered by the underwriters to the general public on the same basis as the other common units offered hereby.

Stabilization, Short Positions and Penalty Bids

The representative may engage in stabilizing transactions, short sales and purchases to cover positions created by short sales, and penalty bids or purchases for the purpose of pegging, fixing or maintaining the price of the common units, in accordance with Regulation M under the Securities Exchange Act of 1934:

•

Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum.

•

A short position involves a sale by the underwriters of common units in excess of the number of common units the underwriters are obligated to purchase in the offering, which creates the syndicate short position. This short position may be either a covered short position or a naked short position. In a covered short position, the number of common units involved in the sales made by the underwriters in excess of the number of common units they are obligated to purchase is not greater than the number of common units that they may purchase by exercising their option to purchase additional common units. In a naked short position, the number of common units involved is greater than the number of common units in their option to purchase additional common units. The underwriters may close out any short position by either exercising their option to purchase additional common units and/or purchasing common units in the open market. In determining the source of common units to close out the short position, the underwriters will consider, among other things, the price of common units available for purchase in the open market as compared to the price at which they may purchase common units through their option to purchase additional common units. A naked short position is more likely to be created if the underwriters are concerned that there could be downward pressure on the price of the common units in the open market after pricing that could adversely affect investors who purchase in the offering.

•

Syndicate covering transactions involve purchases of the common units in the open market after the distribution has been completed in order to cover syndicate short positions.

•

Penalty bids permit the representatives to reclaim a selling concession from a syndicate member when the common units originally sold by the syndicate member are purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions.

These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of our common units or preventing or retarding a decline in the market price of the common units. As a result, the price of the common units may be higher than the price that might

201

Index to Financial Statements

otherwise exist in the open market. These transactions may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time.

Neither we nor any of the underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the common units. In addition, neither we nor any of the underwriters make representation that the representative will engage in these stabilizing transactions or that any transaction, once commenced, will not be discontinued without notice.

Electronic Distribution

A prospectus in electronic format may be made available on the Internet sites or through other online services maintained by one or more of the underwriters and/or selling group members participating in this offering, or by their affiliates. In those cases, prospective investors may view offering terms online and, depending upon the particular underwriter or selling group member, prospective investors may be allowed to place orders online. The underwriters may agree with us to allocate a specific number of common units for sale to online brokerage account holders. Any such allocation for online distributions will be made by the representative on the same basis as other allocations.

Other than the prospectus in electronic format, the information on any underwriter’s or selling group member’s web site and any information contained in any other web site maintained by an underwriter or selling group member is not part of the prospectus or the registration statement of which this prospectus forms a part, has not been approved and/or endorsed by us or any underwriter or selling group member in its capacity as underwriter or selling group member and should not be relied upon by investors.

Nasdaq National Market

Our common units have been approved for listing on the Nasdaq National Market under the symbol “AHGP.”

Discretionary Sales

The underwriters have informed us that they do not intend to confirm sales to discretionary accounts that exceed 5% of the total number of units offered by them.

Stamp Taxes

If you purchase common units offered in this prospectus, you may be required to pay stamp taxes and other charges under the laws and practices of the country of purchase, in addition to the offering price listed on the cover page of this prospectus.

Relationships

Certain of the underwriters and their affiliates have performed investment banking, commercial banking and advisory services for ARLP for which they have received customary fees and expenses. The underwriters and their affiliates may in the future perform investment banking and advisory services for us and our affiliates from time to time for which they may in the future receive customary fees and expenses. The underwriters may, from time to time, engage in transactions with or perform services for us and our affiliates in the ordinary course of their business.

NASD Conduct Rules

Because the NASD views the common units offered hereby as interests in a direct participation program, the offering is being made in compliance with Rule 2810 of the NASD Conduct Rules. Investor suitability with respect to the common units should be judged similarly to the suitability with respect to other securities that are listed for trading on a national securities exchange.

202

Index to Financial Statements

VALIDITY OF THE UNITS

The validity of the common units will be passed upon for us by Vinson & Elkins L.L.P., Houston, Texas. Certain legal matters in connection with the common units will be passed upon for the underwriters by Baker Botts L.L.P., Houston, Texas.

EXPERTS

The consolidated financial statements as of December 31, 2005 and 2004, and for the three years in the period ended December 31, 2005 of Alliance Resource Management GP, LLC included in this prospectus and the related financial statement schedule included elsewhere in the registration statement of which this prospectus constitutes a part have been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their reports appearing herein and elsewhere in the registration statement, and are included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing.

The balance sheets of Alliance Holdings GP, L.P. and Alliance GP, LLC at December 31, 2005 included in this prospectus and included elsewhere in the registration statement of which this prospectus forms a part have been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their reports appearing herein and elsewhere in the registration statement and are included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the Commission a registration statement on Form S-1 regarding the units offered by this prospectus. This prospectus does not contain all of the information found in the registration statement. For further information regarding us and the units offered by this prospectus, you should review the full registration statement, including its exhibits and schedules, filed under the Securities Act of 1933. The registration statement of which this prospectus constitutes a part, including its exhibits and schedules, may be inspected and copied at the public reference room maintained by the Commission at 100 F Street, N.E., Washington, D.C. 20549. Copies of the materials may also be obtained from the Commission at prescribed rates by writing to the public reference room maintained by the Commission at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the public reference room by calling the Commission at 1-800-SEC-0330. The Commission maintains a website at www.sec.gov. Our registration statement, of which this prospectus constitutes a part, can be downloaded at no cost from the Commission’s web site. We intend to furnish our unitholders annual reports containing our audited financial statements and furnish or make available quarterly reports containing our unaudited interim financial information for the first three fiscal quarters of each of our fiscal years.

203

Index to Financial Statements

INDEX TO FINANCIAL STATEMENTS


Alliance Holdings GP, L.P.
Unaudited Pro Forma Condensed Consolidated Financial Statements:

Introduction		F-2
Unaudited Pro Forma Condensed Consolidated Statement of Income for the Year Ended December 31, 2005		F-3
Unaudited Pro Forma Condensed Consolidated Balance Sheet at December 31, 2005		F-4
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements		F-5

Alliance Holdings GP, L.P.
Audited Balance Sheet:

Report of Independent Registered Public Accounting Firm		F-7
Balance Sheet at December 31, 2005		F-8
Note to Balance Sheet		F-9

Alliance GP, LLC
Audited Balance Sheet:

Report of Independent Registered Public Accounting Firm		F-10
Balance Sheet at December 31, 2005		F-11
Note to Balance Sheet		F-12

Alliance Resource Management GP, LLC and Subsidiaries
Audited Consolidated Financial Statements:

Report of Independent Registered Public Accounting Firm		F-13
Consolidated Balance Sheets at December 31, 2005 and 2004		F-14
Consolidated Statements of Income for the Years Ended December 31, 2005, 2004, and 2003		F-15
Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, 2004, and 2003		F-16
Consolidated Statements of Members’ Capital (Deficiency in Capital) and Comprehensive Income (Loss) for the Years Ended December 31, 2005, 2004, and 2003		F-17
Notes to Consolidated Financial Statements		F-18

F-1

Index to Financial Statements

ALLIANCE HOLDINGS GP, L.P.

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Introduction

Unless the context requires otherwise, for purposes of this pro forma presentation, references to “we,” “our,” “us,” “Alliance Holdings” or “the Company” are intended to mean the consolidated business and operations of Alliance Holdings GP, L.P. References to “Alliance Resource Partners” are intended to mean the consolidated business and operations of Alliance Resource Partners, L.P., which includes its intermediate partnership, Alliance Resource Operating Partners, L.P., and its holding company for operations, Alliance Coal, LLC. References to “Alliance Resource Management GP” refer to Alliance Resource Management GP, LLC, the managing general partner of Alliance Resource Partners.

These unaudited pro forma condensed consolidated financial statements give effect to significant transactions and events that affect Alliance Holdings, including:

•

the sale of 12,500,000 common units in this offering and related use of proceeds;

•

the issuance of 20,641,168 of our common units to Alliance Resource GP, LLC, the special general partner of ARLP, in exchange for 15,310,622 ARLP common units; and

•

The unaudited pro forma condensed statements of consolidated operations for the year ended December 31, 2005 assumes the pro forma transactions noted herein occurred on January 1, 2005 (to the extent not already reflected in the historical consolidated statements of operations of each entity). The unaudited pro forma condensed consolidated balance sheet shows the financial effects of the pro forma transactions noted herein as if they had occurred on December 31, 2005 (to the extent not already recorded in the historical balance sheet of Alliance Holdings).

Alliance Holdings was formed in November 2005, and thus it does not have any historical financial statements for 2004. As a result of being under common control with Alliance Resource Management GP, Alliance Holdings’ unaudited pro forma condensed consolidated financial information reflects the unaudited pro forma condensed consolidated financial information of Alliance Resource Management GP. Likewise, Alliance Resource Partners’ financial information is consolidated with Alliance Resource Management GP due to the same common control considerations. The unaudited pro forma condensed consolidated financial statements of Alliance Holdings reflect the elimination of all material intercompany accounts and transactions.

Dollar amounts presented in the tabular data with these unaudited pro forma condensed consolidated financial statements and footnotes (except per unit amounts) are stated in thousands of dollars, unless otherwise indicated.

The unaudited pro forma condensed consolidated financial statements and related pro forma information are based on assumptions that Alliance Holdings believes are reasonable under the circumstances and are intended for informational purposes only. They are not necessarily indicative of the financial results that would have occurred if the transactions described herein had taken place on the dates indicated, nor are they indicative of the future consolidated results of the combined company.

The unaudited pro forma condensed consolidated financial statements of Alliance Holdings should be read in conjunction with, and are qualified in their entirety by reference to, the notes accompanying such unaudited pro forma condensed consolidated financial statements, the historical consolidated financial statements, and the unaudited condensed consolidated statements and related notes of Alliance Resource Management GP included within this prospectus.

F-2

Index to Financial Statements

ALLIANCE HOLDINGS GP, L.P.

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME

FOR THE YEAR ENDED DECEMBER 31, 2005

(In thousands, except per unit data)


	Alliance Resource Management GP, LLC Historical			Offering Adjustments			Alliance Holdings GP, L.P. Pro Forma
SALES AND OPERATING REVENUES:
Coal sales	$	768,958					$	768,958
Transportation revenues		39,069						39,069
Other sales and operating revenues		30,691						30,691

Total revenues		838,718						838,718

EXPENSES:
Operating expenses		521,488						521,488
Transportation expenses		39,069						39,069
Outside purchases		15,113						15,113
General and administrative		33,484						33,484
Depreciation, depletion, and amortization		55,647						55,647
Interest expense (net of interest income and interest capitalized of $3,372)		11,811						11,811

Total operating expenses		676,612						676,612

INCOME FROM OPERATIONS		162,106						162,106
OTHER INCOME		581						581

INCOME BEFORE INCOME TAXES & NON-CONTROLLING INTEREST		162,687						162,687
INCOME TAX EXPENSE		2,682						2,682

INCOME BEFORE NON-CONTROLLING INTEREST		160,005						160,005
Affiliate non-controlling interest in consolidated partnership’s net income		(63,282	)	$	63,252	(a)		(30	)
Non-affiliate non-controlling interest in consolidated partnership’s net income		(84,348	)					(84,348	)

NET INCOME	$	12,375		$	63,252		$	75,627

INCOME ALLOCATION
Limited partners							$	75,627

BASIC EARNINGS PER UNIT
Number of units used in denominator					59,863	(b)		59,863

Net income							$	1.26

DILUTED EARNINGS PER UNIT
Number of units used in denominator					59,863	(b)		59,863

Net income							$	1.26

F-3

Index to Financial Statements

ALLIANCE HOLDINGS GP, L.P.

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET

DECEMBER 31, 2005

(In thousands)


	Alliance Resource Management GP, LLC Historical			Offering Adjustments			Alliance Holdings GP, L.P. Pro Forma
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	32,071		$	312,500	(b)	$	32,071
					(18,375	)(b)
					(5,000	)(b)
					(289,125	)(c)
Trade receivables, net		94,495						94,495
Other receivables		2,330						2,330
Marketable securities		49,242						49,242
Inventories		17,270						17,270
Advance royalties		2,952						2,952
Prepaid expenses and other assets		8,934						8,934

Total current assets		207,294			—			207,294
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment at cost		635,086						635,086
Less accumulated depreciation, depletion and amortization		(330,672	)					(330,672	)

Total property, plant and equipment		304,414						304,414
INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES					144,907	(d)		—
					11,755	(c)
					(156,662	)(e)
OTHER ASSETS:
Advance royalties		16,328						16,328
Coal supply agreements, net		—						—
Other long-term assets		4,733						4,733

Total other assets		21,061			—			21,061

TOTAL ASSETS	$	532,769		$	—		$	532,769

LIABILITIES AND PARTNER’S CAPITAL
CURRENT LIABILITIES:
Accounts Payable	$	53,597					$	53,597
Due to affiliates		1,539						1,539
Accrued taxes other than income taxes		13,177						13,177
Accrued payroll and related expenses		14,517						14,517
Accrued pension benefit		7,588						7,588
Accrued interest		4,855						4,855
Workers’ compensation and pneumoconiosis benefits		7,740						7,740
Current portion, accrued LTIP Employees & Directors		5,088						5,088
Other current liabilities		5,120						5,120
Current maturities, long-term debt		18,000						18,000

Total current liabilities		131,221						131,221
LONG-TERM LIABILITIES:
Long-term debt, excluding current maturities		144,000						144,000
Pneumoconiosis benefits		23,293						23,293
Workers’ compensation		30,050						30,050
Reclamation and mine closing		38,716						38,716
Other liabilities		9,636						9,636

Total long-term liabilities		245,695						245,695

Total liabilities		376,916						376,916

NON-CONTROLLING INTEREST IN CONSOLIDATED PARTNERSHIP
Affiliate		(112,050	)	$	(191,789	)(a)		(303,839	)
Non-Affiliate		270,090						270,090

Total non-controlling interest		158,040			(191,789	)		(33,749	)

COMMITMENTS AND CONTINGENCIES

PARTNERS’ CAPITAL
Members’ equity		4,834			(4,834	)(e)		—

Partners’ equity
Limited partners					312,500	(b)		196,623
					(18,375	)(b)
					(5,000	)(b)
					144,907	(d)
					11,755	(c)
					39,961	(e)
					(289,125	)(c)
General partner								—
Unrealized loss on marketable securities		(68	)					(68	)
Minimum pension liability		(6,953	)					(6,953	)

Total equity		(2,187	)		191,789			189,602

TOTAL LIABILITIES AND PARTNERS’ CAPITAL	$	532,769		$	—		$	532,769

F-4

Index to Financial Statements

ALLIANCE HOLDINGS GP, L.P.

NOTES TO UNAUDITED PRO FORMA CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS

These unaudited pro forma condensed consolidated financial statements and underlying pro forma adjustments are based upon information currently available and certain estimates and assumptions made by the management of Alliance Holdings; therefore, actual results could materially differ from the pro forma information. However, Alliance Holdings believes the assumptions provide a reasonable basis for presenting the significant effects of the transactions noted herein. Alliance Holdings believes the pro forma adjustments give appropriate effect to those assumptions and are properly applied in the pro forma information.

Pro Forma Adjustments

The pro forma adjustments made to the consolidated or combined historical financial statements of Alliance Holdings assets are described as follows:

(a) Reflects pro forma adjustments to non-controlling interest in consolidated partnership (as shown on the condensed consolidated balance sheet) and affiliate non-controlling interest in consolidated partnership’s net income (as shown on the condensed consolidated statements of income) resulting from various pro forma adjustments made herein related to the contribution of 15,550,628 common units of Alliance Resource Partners, L.P. (the “Contributed Units”) to Alliance Holdings by Alliance Resource GP, Alliance Management Holdings, LLC (“AMH”) and AMH II, LLC (“AMH II”). Non-controlling interest represents third-party and related party ownership interests in the net assets of certain subsidiaries of Alliance Holdings. After offering adjustments, the non-controlling interest holders reflected in the pro forma condensed consolidated balance sheet of Alliance Holdings consists of the third-party owners of the common units of Alliance Resource Partners, L.P. and Alliance Resource GP’s general partner interest in ARLP.

The pro forma adjustments to affiliate non-controlling interest in consolidated partnership’s net income (as shown on the condensed consolidated statement of income) represents the portion of ARLP’s net income allocated to Alliance Resource GP, AMH and AMH II because of their ownership of the Contributed Units. After the contribution of the Contributed Units, the net income allocable to the Contributed Units will be allocated to Alliance Holdings.

The pro forma adjustment to non-controlling interest in consolidated partnership (as shown on the condensed consolidated balance sheet) represents the combined basis of Alliance Resource GP, AMH and AMH II in the Contributed Units. The combined basis represents the original investment basis of Alliance Resource GP, AMH and AMH II in the Contributed Units adjusted for cumulative net income allocations and distributions. The limited partners’ pro forma partners’ equity of $196.6 million is comprised primarily of the combined basis in the Contributed Units.

Prior to the transactions contemplated in this prospectus, the Contributed Units were not controlled by Alliance Resource Management GP, LLC. Consequently, the combined basis, adjusted for net income allocations and distributions associated with the Contributed Units, were reported as affiliate non-controlling interests. The pro forma adjustment reflects the contribution of the Contributed Units at their historical carrying basis since the contribution to Alliance Holdings is from entities under common control.

(b) As a result of the limited partner contributions to Alliance Holdings described in Notes (d) and (e), Alliance Resource GP, LLC and Alliance Management Holdings, LLC and AMH II, LLC will receive 47,363,000 common units of Alliance Holdings. Additionally, it reflects the sale of 12,500,000 common units by Alliance Holdings in this offering at an offering price of $25.00 per common unit. Total net proceeds from the sale of these 12,500,000 common units are approximately $289.1 million after deducting applicable underwriting discount and commissions of $18.4 million and estimated offering expenses of $5.0 million.

F-5

Index to Financial Statements

ALLIANCE HOLDINGS GP, L.P.

NOTES TO UNAUDITED PRO FORMA CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(c) Reflects the issuance of 26,721,832 common units by Alliance Holdings (a 47.1% limited partner interest in Alliance Holdings) to Alliance Management Holdings, LLC and AMH II, LLC and the distribution of $289.1 million in exchange for their interests in Alliance Resource Management GP, LLC, 240,006 common units of Alliance Resource Partners and AMH II, LLC’s interest in ARM GP Holdings, Inc. The pro forma adjustment reflects the contribution of these assets at their historical carrying basis since these contributions to Alliance Holdings are from a related party.

(d) Reflects the issuance of 20,641,168 common units by Alliance Holdings (a 32.0% limited partner interest in Alliance Holdings) to Alliance Resource GP, LLC in exchange for its contribution to the Company of 15,310,622 common units of Alliance Resource Partners, L.P. The pro forma adjustment reflects the contribution of these assets at their historical carrying basis since these contributions to Alliance Holdings are from a related party.

(e) Reflects the pro forma elimination of investment and equity accounts between Alliance Holdings and Alliance Resource Management GP as appropriate in consolidation.

We estimate that we will incur incremental general and administrative expenses of $1.5 million annually as a result of being a publicly traded limited partnership, such as costs associated with annual and quarterly reports to unitholders, tax return and Schedule K-1 preparation and distribution, investor relations, registrar and transfer agent fees, director compensation and incremental insurance costs, including director and officer liability and business interruption insurance. The pro forma financial statements do not reflect these incremental general and administrative expenses. For additional information regarding the Administrative Services Agreement, please read “Certain Relationships and Related Party Transactions—Administrative Services Agreement.”

F-6

Index to Financial Statements

ALLIANCE HOLDINGS GP, L.P.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To:	Alliance GP, LLC as general partner of

Alliance Holdings GP, L.P.

We have audited the accompanying balance sheet of Alliance Holdings GP, L.P. (the “Partnership”) as of December 31, 2005. This financial statement is the responsibility of the Partnership’s management. Our responsibility is to express an opinion on this financial statement based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the balance sheet is free of material misstatement. The Partnership is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Partnership’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the balance sheet, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall balance sheet presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such balance sheet presents fairly, in all material respects, the financial position of the Partnership, as of December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.

/s/ DELOITTE & TOUCHE LLP

Tulsa, Oklahoma

March 27, 2006

F-7

Index to Financial Statements

ALLIANCE HOLDINGS GP, L.P.

BALANCE SHEET

AT DECEMBER 31, 2005


ASSETS

Cash	$	1,000


LIABILITIES AND PARTNERS’ EQUITY

Partners’ equity	$	1,000

See Note to Balance Sheet

F-8

Index to Financial Statements

ALLIANCE HOLDINGS GP, L.P.

NOTE TO BALANCE SHEET

Nature of Operations

Alliance Holdings GP, L.P. is a Delaware limited partnership that was formed on November 10, 2005 to become the sole member of Alliance Resource Management GP, LLC, which is the managing general partner of Alliance Resource Partners, L.P. (“Alliance Resource Partners”), a publicly traded limited partnership. Alliance Resource Partners is a North American diversified producer and marketer of coal to major United States utilities and industrial users.

Our assets will consist of the following partnership interests in Alliance Resource Partners to be contributed to us by AMH II, LLC, Alliance Management Holdings, LLC, and Alliance Resource GP, LLC:

•

The 100% ownership interest in Alliance Resource Management GP, LLC, which owns a 0.99% managing general partner interest in Alliance Resource Partners, a 1.0001% managing general partner interest in Alliance Resource Operating Partners, L.P. and a 0.001% managing interest in Alliance Coal, LLC;

•

The incentive distribution rights in Alliance Resource Partners associated with the managing general partner interest, which we hold through our ownership interests in Alliance Resource Management GP, LLC; and

•

15,550,628 common units of Alliance Resource Partners, representing an approximately 42.7% of the outstanding common units of Alliance Resource Partners.

F-9

Index to Financial Statements

ALLIANCE GP, LLC

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To:	C-Holdings, LLC

We have audited the accompanying balance sheet of Alliance GP, LLC (the “Company”) as of December 31, 2005. This financial statement is the responsibility of the Company’s management. Our responsibility is to express an opinion on this financial statement based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the balance sheet is free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the balance sheet, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall balance sheet presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such balance sheet presents fairly, in all material respects, the financial position of the Company, as of December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.

/s/ DELOITTE & TOUCHE LLP

Tulsa, Oklahoma

March 27, 2006

F-10

Index to Financial Statements

ALLIANCE GP, LLC

BALANCE SHEET

AT DECEMBER 31, 2005


ASSETS

Cash	$	1,000


MEMBER’S EQUITY

Member’s Equity	$	1,000

See Note to Balance Sheet

F-11

Index to Financial Statements

ALLIANCE GP, LLC

NOTE TO BALANCE SHEET

Nature of Operations

Alliance GP, LLC is a Delaware limited liability company that was formed on November 10, 2005 and is the general partner of Alliance Holdings GP, L.P., a Delaware limited partnership that was formed on November 10, 2005 to own Alliance Resource Management GP, LLC, the managing general partner of Alliance Resource Partners, L.P., and 15,550,628 common units of Alliance Resource Partners, L.P. Alliance GP, LLC’s general partner interest is fixed without any requirement for capital contributions in connection with additional unit issuances by Alliance Holdings GP, L.P. because Alliance GP, LLC has no economic interest in Alliance Holdings GP, L.P.

F-12

Index to Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Members

of Alliance Resource Management GP, LLC:

We have audited the accompanying consolidated balance sheets of Alliance Resource Management GP, LLC and subsidiaries (the “Company”) as of December 31, 2005 and 2004, and the related consolidated statements of income, members’ capital (deficiency in capital) and comprehensive income, and cash flows for each of the three years ended December 31, 2005. Our audits also included the financial statement schedule listed as Schedule II. These financial statements and financial schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Alliance Resource Management GP, LLC and subsidiaries at December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/ DELOITTE & TOUCHE LLP

Tulsa, Oklahoma

March 27, 2006

F-13

Index to Financial Statements

ALLIANCE RESOURCE MANAGEMENT GP, LLC AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2005 AND 2004

(In thousands)


	December 31,
	2005			2004
ASSETS

CURRENT ASSETS:
Cash and cash equivalents	$	32,071		$	31,184
Trade receivables		94,495			56,967
Other receivables		2,330			1,637
Marketable securities		49,242			49,397
Inventories		17,270			13,839
Advance royalties		2,952			3,117
Prepaid expenses and other assets		8,934			4,345

Total current assets		207,294			160,486

PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment, at cost		635,086			526,468
Less accumulated depreciation, depletion and amortization		(330,672	)		(292,900	)

Total property, plant and equipment		304,414			233,568

OTHER ASSETS:
Advance royalties		16,328			11,737
Coal supply agreements, net		—			2,723
Other long-term assets		4,733			4,353

Total other assets		21,061			18,813

TOTAL ASSETS	$	532,769		$	412,867

LIABILITIES AND MEMBERS’ DEFICIENCY IN CAPITAL

CURRENT LIABILITIES:
Accounts payable	$	53,597		$	31,056
Due to affiliates		1,539			890
Accrued taxes other than income taxes		13,177			10,745
Accrued payroll and related expenses		14,517			13,584
Accrued pension benefit		7,588			5,798
Accrued interest		4,855			5,402
Workers’ compensation and pneumoconiosis benefits		7,740			7,081
Current portion, accrued Long-Term Incentive Plan		5,088			7,500
Other current liabilities		5,120			6,253
Current maturities, long-term debt		18,000			18,000

Total current liabilities		131,221			106,309

LONG-TERM LIABILITIES:
Long-term debt, excluding current maturities		144,000			162,000
Pneumoconiosis benefits		23,293			19,833
Workers’ compensation		30,050			25,994
Reclamation and mine closing		38,716			32,838
Other liabilities		9,636			10,627

Total long-term liabilities		245,695			251,292

Total liabilities		376,916			357,601

COMMITMENTS AND CONTINGENCIES

NON-CONTROLLING INTEREST IN CONSOLIDATED PARTNERSHIP:
Affiliate		(112,050	)		(150,828	)
Non-Affiliate		270,090			211,441

Total non-controlling interest		158,040			60,613

MEMBERS’ DEFICIENCY IN CAPITAL:
Unrealized loss on marketable securities		(68	)		(54	)
Minimum pension liability		(6,953	)		(5,122	)
Members’ capital (deficiency in capital)		4,834			(171	)

Total Members’ deficiency in capital		(2,187	)		(5,347	)

TOTAL LIABILITIES AND MEMBERS’ DEFICIENCY IN CAPITAL	$	532,769		$	412,867

See notes to consolidated financial statements.

F-14

Index to Financial Statements

ALLIANCE RESOURCE MANAGEMENT GP, LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003

(In thousands)


	Year Ended December 31,
	2005			2004			2003
SALES AND OPERATING REVENUES:

Coal sales	$	768,958		$	599,399		$	501,596
Transportation revenues		39,069			29,817			19,553
Other sales and operating revenues		30,691			24,073			21,598

Total revenues		838,718			653,289			542,747


EXPENSES:

Operating expenses		521,488			436,471			368,836
Transportation expenses		39,069			29,817			19,553
Outside purchases		15,113			9,913			8,508
General and administrative		33,484			45,400			28,243
Depreciation, depletion and amortization		55,647			53,674			52,505
Interest expense (net of interest income and interest capitalized of $3,372, $852 and $546, respectively)		11,811			14,963			15,980
Net gain from insurance settlement		—			(15,217	)		—

Total operating expenses		676,612			575,021			493,625

INCOME FROM OPERATIONS		162,106			78,268			49,122

OTHER INCOME		581			1,121			1,374

INCOME BEFORE INCOME TAXES & NON-CONTROLLING INTEREST		162,687			79,389			50,496

INCOME TAX EXPENSE		2,682			2,641			2,577

INCOME BEFORE NON-CONTROLLING INTEREST		160,005			76,748			47,919

Affiliate non-controlling interest in consolidated partnership’s net income		(63,282	)		(31,795	)		(21,086	)

Non-affiliate non-controlling interest in consolidated partnership’s net income		(84,348	)		(41,516	)		(26,520	)

NET INCOME	$	12,375		$	3,437		$	313

See notes to consolidated financial statements.

F-15

Index to Financial Statements

ALLIANCE RESOURCE MANAGEMENT GP, LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003

(In thousands)


	Year Ended December 31,
	2005			2004			2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	12,375		$	3,437		$	313
Adjustments to reconcile net income to net cash provided by operating activities:
Affiliate non-controlling interest in consolidated partnership’s net income		63,282			31,795			21,086
Non-affiliate non-controlling interest in consolidated partnership’s net income		84,348			41,516			26,520
Depreciation, depletion and amortization		55,647			53,674			52,505
Reclamation and mine closings		1,918			1,622			1,341
Coal inventory adjustment to market		573			488			687
Loss on retirement of damaged vertical belt equipment		1,298			—			—
Other		759			255			(353	)
Changes in operating assets and liabilities:
Trade receivables		(37,528	)		(20,593	)		(3,459	)
Other receivables		(693	)		294			(1,828	)
Inventories		(4,004	)		200			(2,049	)
Prepaid expenses		(4,584	)		(913	)		(648	)
Advance royalties		(4,396	)		(1,307	)		2,227
Accounts payable		13,144			8,644			(721	)
Due to affiliates		649			(458	)		1,454
Accrued taxes other than income taxes		2,432			370			2,271
Accrued payroll and related benefits		933			1,169			1,376
Deferred compensation		4,059			14,146			8,338
Pneumoconiosis benefits		3,460			2,702			1,064
Workers’ compensation		4,715			3,849			4,002
Other		(4,761	)		4,300			(3,834	)

Total net adjustments		181,251			141,753			109,979

Net cash provided by operating activities		193,626			145,190			110,292

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment		(110,517	)		(54,713	)		(43,004	)
Purchase of Warrior Coal		—			—			(12,661	)
Proceeds from sale of property, plant and equipment		198			687			913
Purchase of marketable securities		(63,448	)		(49,271	)		(23,091	)
Proceeds from marketable securities		63,589			23,537			—
Proceeds from assumption of liability		—			2,112			—

Net cash used in investing activities		(110,178	)		(77,648	)		(77,843	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on Warrior Coal revolving credit balance		—			—			(17,000	)
Borrowings under revolving credit and working capital facilities		—			—			31,600
Payments under revolving credit and working capital facilities		—			—			(31,600	)
Payments on long-term debt		(18,000	)		—			(31,250	)
Distributions paid by consolidated partnership to affiliate non-controlling interest		(24,505	)		(19,361	)		(16,366	)
Contributions to consolidated partnership from affiliate non-controlling interest		1			3			9
Distributions paid by consolidated partnership to non-affiliate non-controlling interest		(32,687	)		(25,184	)		(19,928	)
Contributions to consolidated partnership from non-affiliate non-controlling interest		—			—			53,927
Distributions paid to members		(7,370	)		(1,985	)		(882	)

Net cash used in financing activities		(82,561	)		(46,527	)		(31,490	)

NET CHANGE IN CASH AND CASH EQUIVALENTS		887			21,015			959
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		31,184			10,169			9,210

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	32,071		$	31,184		$	10,169

SUPPLEMENTAL CASH FLOW INFORMATION:
CASH PAID FOR:
Cash paid for interest	$	15,160		$	15,229		$	15,960

Cash paid to taxing authorities	$	3,025		$	2,150		$	2,681

NON-CASH ACTIVITY:
Purchase of property, plant and equipment	$	9,364		$	—		$	—

Market value of common units issued to Long-Term Incentive Plan participants upon vesting	$	6,988		$	13,680		$	—

Common units of ARLP contributed by members and retired by ARLP	$	—		$	265		$	890

See notes to consolidated financial statements.

F-16

Index to Financial Statements

ALLIANCE RESOURCE MANAGEMENT GP, LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF MEMBERS’ CAPITAL (DEFICIENCY IN CAPITAL)

AND COMPREHENSIVE INCOME (LOSS)

FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003

(In thousands)


	Members’ Capital (Deficiency in Capital)			Unrealized Gain (Loss)			Minimum Pension Liability			Total Members’ Capital (Deficiency in Capital)
Balance at December 31, 2002	$	12,817		$	(150	)	$	(5,275	)	$	7,392
Net income		313			—			—			313
Unrealized gain		—			48			—			48
Minimum pension liability		—			—			1,486			1,486

Total comprehensive income		313			48			1,486			1,847
Distribution to Members		(882	)		—			—			(882	)
Members’ contribution		890			—			—			890
Warrior Coal purchase		(15,026	)		—			—			(15,026	)

Balance at December 31, 2003		(1,888	)		(102	)		(3,789	)		(5,779	)
Net income		3,437			—			—			3,437
Unrealized gain		—			48			—			48
Minimum pension liability		—			—			(1,333	)		(1,333	)

Total comprehensive income (loss)		3,437			48			(1,333	)		2,152
Distribution to Members		(1,985	)		—			—			(1,985	)
Members’ contribution		265			—			—			265

Balance at December 31, 2004		(171	)		(54	)		(5,122	)		(5,347	)

Net income		12,375			—			—			12,375
Unrealized loss		—			(14	)		—			(14	)
Minimum pension liability		—			—			(1,831	)		(1,831	)

Total comprehensive income (loss)		12,375			(14	)		(1,831	)		10,530
Distribution to Members		(7,370	)		—			—			(7,370	)

Balance at December 31, 2005	$	4,834		$	(68	)	$	(6,953	)	$	(2,187	)

See notes to consolidated financial statements.

F-17

Index to Financial Statements

ALLIANCE RESOURCE MANAGEMENT GP, LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003

1. ORGANIZATION AND PRESENTATION

Alliance Resource Management GP, LLC (“ARM GP”), a Delaware limited liability company, was formed in June 1999 to be the managing general partner of Alliance Resource Partners, L.P. ARM GP’s primary business purpose is to manage the affairs and operations of Alliance Resource Partners, L.P. and its subsidiaries (collectively referred to as “ARLP”). ARLP is a publicly traded Delaware limited partnership listed on the Nasdaq National Market under the symbol “ARLP.” ARLP conducts substantially all of its business through its wholly owned subsidiary, Alliance Resource Operating Partners, L.P. (the “Intermediate Partnership”). ARLP and the Intermediate Partnership were formed in May 1999 to acquire, own and operate the majority of the coal operations of Alliance Resource Holdings, Inc., a Delaware corporation (“ARH”) (formerly known as Alliance Coal Corporation).

The Delaware limited partnerships, limited liability companies and corporation that comprise ARLP and its subsidiaries are as follows: Alliance Resource Partners, L.P., Alliance Resource Operating Partners, L.P., Alliance Coal, LLC (the holding company for operations), Alliance Land, LLC, Alliance Properties, LLC, Alliance Service, Inc., Backbone Mountain, LLC, Excel Mining, LLC, Gibson County Coal, LLC, Hopkins County Coal, LLC, MC Mining, LLC, Mettiki Coal, LLC, Mettiki Coal (WV), LLC, Mt. Vernon Transfer Terminal, LLC, Penn Ridge Coal, LLC, Pontiki Coal, LLC, Tunnel Ridge, LLC, Warrior Coal, LLC, Webster County Coal, LLC, and White County Coal, LLC.

Unless the context requires otherwise, references to “we”, “us”, “our” or the “Company” within these notes shall mean ARM GP and its consolidated subsidiaries, which include ARLP and its subsidiaries.

ARM GP owns a 0.99% general partner interest in ARLP, a 1.0001% general partner interest in the Intermediate Partnership, and a 0.001% managing interest in Alliance Coal, LLC, the operating subsidiary. In addition, ARM GP owns all of the “Incentive Distribution Rights” provided for in the ARLP Second Amended and Restated Agreement of Limited Partnership (the “ARLP Partnership Agreement”), which entitles it to receive increasing percentages up to 48% of any cash distributed by ARLP beginning with cash distributed in excess of $0.275 per unit in any quarter (Note 11) together with cash distributed by ARLP to ARM GP for its combined 2% general partner interest.

At December 31, 2005, Alliance Management Holdings, LLC (“AMH”) and AMH II, LLC (“AMH II”) owned 25.9% and 74.1%, respectively, of the members’ interest of ARM GP. AMH and AMH II are collectively referred to as the “Members” and are owned by management of ARM GP and ARLP. The 74.1% member’s interest owned by AMH II was previously owned by entities controlled by The Beacon Group, LP, a Delaware limited partnership, which together with its subsidiaries and affiliates, was a private investment and advisory partnership based in New York City with specific expertise in the energy industry. AMH II purchased The Beacon Group’s interest in ARM GP effective May 9, 2002, for $4.8 million in a business combination using the purchase method of accounting. The purchase price was allocated to the ARM GP assets acquired and the liabilities assumed based on their fair values.

At December 31, 2005, AMH and AMH II also owned a limited partner interest in ARLP of 19,522 and 220,484 common units, respectively. AMH and AMH II’s limited partner interest in ARLP is included in the affiliate portion of non-controlling interest for consolidated financial statement presentation purposes.

Alliance Resource GP, LLC (the “Special GP”) owns a 0.01% general partner interest in ARLP and a 0.01% general partner interest in the Intermediate Partnership. Alliance Resource GP is a wholly-owned subsidiary of ARH. At December 31, 2005, Alliance Resource GP also owns a 41.8% limited partner interest in ARLP that is

F-18

Index to Financial Statements

ALLIANCE RESOURCE MANAGEMENT GP, LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003

attributable to its ownership of 15,310,622 common units of ARLP. Alliance Resource GP’s ownership in ARLP is included in the affiliate portion of the non-controlling interest for consolidated financial statement presentation purposes.

ARH is a wholly-owned subsidiary of Alliance Resource Holdings II, Inc. (“ARH II”), a Delaware corporation formed in May 2002 and owned by management of ARM GP and ARLP.

On February 14, 2003, ARLP acquired Warrior Coal, LLC (“Warrior Coal”) (Note 3). Because the Warrior Coal acquisition was between entities under common control, the acquisition was recorded at historical cost in a manner similar to that used in a pooling of interests.

The number of reconciling items between our consolidated financial statements and those of ARLP are few. The primary differences between our consolidated balance sheet and that of ARLP are non-controlling interest in our net assets by the limited partners of ARLP, the elimination of our investment in ARLP with our underlying partner’s capital account in ARLP and the reclassification of the majority of ARLP’s due to affiliates liabilities to employee benefits accruals on ARM GP. The difference in consolidated net income is primarily attributable to non-controlling interest in consolidated ARLP net income resulting from the allocation of a significant portion of our consolidated earnings to the limited partners of ARLP.

We have not included earnings per share as we do not have outstanding shares, rather our membership interests are based on ownership percentages.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Estimates—The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures in the consolidated financial statements. Actual results could differ from those estimates.

Fair Value of Financial Instruments—The carrying amounts for accounts receivable, marketable securities, and accounts payable approximate fair value because of the short maturity of those instruments. At December 31, 2005 and 2004, the estimated fair value of long-term debt was approximately $176.3 million and $197.3 million, respectively. The fair value of long-term debt is based on interest rates that management believes are currently available to the Company for issuance of debt with similar terms and remaining maturities.

Cash and Cash Equivalents—Cash and cash equivalents include cash on hand and on deposit, including highly liquid investments with maturities of three months or less.

Cash Management—The Company has presented book overdrafts of $10,526,000 and $2,192,000 at December 31, 2005 and 2004, respectively, in accounts payable in the consolidated balance sheets.

Marketable Securities—The Company currently classifies all marketable securities as available-for-sale securities. At December 31, 2005 and 2004, the cost of marketable securities is reported at fair value with unrealized gains and losses reported as a component of Members’ capital until realized. The Company has restricted investments of $1,858,000 and $1,816,000 at December 31, 2005 and 2004, respectively, which are included in other assets in the consolidated balance sheets. The restricted marketable securities are held in escrow and secure reclamation bonds (Note 6).

F-19

Index to Financial Statements

ALLIANCE RESOURCE MANAGEMENT GP, LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003

Inventories—Coal inventories are stated at the lower of cost or market on a first-in, first-out basis. Supply inventories are stated at the lower of cost or market on an average cost basis.

Property, Plant and Equipment—Additions and replacements constituting improvements are capitalized. Maintenance, repairs, and minor replacements are expensed as incurred. Depreciation and amortization are computed principally on the straight-line method based upon the estimated useful lives of the assets or the estimated life of each mine, whichever is less ranging from 2 to 13 years. Depreciable lives for mining equipment and processing facilities range from 2 to 13 years. Depreciable lives for land and land improvements and depletable lives for mineral rights range from 5 to 13 years. Depreciable lives for buildings, office equipment and improvements range from 2 to 13 years. Gains or losses arising from retirements are included in current operations. Depletion of mineral rights is provided on the basis of tonnage mined in relation to estimated recoverable tonnage. At December 31, 2005 and 2004, land and mineral rights include $3,147,000 and $2,030,000, respectively, representing the carrying value of coal reserves attributable to properties where the Company is not currently engaged in mining operations or leasing to third parties, and therefore, the coal reserves are not currently being depleted. Management believes that the carrying value of these reserves will be recovered.

Mine Development Costs—Mine development costs are capitalized until production, other than production incidental to the mine development process, commences and are amortized over the estimated life of the mine. Mine development costs represent costs that establish access to mineral reserves and include costs associated with sinking or driving shafts and underground drifts, permanent excavations, roads and tunnels.

Long-Lived Assets—The Company reviews the carrying value of long-lived assets and certain identifiable intangibles whenever events or changes in circumstances indicate that the carrying amount may not be recoverable based upon estimated undiscounted future cash flows. The amount of an impairment is measured by the difference between the carrying value and the fair value of the asset.

In June 2003, the Company idled the active surface mine at its Hopkins County Coal, LLC (“Hopkins County Coal”) mining complex in response to soft market demand. In October 2004, the surface mine was re-opened in response to incremental sales opportunities from existing customers as well as strong market demand for Illinois Basin region coal. While the Hopkins County Coal mining complex was idled, the Company evaluated the recoverability of the appropriate asset group and concluded that there was no impairment loss.

Advance Royalties—Rights to coal mineral leases are often acquired and/or maintained through advance royalty payments. Management assesses the recoverability of royalty prepayments based on estimated future production and capitalizes these amounts accordingly. Royalty prepayments expected to be recouped within one year are classified as a current asset. As mining occurs on those leases, the royalty prepayments are included in the cost of mined coal. Royalty prepayments estimated to be non-recoverable are expensed.

In March 2004, the Financial Accounting Standards Board (“FASB”) issued Emerging Issues Task Force (“EITF”) Issue No. 04-2, Whether Mineral Rights Are Tangible or Intangible Assets. In this Issue, the Task Force reached the consensus that mineral rights are tangible assets and amended Statement of Financial Accounting Standards (“SFAS”) No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets, which previously classified mineral rights as intangible assets. Consistent with other extractive industry entities, the Company has historically included its related assets as tangible; therefore, there was no material effect on the Company’s consolidated financial statements upon adoption.

Coal Supply Agreements—A portion of the acquisition costs from a business combination in 1996 was allocated to coal supply agreements. This allocated cost is being amortized on the basis of coal shipped in

F-20

Index to Financial Statements

ALLIANCE RESOURCE MANAGEMENT GP, LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003

relation to total coal to be supplied during the respective coal supply agreement terms. The amortization periods ended December 2005. Accumulated amortization for coal supply agreements was $38,463,000 and $35,740,000 at December 31, 2005 and 2004, respectively. The aggregate amortization expense recognized for coal supply agreements was $2,723,000, $2,722,000 and $2,722,000 for the years ended December 31, 2005, 2004 and 2003, respectively.

Reclamation and Mine Closing Costs—The liability for the estimated cost of future mine reclamation and closing procedures is recorded on a present value basis when incurred and the associated cost is capitalized by increasing the carrying amount of the related long-lived asset. Those costs relate to permanently sealing portals at underground mines and to reclaiming the final pits and support acreage at surface mines. Other costs common to both types of mining are related to removing or covering refuse piles and settling ponds, and dismantling preparation plants, other facilities and roadway infrastructure.

Workers’ Compensation and Pneumoconiosis (“Black Lung”) Benefits—The Company is self-insured for workers’ compensation benefits, including black lung benefits. The Company accrues a workers’ compensation liability for the estimated present value of workers’ compensation and black lung benefits based on actuarial valuations.

Income Taxes—ARLP is not a taxable entity for federal or state income tax purposes; the tax effect of its activities accrues to the unitholders. Although publicly traded partnerships as a general rule will be taxed as corporations, ARLP qualifies for an exemption because at least 90% of its income consists of qualifying income. Net income for financial statement purposes may differ significantly from taxable income reportable to unitholders as a result of differences between the tax bases and financial reporting bases of assets and liabilities and the taxable income allocation requirements under the ARLP Partnership Agreement. ARLP’s subsidiary, Alliance Service, Inc. (“Alliance Service”), is subject to federal and state income taxes. Prior to ARLP’s acquisition of Warrior Coal, the financial results of Warrior Coal were subject to federal and state income taxes. The federal and state income taxes associated with Warrior Coal’s financial results from January 26, 2001, the date of ARH Warrior Holdings, Inc.’s (“ARH Warrior Holdings”) acquisition of Warrior Coal, to February 14, 2003, the date of ARLP’s acquisition of Warrior Coal, are included in income taxes. ARLP’s tax counsel has provided an opinion that ARLP, the Intermediate Partnership and the holding company will each be treated as a partnership. However, as is customary, no ruling has been or will be requested from the IRS regarding ARLP’s classification as a partnership for federal income tax purposes. The Company’s tax basis in net assets exceeded the book basis in net assets by $130 million and $125.8 million at December 31, 2005 and 2004, respectively.

Revenue Recognition—Revenues from coal sales are recognized when title passes to the customer as the coal is shipped. Some coal supply agreements provide for price adjustments based on variations in quality characteristics of the coal shipped. In certain cases, a customer’s analysis of the coal quality is binding and the results of the analysis are received on a delayed basis. In these cases, the Company estimates the amount of the quality adjustment and adjusts the estimate to actual when the information is provided by the customer. Historically such adjustments have not been material. Non-coal sales revenues primarily consist of rental and service fees associated with agreements to host and operate a third-party coal synfuel facility and to assist with the coal synfuel marketing and other related services. These non-coal sales revenues are recognized as the services are performed. Transportation revenues are recognized in connection with the Company incurring the corresponding costs of transporting the coal to customers through third-party carriers since the Company is directly reimbursed for these costs through customer billings.

F-21

Index to Financial Statements

ALLIANCE RESOURCE MANAGEMENT GP, LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003

Common Unit-Based Compensation—The Company accounts for the compensation expense of the non-vested restricted common units granted under the Long-Term Incentive Plan (“LTIP”) (Note 14) using the intrinsic value method prescribed in Accounting Principles Board Opinion (“APB”) No. 25, Accounting for Stock Issued to Employees and the related FASB Interpretation No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans. Compensation cost for the restricted Common Units is recorded on a pro-rata basis, as appropriate given the “cliff vesting” nature of the grants, based upon the current market value of ARLP’s Common Units at the end of each period.

Consistent with the disclosure requirements of SFAS No. 148, Accounting for Stock-Based Compensation Transition and Disclosure, an amendment of SFAS No. 123, Accounting for Stock-Based Compensation, the following table demonstrates that compensation cost for the non-vested restricted units granted under the LTIP is the same under the intrinsic value method and the provisions of SFAS No. 123 (in thousands, except per unit data):


	Years Ended December 31,
	2005			2004			2003
Net income, as reported	$	12,375		$	3,437		$	313

Add: compensation expenses related to LTIP units included in reported net income, excluding the non-controlling interest portion		634			877			152

Deduct: compensation expense related to LTIP units determined under fair value method for all awards, excluding the non-controlling interest portion		(634	)		(877	)		(152	)

Net income, pro forma	$	12,375		$	3,437		$	313

The total accrued liability associated with the LTIP as of December 31, 2005 and 2004 was $6,517,000 and $10,013,000, respectively, and is reported separately in current liabilities and combined with other long-term liabilities contained in the consolidated balance sheets. See New Accounting Standards discussion below concerning the impact of SFAS No. 123R, Share-Based Payment, on accounting for the LTIP.

New Accounting Standards—In November 2004, the FASB issued SFAS No. 151, Inventory Costs. SFAS No. 151 is an amendment of Accounting Research Bulletin (“ARB”) No. 43, Chapter 4, Paragraph 5 that deals with inventory pricing. SFAS No. 151 clarifies the accounting for abnormal amounts of idle facility expenses, freight, handling costs, and spoilage. Under previous guidance, Chapter 4, Paragraph 5 of ARB No. 43, items such as idle facility expense, excessive spoilage, double freight, and re-handling costs might be considered to be so abnormal, under certain circumstances, as to require treatment as current period charges. This Statement eliminates the criterion of “so abnormal” and requires that those items be recognized as current period charges. Also, SFAS No. 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for the Company on January 1, 2006. The Company believes that its adoption will not have any significant impact on the Company’s financial position, results of operations or cash flows.

In December 2004, the FASB issued SFAS No. 123R, which is a revision of SFAS No. 123, and supersedes APB No. 25. Among other items, SFAS No. 123R eliminates the use of APB No. 25 and the intrinsic value method of accounting, and requires companies to recognize in their financial statements the cost of employee services received in exchange for awards of equity instruments, based on the fair value of those awards on the grant date.

F-22

Index to Financial Statements

ALLIANCE RESOURCE MANAGEMENT GP, LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003

In April 2005, the Securities and Exchange Commission issued a rule that amended the implementation date for the Company’s adoption of SFAS No. 123R from the third quarter of 2005 to the first quarter of 2006. SFAS No. 123R permits companies to adopt its requirements using either a “modified prospective” method, or a “modified retrospective” method. Under the “modified prospective” method, compensation cost is recognized in the financial statements beginning with the effective date, based on the requirements of SFAS No. 123R, of all share-based payments granted after that date, and based on the requirements of SFAS No. 123 for all unvested awards granted prior to the effective date of SFAS No. 123R. Under the “modified retrospective” method, the requirements are the same as under the “modified prospective” method, but also permits entities to restate financial statements of previous periods based on pro forma disclosures made in accordance with SFAS No. 123. The Company adopted SFAS No. 123R effective on January 1, 2006. The Company used the modified prospective method of adoption provided under SFAS No. 123R and, therefore, will not restate prior period results. Because the Company has previously expensed share-based payments using the current market value of ARLP’s Common Units at the end of each period, the adoption of SFAS No. 123R will not have a material impact on the Company’s consolidated results of operations.

The intrinsic value previously recognized at December 31, 2005 essentially equals the fair value at January 1, 2006 and, therefore, no incremental compensation cost will be recognized upon adoption of SFAS 123R. As required by SFAS No. 123R, the fair value will be reduced for expected forfeitures, to the extent compensation cost has been previously recognized and this amount will be recognized as a cumulative effect of accounting change. Because the share-based compensation will be settled by delivery of Common Units, except for the minimum statutory income tax withholding requirements, the previously recognized liability reflected separately in current liabilities and combined with other long-term liabilities in the consolidated balance sheet will be reclassified as non-controlling interest in consolidated partnership (“Non-Controlling Interest”) attributable to non-affiliates upon adoption of SFAS 123R (Note 14).

As permitted by SFAS No. 123, prior to January 1, 2006 the Company accounted for share-based payments to employees using the APB No. 25 intrinsic method and related FASB Interpretation No. 28 based upon the current market value of ARLP’s Common Units at the end of each period. The Company has recorded compensation expense of $8,193,000, $20,320,000 and $7,687,000 for each of the three years ended December 31, 2005, 2004 and 2003, respectively.

In March 2005, the FASB issued EITF No. 04-6, Accounting for Stripping Costs in the Mining Industry and concluded that stripping costs incurred during the production phase of a mine are variable production costs that should be included in the costs of the inventory produced during the period that the stripping costs are incurred. EITF No. 04-6 does not address the accounting for stripping costs incurred during the pre-production phase of a mine. EITF No. 04-6 is effective for the first reporting period in fiscal years beginning after December 15, 2005 with early adoption permitted. The effect of initially applying this consensus would be accounted for in a manner similar to a cumulative-effect adjustment. Since the Company has historically adhered to the accounting principles similar to EITF No. 04-6 in accounting for stripping costs incurred at the Company’s surface operation, the Company’s adoption of EITF No. 04-6, on January 1, 2006, did not have a material impact on its consolidated financial statements.

In April 2005, the FASB adopted Financial Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations (“FIN 47”). FIN 47 clarifies that the term “conditional asset obligation” from SFAS No. 143, Accounting for Asset Retirement Obligations refers to a legal obligation to perform an asset retirement activity in which the timing or method of settlement is conditional on a future event and required the recognition of such conditional obligations even through uncertainty exists. The Partnership’s adoption of FIN 47 at December 31, 2005 did not affect the Partnership’s consolidated financial statements.

F-23

Index to Financial Statements

ALLIANCE RESOURCE MANAGEMENT GP, LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003

Reclassifications—Certain reclassifications have been made to the 2004 balance sheet presentation of the accrued pension benefit and other current liabilities to conform to the 2005 classifications. For 2004 and 2003 cash flow presentation, prepaid expenses and other assets are reported separately to conform to the 2005 presentation.

3. ACQUISITIONS

Tunnel Ridge

In January 2005, ARLP acquired 100% of the limited liability company member interests of Tunnel Ridge, LLC (“Tunnel Ridge”) for approximately $500,000 and the assumption of reclamation liabilities from ARH, a company owned by management of ARLP. Tunnel Ridge controls through a coal lease agreement with the Special GP, approximately 9,400 acres of land located in Ohio County, West Virginia and Washington County, Pennsylvania containing an estimated 70 million tons of high-sulfur coal in the Pittsburgh No. 8 coal seam. Under the terms of the coal lease, beginning on January 1, 2005, Tunnel Ridge has paid and will continue to pay the Special GP an advance minimum royalty of $3.0 million per year. The advance royalty payments are fully recoupable against earned royalties (Note 17).

The Tunnel Ridge transaction described above was a related-party transaction and, as such, was reviewed by the Board of Directors of ARM GP and its Conflicts Committee. Based upon these reviews, the Conflicts Committee determined that these transactions reflect market-clearing terms and conditions customary in the coal industry. As a result, the Board of Directors of ARM GP and its Conflicts Committee approved the Tunnel Ridge transaction as fair and reasonable to ARLP and its limited partners.

Warrior Coal

On February 14, 2003, Warrior Coal was acquired from an affiliate, ARH Warrior Holdings, a subsidiary of ARH, pursuant to an Amended and Restated Put and Call Option Agreement (“Put/Call Agreement”). Warrior Coal purchased the capital stock of Roberts Bros. Coal Co., Inc., Warrior Coal Mining Company, Warrior Coal Corporation and certain assets of Christian Coal Corp. and Richland Mining Co., Inc. in January 2001. ARM GP originally declined the opportunity to purchase these assets as ARLP had previously committed to major capital expenditures at two existing operations. As a condition to not exercising its right of first refusal, ARLP requested that ARH Warrior Holdings enter into a put and call arrangement for Warrior Coal. ARH Warrior Holdings and ARLP, with the approval of the Conflicts Committee of ARM GP, entered into the Put/Call Agreement in January 2001. Concurrently, ARH Warrior Holdings acquired Warrior Coal in January 2001 for $10.0 million.

The Put/Call Agreement preserved the opportunity for ARLP to acquire Warrior Coal during a specified time period. Under the terms of the Put/Call Agreement, ARH Warrior Holdings exercised its put option requiring ARLP to purchase Warrior Coal at a put option price of approximately $12.7 million.

The option provisions of the Put/Call Agreement were subject to certain conditions (unless otherwise waived), including, among others, (a) the non-occurrence of a material adverse change in the business and financial condition of Warrior Coal, (b) the prohibition of any dividends or other distributions to Warrior Coal’s shareholders, (c) the maintenance of Warrior Coal’s assets in good working condition, (d) the prohibition on the sale of any equity interest in Warrior Coal except for the options contained in the Put/Call Agreement, and (e) the prohibition on the sale or transfer of Warrior Coal’s assets except those made in the ordinary course of its business.

The Put/Call Agreement option prices reflected negotiated sale and purchase amounts that both parties determined would allow each party to satisfy acceptable minimum investment returns in the event either the put or call options were exercised. In January 2001 and in December 2002, ARLP developed financial projections for

F-24

Index to Financial Statements

ALLIANCE RESOURCE MANAGEMENT GP, LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003

Warrior Coal based on due diligence procedures it customarily performs when considering the acquisition of a coal mine. The assumptions underlying the financial projections made by ARLP for Warrior Coal included, among others, (a) annual production levels ranging from 1.5 million to 1.8 million tons, (b) coal prices at or below the then current coal prices and (c) a discount rate of 12 percent. Based on these financial projections, as of the date of the acquisition and at December 31, 2002 and 2001, ARLP believed that the fair value of Warrior Coal was equal to or greater than the put option exercise price.

The put option price of $12.7 million was paid to ARH Warrior Holdings in accordance with the terms of the Put/Call Agreement. In addition, ARLP repaid Warrior Coal’s borrowings of $17.0 million under the revolving credit agreement between the Special GP and Warrior Coal. The primary borrowings under the revolving credit agreement financed new infrastructure capital projects at Warrior Coal that have contributed to improved productivity and significantly increased capacity. ARLP funded the Warrior Coal acquisition through a portion of the proceeds received from the issuance of 4,500,000 Common Units (Note 1). Because the Warrior Coal acquisition was between entities under common control, it has been accounted for at historical cost in a manner similar to that used in a pooling of interests.

Under the terms of the Put/Call Agreement, the ARLP assumed certain other obligations, including a mineral lease and sublease with SGP Land, LLC (“SGP Land”), a subsidiary of the Special GP, covering coal reserves that have been and will continue to be mined by Warrior Coal. The terms and conditions of the mineral lease and sub-lease remained unchanged (Note 17).

Lodestar

On July 15, 2003, Hopkins County Coal executed an Asset Purchase Agreement with Lodestar Energy, Inc. (“Lodestar”), a coal company operating in Chapter 7 bankruptcy proceedings. Concurrently, Hopkins County Coal entered into various other agreements (collectively, the Asset Purchase Agreement and the various other agreements are referred to as the “Lodestar Agreements”) with several parties, including the Kentucky Environmental and Public Protection Cabinet (“Cabinet”) and Frontier Insurance Company (“Frontier”). Closing of the Lodestar Agreements was subject to the resolution of numerous contingencies and/or conditions. Under the terms of the relevant Lodestar Agreements, Hopkins County Coal principally acquired a mining pit, created by Lodestar’s mining activities. The mining pit will be used for refuse disposal by ARLP’s Webster County Coal, LLC’s Dotiki mine. The purchase price included a nominal monetary amount and the assumption of remedial reclamation activities under the various mining permits acquired by Hopkins County Coal from Lodestar. The Cabinet accepted these remedial activities in lieu of certain solid waste closure requirements applicable to residual landfills. Hopkins County Coal also received $2.1 million from Frontier in exchange for the assumption of the remedial activities associated with the mining pit. As a result of closing the Lodestar Agreements on June 2, 2004, Hopkins County Coal recorded the fair value of the initial asset retirement obligation of approximately $4.1 million with a corresponding asset that was reduced by the $2.1 million of cash received.

4. MINE FIRE INCIDENTS

MC Mining Mine Fire

On December 26, 2004, MC Mining, LLC’s Excel No. 3 mine was temporarily idled following the occurrence of a mine fire (the “MC Mining Fire Incident”). The fire was discovered by mine personnel near the bottom of the Excel No. 3 mine slope late in the evening of December 25, 2004. Under a firefighting plan developed by MC Mining, in cooperation with mine emergency response teams from the U.S. Department of Labor’s Mine Safety and Health Administration (“MSHA”) and Kentucky Office of Mine Safety and Licensing, the four portals at the Excel No. 3 mine were temporarily capped to deprive the fire of oxygen. A series of boreholes was then drilled into the mine from the surface, and nitrogen gas and foam were injected through the boreholes into the fire area to further suppress the fire. As a result of these efforts, the mine atmosphere was

F-25

Index to Financial Statements

ALLIANCE RESOURCE MANAGEMENT GP, LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003

rendered substantially inert, or without oxygen, and the Excel No. 3 mine fire was effectively suppressed. MC Mining then began construction of temporary and permanent barriers designed to completely isolate the mine fire area. Once the construction of the permanent barriers was completed, MC Mining began efforts to repair and rehabilitate the Excel No. 3 mine infrastructure. On February 21, 2005, the repair and rehabilitation efforts had progressed sufficiently to allow initial resumption of production. Coal production has returned to near normal levels, but continues to be adversely impacted by inefficiencies attributable to or associated with the MC Mining Fire Incident.

The Company maintains commercial property (including business interruption and extra expense) insurance policies with various underwriters, which policies are renewed annually in October and provide for self-retention and various applicable deductibles, including certain monetary and/or time element forms of deductibles (collectively, the “2005 Deductibles”) and 10% co-insurance (“2005 Co-Insurance”). The Company believes such insurance coverage will cover a substantial portion of the total cost of the disruption to MC Mining’s operations. However, concurrent with the renewal of the Company’s commercial property (including business interruption) insurance policies concluded on October 31, 2005, MC Mining confirmed with the current underwriters of the commercial property insurance coverage that any negotiated settlement of the losses arising from or in connection with the MC Mining Fire Incident would not exceed $40.0 million (inclusive of co-insurance and deductible amounts). Until the claim is resolved ultimately, either through the claim adjustment process, settlement, or litigation, with the applicable underwriters, the Company can make no assurance of the amount or timing of recovery of insurance proceeds.

The Company made an initial estimate of certain costs primarily associated with activities relating to the suppression of the fire and the initial resumption of operations. Operating expenses for 2004 were increased by $4.1 million to reflect an initial estimate of certain minimum costs attributable to the MC Mining Fire Incident that are not reimbursable under the Company’s insurance policies due to the application of the 2005 Deductibles and 2005 Co-Insurance.

Following the initial two submittals by the Company to a representative of the underwriters of its estimate of the expenses and losses (including business interruption losses) incurred by MC Mining and other affiliates arising from and in connection with the MC Mining Fire Incident (the “MC Mining Insurance Claim”), on September 15, 2005, the Company filed a third estimate of its expenses and losses, with an update through July 31, 2005. Partial payments of $12.2 million were received in 2005, which are net of the 2005 Deductibles and 2005 Co-Insurance. The accounting for these partial payments and future payments, if any, made to the Company by the underwriters will be subject to the accounting methodology described below. On March 23, 2006, the Company filed a third partial proof of loss for the period through July 31, 2005 in the amount of $4.0 million. The Company continues to evaluate its potential insurance recoveries under the applicable insurance policies in the following areas:

1. Fire Brigade/Extinguishing/Mine Recovery Expense; Expenses to Reduce Loss; Debris Removal Expenses; Demolition and Increased Cost of Construction; Expediting Expenses; and Extra Expenses incurred as a result of the fire—These expenses and other costs (e.g. professional fees) associated with extinguishing the fire, reducing the overall loss, demolition of certain property and removal of debris, expediting the recovery from the loss, and extra expenses that would not have been incurred by the Company, but for the MC Mining Fire Incident, are being expensed as incurred with related actual and/or estimated insurance recoveries recorded as they are considered to be probable, up to the amount of the actual cost incurred.

2. Damage to MC Mining mine property—The net book value of property destroyed of $154,000, was written off in the first quarter of 2005 with a corresponding amount recorded as an estimated insurance recovery, since such recovery is considered probable. Any insurance proceeds from the claims relating to

F-26

Index to Financial Statements

ALLIANCE RESOURCE MANAGEMENT GP, LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003

the MC Mining mine property (other than amounts relating to the matters discussed in 1. above) that exceed the net book value of such damaged property would result in a gain. Any gain will be recorded when the MC Mining Insurance Claim is resolved and/or proceeds are received.

3. MC Mining mine business interruption losses—The Company has submitted to a representative of the underwriters a business interruption loss analysis for the period of December 24, 2004 through July 31, 2005. Expenses associated with business interruption losses are expensed as incurred, and estimated insurance recoveries of such losses are recognized to the extent such recoveries are considered to be probable, up to the actual amount incurred. Recoveries in excess of actual costs incurred will be recorded as gains when the MC Mining Insurance Claim is resolved and/or proceeds are received.

In 2005, pursuant to the accounting methodology described above, of the $12.2 million of partial payments received, the Company recorded, as an offset to operating expenses, $10.7 million of which amount represents the current estimated insurance recovery of actual costs incurred, net of the 2005 Deductibles and 2005 Co-Insurance. The Company continues to discuss the MC Mining Insurance Claim and the determination of the total claim amount with representatives of the underwriters. The MC Mining Insurance Claim will continue to be developed as additional information becomes available and the Company has completed its assessment of the losses (including the methodologies associated therewith) arising from or in connection with the MC Mining Fire Incident. At this time, based on the magnitude and complexity of the MC Mining Insurance Claim, the Company is unable to reasonably estimate the total amount of the MC Mining Insurance Claim as well as its exposure, if any, for amounts not covered by the Company’s insurance program.

Dotiki Mine Fire

On February 11, 2004, Webster County Coal, LLC’s (“Webster County Coal”) Dotiki mine was temporarily idled for a period of twenty-seven calendar days following the occurrence of a mine fire that originated with a diesel supply tractor (the “Dotiki Fire Incident”). As a result of the firefighting efforts of MHSA, Kentucky Department of Mines and Minerals, and Webster County Coal personnel, Dotiki successfully extinguished the fire and totally isolated the affected area of the mine behind permanent barriers. Initial production resumed on March 8, 2004. For the Dotiki Fire Incident, the Company had commercial property insurance that provided coverage for damage to property destroyed, interruption of business operations, including profit recovery, and expenditures incurred to minimize the period and total cost of disruption to operations.

On September 10, 2004, the Company filed a third and final proof of loss with the applicable insurance underwriters reflecting a settlement of all expenses, losses and claims incurred by Webster County Coal and other affiliates arising from or in connection with the Dotiki Fire Incident in the aggregate amount of $27.0 million, inclusive of a $1.0 million self-retention of initial loss, a $2.5 million deductible and 10% co-insurance.

During 2004, the Company recorded as an offset to operating expenses $5.9 million and a combined net gain of approximately $15.2 million for damage to the property destroyed, interruption of business operations (including profit recovery), and extra expenses incurred to minimize the period and total cost of disruption to operations associated with the Dotiki Fire Incident.

F-27

Index to Financial Statements

ALLIANCE RESOURCE MANAGEMENT GP, LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003

5. VERTICAL BELT FAILURE

On June 14, 2005, White County Coal, LLC’s (“White County Coal”) Pattiki mine was temporarily idled following the failure of the vertical conveyor belt system ( the “Vertical Belt Incident”) used in conveying raw coal out of the mine. White County Coal surface personnel detected a failure of the vertical conveyor belt on June 14, 2005 and immediately shut down operation of all underground conveyor belt systems. On July 20, 2005, White County Coal’s efforts to repair the vertical belt system had progressed sufficiently to allow it to perform a full test of the vertical belt system. After evaluating the test results, the Pattiki mine resumed initial production operations on July 21, 2005. Production of raw coal has returned to levels that existed prior to the occurrence of the Vertical Belt Incident. The majority of repairs to the vertical belt conveyor system and ancillary equipment have been completed. The Company’s operating expenses were increased by $2.9 million for the year ended December 31, 2005, to reflect the estimated direct expenses and costs attributable to the Vertical Belt Incident, which estimate included a $1.3 million retirement of the damaged vertical belt equipment. The Company has not identified currently any significant additional costs compared to the original cost estimates. The Company is conducting an analysis of a number of possible alternatives to mitigate the losses arising from the Vertical Belt Incident. This analysis will include a review of the Vertical Belt System Design, Supply, and Oversight of Installation Contract (“Installation Contract”), dated December 7, 2000, between White County Coal, LLC and Lake Shore Mining, Inc. Until such analysis is completed, however, the Company can make no assurances of the amount or timing of recoveries, if any. Concurrent with the renewal of the Company’s commercial property (including business interruption) insurance policies concluded on October 31, 2005, White County Coal confirmed with the current underwriters of the commercial property insurance coverage that it would not file a formal insurance claim for losses arising from or in connection with the Vertical Belt Incident.

6. MARKETABLE SECURITIES AND RESTRICTED CASH

Marketable securities include Federal home loan discount notes and banker’s acceptances. At December 31, 2004, the cost of the banker’s acceptances approximated fair value and no effect of unrealized gains (losses) is reflected in Members’ capital. There were no bankers acceptances outstanding at December 31, 2005. The Federal home loan discount notes had a cumulative unrealized loss reflected in Members’ capital of $68,000 and $54,000 at December 31, 2005 and 2004, respectively.

Marketable securities consist of the following at December 31, (in thousands):


	2005		2004
Federal home loan discount notes	$	49,242	$	39,414
Bankers acceptances		—		9,983

Total unrestricted marketable securities	$	49,242	$	49,397

Restricted cash and cash equivalents	$	1,858	$	1,816

Total restricted cash and cash equivalents (included in other long-term assets)	$	1,858	$	1,816

F-28

Index to Financial Statements

ALLIANCE RESOURCE MANAGEMENT GP, LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003

7. INVENTORIES

Inventories consist of the following at December 31, (in thousands):


	2005		2004
Coal	$	6,538	$	4,822
Supplies		10,732		9,017

	$	17,270	$	13,839

8. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following at December 31, (in thousands):


	2005		2004
Mining equipment and processing facilities	$	461,005	$	405,437
Land and mineral rights		26,694		22,281
Buildings, office equipment and improvements		57,943		46,281
Construction in progress		29,699		9,257
Mine development costs		59,745		43,212

		635,086		526,468
Less accumulated depreciation, depletion and amortization		(330,672)		(292,900)

	$	304,414	$	233,568

Mine development costs at December 31, 2004 are separately stated to conform with the December 31, 2005 presentation.

9. LONG-TERM DEBT

Long-term debt consists of the following at December 31, (in thousands):


	2005		2004
Senior notes	$	162,000	$	180,000
Less current maturities		(18,000)		(18,000)

	$	144,000	$	162,000

The Intermediate Partnership has $162.0 million principal amount of 8.31% senior notes due August 20, 2014, payable in nine remaining equal annual installments of $18.0 million with interest payable semiannually. On August 22, 2003, the Intermediate Partnership completed an $85.0 million revolving credit facility which expires September 30, 2006. The interest rate on the revolving credit facility is based on either the (i) London Interbank Offered Rate or (ii) the “Base Rate,” which is equal to the greater of the JPMorgan Chase Prime Rate or the Federal Funds Rate plus ¹/2 of 1%, plus, in either case, an applicable margin. The Company incurred certain costs aggregating $1.2 million associated with the revolving credit facility. These costs have been deferred and are being amortized as a component of interest expense over the term of the revolving credit facility. In March 2005, the Intermediate Partnership entered into Amendment No. 1 to the credit facility to increase the maximum capital expenditures from $50.2 and $50.6 million for the years ended December 31, 2006 and 2005, respectively, to $125.0 million for each of the years ended December 31, 2006 and 2005. The Company had no borrowings outstanding under the revolving credit facility at December 31, 2005. Letters of credit can be issued under the revolving credit facility not to exceed $30.0 million; outstanding letters of credit reduce amounts available under the revolving credit facility. At December 31, 2005, the Company had letters of

F-29

Index to Financial Statements

ALLIANCE RESOURCE MANAGEMENT GP, LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003

credit of $9.0 million outstanding under the revolving credit facility to secure the Company’s obligations for reclamation liabilities and workers’ compensation benefits.

The senior notes and revolving credit facility are guaranteed by all of the subsidiaries of the Intermediate Partnership. The senior notes and revolving credit facility contain various restrictive and affirmative covenants, including the amount of distributions by the Intermediate Partnership and the incurrence of other debt exceeding $35.0 million. The senior note restrictions on distributions are consistent with the ARLP Partnership Agreement and the credit facility limit borrowings to fund distributions to $25.0. The senior note limitations on the amount of distributions by the Intermediate Partnership include maintaining defined levels of cash, meeting certain debt ratios and maintaining the absence of default or an event of default as defined in the senior note agreement. The Intermediate Partnership was in compliance with the covenants of both the revolving credit facility and senior notes at December 31, 2005.

The Company previously entered into and has maintained agreements with two banks to provide additional letters of credit in an aggregate amount of $25.0 million to maintain surety bonds to secure its obligations for reclamation liabilities and workers’ compensation benefits as statutorily required. At December 31, 2005, the Company had $24.8 million in letters of credit outstanding under these agreements. The Special GP guarantees the letters of credit (Note 17).

Aggregate maturities of long-term debt are payable as follows (in thousands):


Year Ending December 31,
2006	$	18,000
2007		18,000
2008		18,000
2009		18,000
2010		18,000
Thereafter		72,000

	$	162,000

10. NON-CONTROLLING INTEREST IN CONSOLIDATED PARTNERSHIP

Non-Controlling Interest represents third-party and related party ownership interests in the net assets of ARLP. The following table shows the components of Non-Controlling Interest at December 31, (in thousands):


	2005			2004
Affiliates of ARM GP	$	(112,050	)	$	(150,828	)
Non-Affiliates of ARM GP		270,090			211,441

	$	158,040		$	60,613

As a result of common control considerations, our consolidated financial information reflects the assets and liabilities from the consolidated financial information of ARLP, with any third-party and non-controlling affiliate investors’ ownership in our consolidated balance sheet amounts shown as Non-Controlling Interest.

The Non-Controlling Interest designated as Affiliates of ARM GP represents the limited partner interest in ARLP controlled through the common units held by the Special GP, AMH and AMH II and the Special GP’s 0.01% general partner interest in ARLP and 0.01% general partner interest in the Intermediate Partnership.

F-30

Index to Financial Statements

ALLIANCE RESOURCE MANAGEMENT GP, LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003

The Non-Controlling Interest designated as Non-Affiliates of ARM GP represents the limited partners interest in ARLP controlled through the common unit ownership, excluding the common units held by the Special GP and the common units held by AMH and AMH II.

The following table shows cash distributions paid to and contributions from each component of the Non-Controlling Interest for the periods indicated (in thousands):


	Years Ended December 31,
	2005		2004		2003
Distributions paid to non-controlling interests:
ARLP’s limited partners	$	57,179	$	44,536	$	36,286
Special GP		13		9		7

Contributions from non-controlling interests:
ARLP’s limited partners		—		—		53,927
Special GP		1		3		9

Distributions in the table above paid to Non-Controlling Interest represent ARLP’s quarterly distributions in accordance with the ARLP Partnership Agreement.

Contributions in the table above from ARLP’s limited partners in 2003 represent the combined net proceeds of $54.7 million from public offerings of common units in February and March 2003 less expenses of $0.8 million.

In addition to the cash distributions and contributions above, ARLP issued 165,426 and 462,252 common units valued at $7.0 and $13.7 million in November 2005 and 2004, respectively, pursuant to the Long-Term Incentive Plan (Note 13).

The Affiliates of ARM GP component of Non-Controlling Interest includes the $(158.7) million net impact at ARLP’s formation attributable to the Special GP’s contribution of net assets of $120.6 million offset by the Special GP’s retention of debt borrowing assumed by ARLP of $214.5 million and a distribution to the Special GP at the time of formation of $64.8 million.

11. DISTRIBUTIONS OF AVAILABLE CASH FROM THE CONSOLIDATED PARTNERSHIP

ARLP will distribute 100% of its available cash within 45 days after the end of each quarter to unitholders of record and to the General Partners. Available cash is generally defined as all cash and cash equivalents of ARLP on hand at the end of each quarter less reserves established by ARM GP in its reasonable discretion for future cash requirements. These reserves are retained to provide for the conduct of ARLP’s business, the payment of debt principal and interest and to provide funds for future distributions.

As quarterly distributions of available cash exceed the minimum quarterly distribution (“MQD”) and target distribution levels as established in the ARLP Partnership Agreement, holders of Incentive Distribution Rights receive distributions based on specified increasing percentages of the available cash that exceed the MQD and the target distribution levels. ARM GP owns all of the Incentive Distribution Rights provided for in the ARLP Partnership Agreement. The ARLP Partnership Agreement defines the MQD as $0.25 per unit ($1.00 per unit on an annual basis). The target distribution levels are based on the amounts of available cash from ARLP’s operating surplus distributed for a given quarter that exceed the MQD and common unit arrearages, if any.

F-31

Index to Financial Statements

ALLIANCE RESOURCE MANAGEMENT GP, LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003

Under the quarterly incentive distribution rights provisions of the ARLP Partnership Agreement, the holders of Incentive Distribution Rights are entitled to receive 15% of the amount ARLP distributes in excess of $0.275 per unit, 25% of the amount ARLP distributes in excess of $0.3125 per unit, and 50% of the amount ARLP distributes in excess of $0.375 per unit. These percentages include distribution provisions to ARM GP for its 2% general partner interest in ARLP. ARLP allocated to ARM GP incentive distributions of $9,397,000 and $1,828,000 for the years ended December 31, 2005 and 2004, respectively. In the Company’s consolidated financial statements, the incentive distributions are eliminated for presentation purposes. There were no incentive distributions allocated to ARM GP for the year ended December 31, 2003. The following table summarizes the quarterly per unit distributions paid during the respective quarter:


	Years Ended December 31,
	2005		2004		2003
First Quarter	$	0.3750	$	0.2813	$	0.2625
Second Quarter	$	0.3750	$	0.3125	$	0.2625
Third Quarter	$	0.4125	$	0.3250	$	0.2625
Fourth Quarter	$	0.4125	$	0.3250	$	0.2625

The ARLP Partnership Agreement provides for the conversion of the Subordinated Units into Common Units after meeting certain financial tests. ARLP satisfied, in two stages, the financial tests that resulted in the Subordinated Units being converted into Common Units. First, ARLP satisfied certain financial tests that provided for the early conversion of one-half of the Subordinated Units (i.e. 6,422,530 Subordinated Units) to Common units in September 2003. Second, ARLP satisfied the final conversion financial tests for converting the remaining Subordinated Units (i.e., 6,422,532 Subordinated Units) to Common Units in September 2004. The Board of Directors (and its Conflicts Committee) for ARM GP approved management’s determination that both the early conversion financial tests and the final conversion financial tests were met. As a result, one-half of the Subordinated Units converted into Common Units on November 15, 2003 and the remaining one-half of the Subordinated Units converted into Common Units on November 2, 2004.

On January 30, 2006, ARLP declared a quarterly distribution of $0.46 per unit, totaling approximately $21.1 million (which includes ARM GP’s portion of incentive distributions), payable on February 14, 2006, to all unitholders of record on February 6, 2006. Excluding ARM GP’s portion of the incentive distribution and general partner interest distribution of $3.9 and $0.4 million, respectively, the quarterly distribution to the non-controlling interest affiliates and non-affiliate totaled $16.8 million.

F-32

Index to Financial Statements

ALLIANCE RESOURCE MANAGEMENT GP, LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003

12. INCOME TAXES

The Company’s subsidiary, Alliance Service, is subject to federal and state income taxes. Alliance Service’s income primarily consists of rental and service fees provided to an independent coal synfuel producer at Warrior Coal. Alliance Service has no temporary differences between the financial reporting basis and the tax basis of its assets and liabilities. Prior to the Company’s acquisition of Warrior Coal, the financial results of Warrior Coal were subject to federal and state income taxes. The federal and state income taxes associated with Warrior Coal’s financial results prior to the Company’s acquisition on February 14, 2003, are included in income taxes. Components of income tax expense are as follows (in thousands):


	Years Ended December 31,
	2005		2004		2003
Current:	$	2,115	$	2,089	$	1,516
Federal		567		552		431

State		2,682		2,641		1,947

Deferred:
Federal		—		—		550
State		—		—		80

		—		—		630

Income tax expense (benefit)	$	2,682	$	2,641	$	2,577

Reconciliations from the provision for income taxes at the U.S. federal statutory rate to the effective tax rate for the provision for income taxes are as follows (in thousands):


	Years Ended December 31,
	2005		2004		2003
Income taxes at statutory rate	$	56,942	$	27,742	$	17,668

Less: Income taxes at statutory rate on income not subject to income taxes		(54,527)		(25,409)		(15,855)

Increase/(decrease) resulting from:
State taxes, net of federal income tax benefit		346		333		313
Deferred tax assets retained by ARH Warrior Holdings		—		—		413
Other		(79)		(25)		38

Income tax expense	$	2,682	$	2,641	$	2,577

The tax reconciliation above is based on “Income before non-controlling interest”.

13. EMPLOYEE BENEFIT PLANS

Defined Contribution Plans—ARLP’s employees currently participate in a defined contribution profit sharing and savings plan sponsored by ARLP. This plan covers substantially all full-time employees. Plan participants may elect to make voluntary contributions to this plan up to a specified amount of their compensation. ARLP makes matching contributions based on a percent of an employee’s eligible compensation and for certain subsidiaries it makes an additional non-matching contribution, also based on an employee’s eligible compensation. Additionally, ARLP contributes a defined percentage of eligible earnings for certain employees not covered by the defined benefit plan described below. ARLP’s expense for this plan was

F-33

Index to Financial Statements

ALLIANCE RESOURCE MANAGEMENT GP, LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003

approximately $3,810,000, $3,267,000 and $2,975,000 for the years ended December 31, 2005, 2004 and 2003, respectively.

Defined Benefit Plans—Certain employees at the mining operations participate in a defined benefit plan (the “Pension Plan”) sponsored by ARLP. The benefit formula is a fixed dollar unit based on years of service.

The following sets forth changes in benefit obligations and plan assets for the years ended December 31, 2005 and 2004 and the funded status of the Pension Plan reconciled with amounts reported in the Company’s consolidated financial statements at December 31, 2005 and 2004, respectively (dollars in thousands):


	2005			2004
Change in benefit obligations:
Benefit obligations at beginning of year	$	29,106		$	22,948
Service cost		3,007			2,821
Interest cost		1,660			1,427
Actuarial loss		1,745			2,180
Benefits paid		(411)			(270)

Benefit obligation at end of year		35,107			29,106


Change in plan assets:
Fair value of plan assets at beginning of year		23,307			21,185
Employer contribution		3,000			—
Actual return on plan assets		1,623			2,392
Benefits paid		(411)			(270)

Fair value of plan assets at end of year		27,519			23,307

Funded status		(7,588)			(5,799)

Unrecognized prior service cost		42			90
Unrecognized actuarial loss		6,953			5,122

Net amount recognized	$	(593)		$	(587)

Amounts recognized in balance sheet:
Accrued benefit liability	$	(7,588)		$	(5,799)
Intangible asset		42			90
Accumulated other comprehensive income		6,953			5,122

Net amount recognized	$	(593)		$	(587)

Weighted-average assumptions as of December 31:
Discount rate		5.60	%		5.75	%

Weighted-average assumptions used to determine net periodic benefit cost for the year ended December 31:
Discount rate		5.75	%		6.25	%
Expected return on plan assets		8.00	%		8.00	%

Weighted-average asset allocations as of December 31:
Equity securities		88	%		88	%
Fixed income securities		11	%		11	%
Cash and cash equivalents		1	%		1	%

		100	%		100	%

F-34

Index to Financial Statements

ALLIANCE RESOURCE MANAGEMENT GP, LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003


	Years Ended December 31,
	2005			2004			2003
Components of net periodic benefit cost:
Service cost	$	3,007		$	2,821		$	2,502
Interest cost		1,660			1,427			1,215
Expected return on plan assets		(1,916	)		(1,686	)		(1,115	)
Prior service cost		48			48			48
Net loss		207			141			399

Net periodic benefit cost	$	3,006		$	2,751		$	3,049

Effect on minimum pension liability	$	(1,831	)	$	(1,333	)	$	(1,486	)

Estimated future benefit payments as of December 31, 2005 are as follows (in thousands):


Year Ending December 31,
2006	$	636
2007		802
2008		983
2009		1,195
2010		1,418
2011-2015		11,650

	$	16,684

The actuarial loss component of the change in benefit obligations for 2005 and 2004 was primarily attributable to reductions in the discount rate assumptions. ARLP expects to contribute $7,900,000 to the Pension Plan in 2006.

The Compensation Committee (“Compensation Committee”) of the Board of Directors of ARM GP maintains a Funding and Investment Policy Statement (“Policy Statement”) for the Pension Plan. The Policy Statement provides that the assets of the Pension Plan be invested in a diversified mix of domestic equity securities and international equity securities, domestic fixed income securities and cash equivalents with the goal of ensuring that the Pension Plan assets provide sufficient resources to meet or exceed benefit obligations. Investment options, which may be through mutual funds, collective funds, or direct investment in individual stock, bonds or cash equivalent investments, include (a) money market accounts, (b) U.S. Government bonds, (c) corporate bonds, (d) large, mid, and small capitalization stocks, and (e) international stocks. The Policy Statement imposes the following limitations, subject to exceptions authorized by the Compensation Committee under unusual market conditions: the maximum investment in any one stock should not exceed 10% of the total stock portfolio, the maximum investment in any one industry should not exceed 30% of the total stock portfolio, and the average credit quality of the bond portfolio should be at least AA with a maximum amount of non-investment grade debt of 10%. The Policy Statement’s current asset allocation guidelines are as follows:


	Percentage of Total Portfolio
	Minimum		Target		Maximum
Domestic stocks	50	%	70	%	90	%
Foreign stocks	0	%	10	%	20	%
Fixed income/cash	5	%	20	%	40	%

The expected long-term rate of return assumption is developed based on input from an independent investment manager, including its review of asset class return, expectations by economists, and an independent

F-35

Index to Financial Statements

ALLIANCE RESOURCE MANAGEMENT GP, LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003

actuary. ARLP’s advisors base the projected returns on broad equity and bond indices. The Pension Plan’s expected long-term rate of return is based on an asset allocation assumption of 80.0% with equity manager, with an expected long-term rate of return of 10.4%, and 20.0% with fixed income managers, with an expected long-term rate of return of 5.3%. The Pension Plan was established effective January 1, 1997 and ARLP’s initial contribution to the Pension Plan was made in 1998.

14. COMPENSATION PLANS

Effective January 1, 2000, ARM GP adopted the Long-Term Incentive Plan (the “LTIP”) for certain employees and directors of the Company and its affiliates, who perform services for the Company. Annual grant levels and vesting provisions for designated participants are recommended by the President and Chief Executive Officer of the Company, subject to the review and approval of the Compensation Committee. Grants are made either of restricted units, which are “phantom” units that entitle the grantee to receive a Common Unit or an equivalent amount of cash upon the vesting of the phantom unit, or options to purchase Common Units. Common Units to be delivered upon the vesting of restricted units or to be issued upon exercise of a unit option will be acquired by the Company in the open market at a price equal to the then prevailing price, or directly from ARH or any other third party, including units newly issued by ARLP, units already owned by the Company, or any combination of the foregoing. On December 22, 2005, the Compensation Committee executed a unanimous consent resolution that effective January 1, 2006, (a) all existing grants made under the LTIP prior to January 1, 2006 and subsequent thereto be settled, upon satisfaction of any applicable vesting requirements, in Common Units to the extent of net share settlement for minimum statutory income tax withholding requirements for each individual participant based upon the fair market value of the Common Units as of the date of payment, and (b) any existing and prospective LTIP grants of restricted units receive quarterly distributions as provided in the distribution equivalent rights provision of the LTIP. Therefore, each LTIP participant will have a contingent right to receive an amount equal to the cash distributions made by ARLP during the vesting period.

The aggregate number of units reserved for issuance under the LTIP is 1,200,000. Effective January 1, 2004, the Compensation Committee approved an amendment to the LTIP clarifying that any award that is forfeited, expires for any reason, or is paid or settled in cash, including the satisfaction of minimum statutory withholding requirements, rather than through the delivery of units will be available for future grants under the LTIP. Of the initial 1,200,000 units reserved for issuance under the LTIP, cumulative units of 1,092,780 were granted in years 2000, 2001, 2002 and 2003. Of those grants, 43,650 units were forfeited and 421,452 units were settled in cash rather than delivery of units, resulting in the net issuance of 627,678 Common Units under those grants. During 2004 and 2005, the Compensation Committee approved grants of 205,570 units and 114,390 units, respectively, which will vest December 31, 2006 and January 1, 2008, respectively, subject to the satisfaction of certain financial tests that management currently believes will be satisfied. As of December 31, 2005, 3,690 outstanding LTIP grants have been forfeited. Consequently, as of December 31, 2005, 256,052 units remain available for issuance in the future, assuming that all grants currently issued and outstanding for 2004 and 2005 are settled with Common Units and no forfeitures occur. Expenses related to the LTIP were approximately $8,193,000, $20,320,000 and $7,687,000 for the years ended 2005, 2004 and 2003, respectively. Effective January 1, 2006, the Compensation Committee approved additional grants of 85,275 restricted units, which will vest January 1, 2009, subject to the satisfaction of certain financial tests. See New Accounting Standards (Note 2) for a discussion concerning the impact of SFAS No. 123R on accounting for the LTIP.

Effective January 1, 1997, the Company adopted a Supplemental Executive Retirement Plan (the “SERP”) for certain officers and key employees. The purpose of the SERP is to enhance ARLP’s ability to retain specific officers and key employees, by providing them with the deferred compensation benefits contained in the SERP. The intent of the SERP is to provide each participant with retirement benefits that are comparable in value to those of similar retirement programs administered by other companies, as well as to align each participant’s

F-36

Index to Financial Statements

ALLIANCE RESOURCE MANAGEMENT GP, LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003

supplemental benefits under the SERP with the interests of ARLP’s unitholders. All allocations made to participants under the SERP are made in the form of “phantom” units. The SERP is administered by the Compensation Committee. The Company is able to amend or terminate the plan at any time. Expenses related to the SERP were approximately $393,000, $2,099,000 and $626,000 for the years ended 2005, 2004 and 2003, respectively. The total accrued liability associated with the SERP plan as of December 31, 2005 and 2004 was $4,050,000 and $3,657,000, respectively, and is included in other liabilities in the consolidated balance sheets.

15. RECLAMATION AND MINE CLOSING COSTS

The majority of the Company’s operations are governed by various state statutes and the Federal Surface Mining Control and Reclamation Act of 1977, which establish reclamation and mine closing standards. These regulations, among other requirements, require restoration of property in accordance with specified standards and an approved reclamation plan. The Company has estimated the costs and timing of future reclamation and mine closing costs and recorded those estimates on a present value basis using discount rates ranging from 4.22% to 6.0%.

On January 1, 2003, the Company adopted SFAS No. 143, Accounting for Asset Retirement Obligations, which requires the fair value of a liability for an asset retirement obligation to be recognized in the period in which it is incurred. Since the Company has historically adhered to accounting principles similar to SFAS No. 143, this standard had no material effect on the Company’s consolidated financial statements upon adoption.

Discounting resulted in reducing the accrual for reclamation and mine closing costs by $29,339,000 and $28,760,000 at December 31, 2005 and 2004, respectively. Estimated payments of reclamation and mine closing costs as of December 31, 2005 are as follows (in thousands):


Year Ending December 31,
2006	$	2,597
2007		4,197
2008		3,478
2009		585
2010		2,638
Thereafter		57,157

Aggregate undiscounted reclamation and mine closing		70,652
Effect of discounting		(29,339)


Total reclamation and mine closing costs		41,313
Less current portion		(2,597)

Reclamation and mine closing costs	$	38,716

The following table presents the activity affecting the reclamation and mine closing liability (in thousands):


	Years Ended December 31,
	2005			2004			2003
Beginning balance	$	34,018		$	23,466		$	23,456
Accretion		1,918			1,622			1,341
Payments		(189	)		(899	)		(1,054)
Allocation of liability associated with acquisition, Mine development and change in assumptions		5,566			9,829			(277)

Ending balance	$	41,313		$	34,018		$	23,466

F-37

Index to Financial Statements

ALLIANCE RESOURCE MANAGEMENT GP, LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003

During the year ended December 31, 2005, the reclamation and mine closing cost liability increase of $5,566,000 was primarily attributable to an increase in the estimates of the cost to perform certain reclamation activities and, in particular, certain land restoration procedures associated with the Lodestar acquisition. Additionally, $411,000 of the 2005 increase is attributable to the Tunnel Ridge acquisition (Note 3). During the year ended December 31, 2004, the reclamation and mine closing cost liability increase of $9,829,000 was primarily attributable to the Lodestar acquisition of $4,129,000 described in Note 3 and the initial land disturbances associated with mine development at Mettiki Coal, LLC and Mettiki Coal (WV), LLC of a combined $2,329,000. The liability also increased as the permitted refuse disposal areas were expanded at several existing operations and a comprehensive study related to water treatment costs was completed.

16. PNEUMOCONIOSIS (“BLACK LUNG”) BENEFITS

Certain mine operating entities of the Company are liable under state statutes and the Federal Coal Mine Health and Safety Act of 1969, as amended, to pay black lung benefits to eligible employees and former employees and their dependents.

Pneumoconiosis (“black lung”) benefits liability is calculated using the service cost method. Under the service cost method the calculation of the actuarial present value of the estimated black lung obligation is based on an actuarial study performed by an independent actuary. Actuarial gains or losses are amortized over the remaining service period of active miners. The discount rate used to calculate the estimated present value of future obligations was 4.23% and 4.5% at December 31, 2005 and 2004, respectively.

The reconciliation of changes in benefit obligations at December 31, 2005 and 2004 is as follows (in thousands):


	2005		2004
Benefit obligations at beginning of year	$	20,335	$	17,633
Service Cost		1,977		1,217
Interest cost		1,203		1,091
Actuarial loss		470		549
Benefits and expense paid		(190)		(155)

Benefit obligations at end of year	$	23,795	$	20,335

The U.S. Department of Labor has issued revised regulations that alter the claims process for federal black lung benefit recipients. Both the coal and insurance industries challenged certain provisions of the revised regulations through litigation, but the regulations were upheld, with some exceptions as to the retroactive application of the regulations. The revised regulations may result in an increase in the incidence and recovery of black lung claims.

17. RELATED PARTY TRANSACTIONS

SGP Land—Webster County Coal has a mineral lease and sublease with SGP Land requiring annual minimum royalty payments of $2.7 million, payable in advance through 2013 or until $37.8 million of cumulative annual minimum and/or earned royalty payments have been paid. Webster County Coal paid royalties of $3,449,000, $4,611,000 and $3,460,000 for the years ended December 31, 2005, 2004 and 2003, respectively. As of December 31, 2005, Webster County Coal has recouped, as earned royalties, all advance minimum royalty payments made in accordance with these lease terms except for $1,018,000.

F-38

Index to Financial Statements

ALLIANCE RESOURCE MANAGEMENT GP, LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003

Warrior Coal has a mineral lease and sublease with SGP Land. Under the terms of the lease, Warrior Coal has paid and will continue to pay in arrears an annual minimum royalty obligation of $2,270,000 until $15,890,000 of cumulative annual minimum and/or earned royalty payments have been paid. The annual minimum royalty periods are from October 1 through the end of the following September 30, expiring September 30, 2007. Warrior Coal paid royalties of $3,627,000, $2,561,000 and $2,453,000 for the years ended December 31, 2005, 2004 and 2003, respectively. As of December 31, 2005, Warrior Coal has recouped, as earned royalties, all advance minimum royalty payments made in accordance with these lease terms.

Under the terms of the mineral lease and sublease agreements described above, Webster County Coal and Warrior Coal also reimburse SGP Land for SGP Land’s base lease obligations. ARLP reimbursed SGP Land $6,379,000, $5,428,000 and $4,395,000 for the years ended December 31, 2005, 2004 and 2003, respectively, for the base lease obligations. Webster County Coal and Warrior Coal have recouped, as earned royalties, all advance minimum royalty payments made in accordance with these terms except for $236,000 as of December 31, 2005.

In 2001, SGP Land, as successor in interest to an unaffiliated third party, entered into an amended mineral lease with MC Mining. Under the terms of the lease, MC Mining has paid and will continue to pay an annual minimum royalty obligation of $300,000 until $6.0 million of cumulative annual minimum and/or earned royalty payments have been paid. MC Mining paid royalties of $600,000 and $479,000 during the years ended December 31, 2005 and 2003, respectively. The 2004 annual minimum royalty obligation of $300,000 was paid in January 2005. As of December 31, 2005, MC Mining has recouped, as earned royalties, all advance minimum royalty payments made in accordance with these lease terms except for $600,000.

On October 23, 2005, ARLP exercised its option to lease and/or sublease certain reserves from SGP Land, which reserves are contiguous to ARLP’s Hopkins County Coal mining complex. Upon exercise of the option agreement, Hopkins County Coal entered into a Coal Lease and Sublease Agreement as well as a Royalty Agreement (collectively, the “Coal Lease Agreements”). The terms of the Coal Lease Agreements are through December 2015, with the right to extend the term for successive one-year periods for as long as ARLP is mining within the coal field, as such term is defined in the Coal Lease Agreements.

The Coal Lease Agreements provide for five annual minimum royalty payments of $684,000. The combined annual minimum royalty payments, consistent with the option agreement, and cumulative option fees of $3.4 million previously paid by Hopkins County Coal are fully recoupable against future tonnage royalty payments. Under the terms of the Coal Lease Agreements, Hopkins County Coal will also reimburse SGP Land for SGP Land’s base lease obligations. Under the terms of the option to lease and/or lease and sublease agreements, Hopkins County Coal paid advance minimum royalties and/or option fees of $684,000 and $1,368,000 during the years ended December 31, 2005 and 2004, respectively. The 2003 option fee of $684,000 was paid in January 2004 and is included in the due to affiliates balance as of December 31, 2003. As of December 31, 2005, Hopkins County Coal has available $4,059,000 of advance minimum royalty payments made under these agreements that management expects will be recouped against future production.

Special GP—In January 2005, ARLP acquired Tunnel Ridge from ARH (Note 3). In connection with this acquisition, ARLP assumed a coal lease with the Special GP. Under the terms of the lease, Tunnel Ridge has paid and will continue to pay an annual minimum royalty obligation of $3.0 million until the earlier of January 1, 2033 or the exhaustion of mineable and merchantable coal. Tunnel Ridge paid an advance minimum royalty of $3.0 million during 2005, which management expects will be recouped against future production.

F-39

Index to Financial Statements

ALLIANCE RESOURCE MANAGEMENT GP, LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003

Tunnel Ridge also has rights to surface land and other tangible assets under a separate lease agreement with the Special GP. Under the terms of the lease agreement, Tunnel Ridge has paid and will continue to pay the Special GP an annual lease payment of $240,000. The lease agreement has an initial term of four years, which may be extended to be consistent with the term of the coal lease. Lease expense was $240,000 for the year ended December 31, 2005.

ARLP has a non-cancelable operating lease arrangement with the Special GP for the coal preparation plant and ancillary facilities at the Gibson County Coal, LLC mining complex. Based on the terms of the lease, ARLP will make monthly payments of approximately $216,000 through January 2011. Lease expense incurred for each of the three years in the period ended December 31, 2005 was $2,595,000.

The Company previously entered into and has maintained agreements with two banks to provide letters of credit in an aggregate amount of $25.0 million (Note 9). At December 31, 2005, the Company had $24.8 million in outstanding letters of credit. The Special GP guarantees these letters of credit. Historically, the Company has compensated the Special GP for a guarantee fee equal to 0.30% per annum of the face amount of the letters of credit outstanding. During 2003 the Special GP agreed to waive the guarantee fee in exchange for a parent guarantee from the Intermediate Partnership and Alliance Coal, LLC on the mineral lease and sublease with Webster County Coal and Warrior Coal described above. Since the guarantee is made on behalf of entities within the consolidated company, the guarantee has no fair value under FASB Interpretation (“FIN”) No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others, and does not impact the consolidated financial statements. The Company paid approximately $31,300 in guarantee fees to the Special GP for the year ended December 31, 2003.

18. COMMITMENTS AND CONTINGENCIES

Commitments—The Company leases buildings and equipment under operating lease agreements that provide for the payment of both minimum and contingent rentals. ARLP also has a non-cancelable lease with the Special GP (Note 17). Future minimum lease payments under operating leases are as follows (in thousands):


Year Ending December 31,	Affiliate		Others		Total
2006	$	2,835	$	977	$	3,812
2007		2,835		709		3,544
2008		2,835		264		3,099
2009		2,595		13		2,608
2010		2,595		—		2,595
Thereafter		216		—		216

	$	13,911	$	1,963	$	15,874

Rental expense (including rental expense incurred under operating lease agreements) was $6,390,000, $6,112,000 and $5,490,000 for the years ended December 31, 2005, 2004 and 2003, respectively.

In October 2002, the Company entered into a master equipment lease. The Company’s credit facilities limit the amount of total operating lease obligations to $10.0 million payable in any period of 12 consecutive months. This master equipment lease is subject to this limitation on lease obligations. The Company entered into nine operating leases during 2003 under the master equipment lease with lease terms ranging from three to six years.

F-40

Index to Financial Statements

ALLIANCE RESOURCE MANAGEMENT GP, LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003

The Company did not enter into any new equipment leases under the master equipment lease during 2004 or 2005. Partnership has exercised purchase options under the master equipment lease as they come available, which has partially contributed to the decrease in future lease commitments.

Contractual Commitments—In connection with planned capital projects, the Company had contractual commitments of approximately $10.8 million at December 31, 2005.

General Litigation—The Company is involved in various lawsuits, claims and regulatory proceedings incidental to its business. Disputes between the Company and its customers over the provisions of long-term coal supply contracts arise occasionally and generally relate to, among other things, coal quality, quantity, pricing and the existence of force majeure conditions. Other than the recently settled contract dispute with ICG described below, the Company is not involved in any litigation relating to any of the Company’s long-term coal supply contracts. However, we cannot assure you that disputes will not occur or that the Company will be able to resolve those disputes in a satisfactory manner. The Company is not engaged in any litigation that we believe is material to the Company’s operations, including under the various environmental protection statutes to which the Company is subject. The Company provides for costs related to litigation and regulatory proceedings, including civil fines issued as part of the outcome of these proceedings, when a loss is probable and the amount is reasonably determinable. Although the ultimate outcome of these matters cannot be predicted with certainty, in the opinion of management, the outcome of these matters to the extent not previously provided for or covered under insurance, is not expected to have a material adverse effect on the Company’s business, financial position or results of operations. Nonetheless, these matters or estimates that are based on current facts and circumstances, if resolved in a manner different from the basis on which management has formed its opinion, could have a material adverse effect on the Company’s financial position or results of operations.

Other—During October 2005, the Company completed its annual property and casualty insurance renewal with various insurance coverages effective as of October 1, 2005. Available capacity for underwriting property insurance has tightened as a result of recent events including insurance carrier losses associated with U.S. gulf coast hurricanes, poor loss claims history in the underground coal mining industry and our recent loss history (i.e., Vertical Belt Incident, MC Mining Fire Incident, and Dotiki Fire Incident). As a result, the Company will retain a participating interest along with our insurance carriers at an average rate of approximately 10% in the $75 million commercial property program. The aggregate maximum limit in the commercial property program is $75 million per occurrence of which we would be responsible for a maximum amount of $7.75 million for each occurrence, excluding a $1.5 million deductible for property damage and a 45-day waiting period for business interruption. As a result of the renewal for comparable levels of commercial property coverage, premiums for the property insurance program increased by approximately 130%. The company can make no assurances that it will not experience significant insurance claims in the future, which as a result of the participation in the commercial property program, could have a material adverse effect on the business, financial conditions, results of operations and ability to purchase property insurance in the future.

The Company’s subsidiary, Mettiki Coal (WV), LLC, is developing an underground longwall mining operation in Tucker County, West Virginia (referred to as the Mountain View Mine or E-Mine), which will eventually replace Mettiki Coal’s existing longwall mining operation at the D-Mine located in Garrett County, Maryland. The Mountain View Mine is located approximately 10 miles from Mettiki Coal. In order to proceed with development of the Mountain View Mine, Mettiki Coal (WV) submitted various permit applications to the West Virginia Department of Environmental Protection, or WVDEP, including an application for approval to conduct underground mining. WVDEP issued the required permits in the Spring of 2004. Certain complainants appealed WVDEP’s decision issuing the underground mining permit to the West Virginia Surface Mine Board, or SMB, which held administrative hearings on the matter in late 2004 and early 2005. On March 8, 2005, the SMB on a divided 3-3 vote issued a final order concluding consideration of the appeal without effectively

F-41

Index to Financial Statements

ALLIANCE RESOURCE MANAGEMENT GP, LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003

rendering a decision, which, by operation of West Virginia law, resulted in the affirmation of WVDEP’s decision to issue the underground mining permit. The complainants appealed the SMB decision, but subsequently voluntarily agreed to withdraw the appeal, which was dismissed with prejudice by the Tucker County circuit court in West Virginia on April 26, 2005.

On April 19, 2005, these same complainants submitted a letter to the US Department of the Interior’s Office of Surface Mining, Reclamation and Enforcement, or (OSM), and the OSM’s regional field office in Charleston, West Virginia, or (CHFO), requesting federal monitoring and inspection of the Mountain View Mine and alleging that operations at the mine would create acid mine drainage with no defined end point. By written notice, dated April 21, 2005, the CHFO advised WVDEP that it would review the complainants’ allegation that the Mountain View Mine would cause material harm to the hydrological balance within and outside of the permit area. Following its initial review, on September 15, 2005, the CHFO notified WVDEP that it intended to initiate a formal investigation into the issuance of the underground mining permit for the Mountain View Mine. WVDEP requested an informal review of the CHFO decision by the OSM. By two letters, both dated October 21, 2005, OSM reversed the decision of the CHFO concluding that the CHFO and OSM lacked statutory authority to review the WVDEP’s issuance of the underground mining permit, and the Department of the Interior ordered that this was the Department’s final decision on the matter raised in the complainants’ letter dated April 19, 2005. The Mountain View Mine is not currently subject to any pending or threatened agency or third-party claims. However, on March 8, 2006, these same complainants requested that the Director of OSM evaluate West Virginia’s State Program pursuant to 30 C.F.R. §§ 733 et seq., but acknowledged a similar request had been made on April 19, 2005, which request had been previously rejected by the Department of Interior’s final decision on October 21, 2005.

On October 12, 2004, Pontiki Coal, LLC (“Pontiki”), one of the Company’s subsidiaries and the successor-in-interest of Pontiki Coal Corporation as a result of a merger completed on August 4, 1999, was served with a complaint from ICG, LLC (“ICG”) alleging breach of contract and seeking declaratory relief to determine the parties’ rights under a coal sales agreement between Horizon Natural Resource Sales Company (“Horizon Sales”), as buyer, and Pontiki Coal Corporation, as seller, dated October 3, 1998, as amended on February 28, 2001, which we refer to as the Horizon Agreement. ICG has represented that it acquired the rights and assumed the liabilities of the Horizon Agreement effective September 30, 2004, as part of an asset sale approved by the U.S. Bankruptcy Court supervising the bankruptcy proceedings of Horizon Sales and its affiliates.

The complaint alleged that from January 2004 to August 2004, Pontiki failed to deliver a total of 138,111 tons of coal that met the contract delivery and quality specifications resulting in an alleged loss of profits for ICG of $4.1 million. The Company is aware that certain deliveries under the Horizon Agreement were not made during 2004 for reasons including, but not limited to, force majeure events at Pontiki and ICG’s failure to provide transportation services for the delivery of coal as required under the Horizon Agreement. In November 2005, the Company settled this contract dispute with ICG. Under this settlement, effective August 1, 2005, Pontiki will ship coal in approximately ratable monthly quantities until the remaining contract obligation of 1,681,303 tons is shipped, and this contract will terminate on or by December 31, 2006. Under the terms of the settlement, the existing coal supply agreement was amended to change the coal quality specifications and to exclude from the definition of “force majeure” the events of railroad car shortages and geological and quality issues with respect to coal. As part of this settlement, the Company and ICG also executed a new coal sales agreement whereby another subsidiary of the Company will purchase 892,000 tons of coal from ICG. Approximately 63,000 tons were purchased and sold at a profit in 2005 and the remaining 829,000 tons are expected to be purchased and sold at a profit in 2006. These agreements will expire on or by December 31, 2006.

F-42

Index to Financial Statements

ALLIANCE RESOURCE MANAGEMENT GP, LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003

At certain of the Company’s operations, property tax assessments for several years are under audit by the related tax authorities. The Company believes that it has recorded adequate liabilities based on reasonable estimates of any property tax assessments that may be ultimately assessed as a result of these audits.

19. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS

The Company has significant long-term coal supply agreements, some of which contain prospective price adjustment provisions designed to reflect changes in market conditions, labor and other production costs and, in the infrequent circumstance when the coal is sold other than free on board the mine, changes in transportation rates. Total revenues to major customers, including transportation revenues (Note 2), which exceed ten percent of total revenues (Customer C comprised less than nine percent of total revenues in 2004) are as follows (in thousands):


	Years Ended December 31,
	2005		2004		2003
Customer A	$	133,672	$	124,847	$	116,750
Customer B		88,525		89,887		78,724
Customer C		83,255		56,658		52,561

Trade accounts receivable from these customers totaled approximately $45.3 million at December 31, 2005. The Company’s bad debt experience has historically been insignificant; however the Company established an allowance of $763,000 during 2001, due to the Company’s total credit exposure to Enron Corp., which filed for bankruptcy protection during December 2001. The Company received $114,000 in 2004 for its claim against Enron, which was recognized as a recovery in 2004. The remaining balance of $649,000 was written off in 2004. Financial conditions of its customers could result in a material change to this estimate in future periods. The coal supply agreements with Customers A, B and C expire in 2007, 2023 and 2013, respectively.

20. SEGMENT INFORMATION

The Company operates in the eastern United States as a producer and marketer of coal to major United States utilities and industrial users, also located in the eastern United States. The Company has the following three reportable segments: the Illinois Basin, Central Appalachia and Northern Appalachia. The segments also represent the three major coal deposits in the eastern United States. Coal quality, coal seam height, transportation methods and regulatory issues are similar within each of these three segments. The Illinois Basin is comprised of the Dotiki, Gibson, Hopkins, Pattiki and Warrior mines. Central Appalachia is comprised of the Pontiki and MC Mining mines. Northern Appalachia is comprised of the Mettiki, Mountain View, Tunnel Ridge and Penn Ridge mines. The Mountain View mine is currently being developed to eventually replace production in the Mettiki mine which is expected to deplete its coal reserves in late 2006. The Partnership is in the process of permitting the Tunnel Ridge and Penn Ridge properties for future mine development.

Operating segment results for the years ended December 31, 2005, 2004 and 2003 are presented below. Other and Corporate includes marketing and administrative expenses, the Mt. Vernon Transfer Terminal and coal brokerage activity.


	Illinois Basin		Central Appalachia		Northern Appalachia		Other and Corporate (1)		Consolidated
	(in thousands)

Operating segment results for the year ended December 31, 2005 were as follows:
Total revenues	$	553,908	$	157,203	$	120,423	$	7,184	$	838,718
Selected production expenses (2)		289,720		94,909		62,425		3,606		450,660
Segment Adjusted EBITDA (3)		183,075		41,583		36,047		2,924		263,629
Total assets		274,437		91,853		73,789		92,690		532,769
Capital expenditures (4)		70,353		23,451		24,435		1,642		119,881

F-43

Index to Financial Statements

ALLIANCE RESOURCE MANAGEMENT GP, LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003


	Illinois Basin		Central Appalachia		Northern Appalachia		Other and Corporate (1)		Consolidated
	(in thousands)

Operating segment results for the year ended December 31, 2004 were as follows:
Total revenues	$	391,005	$	147,361	$	112,251	$	2,672	$	653,289
Selected production expenses (2)		224,540		98,162		51,304		585		374,591
Segment Adjusted EBITDA (3)(5)		121,763		28,953		41,141		1,569		193,426
Total assets		216,739		64,241		46,168		85,719		412,867
Capital expenditures		32,870		14,465		6,605		773		54,713

Operating segment results for the year ended December 31, 2003 were as follows:
Total revenues	$	328,586	$	116,443	$	89,933	$	7,785	$	542,747
Selected production expenses (2)		184,112		77,840		44,521		6,748		313,221
Segment Adjusted EBITDA (3)		95,351		23,962		27,288		623		147,224
Total assets		189,079		65,395		43,127		38,853		336,454
Capital expenditures		26,243		12,134		4,408		219		43,004

(1)	Revenues included in the Other and Corporate column are attributable to Mt. Vernon Transfer Terminal transloading revenues and brokerage coals sales.

(2)	Selected production expenses is comprised of operating expenses and outside purchases (as reflected in the Consolidated Statements of Income), excluding production taxes and royalties that are incurred as a percentage of coal sales or volumes.

(3)	Segment adjusted EBITDA is defined as net income before non-controlling interest, income tax expense (benefit), interest expense and interest income, depreciation, depletion and amortization, and general and administrative expense.

(4)	Capital expenditures include items received but not yet paid, which is disclosed as non-cash activity, purchases of property, plant and equipment in the supplemental cash flow information

(5)	The Illinois Basin’s year 2004 segment adjusted EBITDA includes $15.2 million for the net gain from insurance settlement associated with the Dotiki Fire Incident.


	Year Ended December 31,
	2005			2004			2003
	(in thousands)

Reconciliation of Segment Adjusted EBITDA to income before non-controlling interest:
Segment Adjusted EBITDA	$	263,629		$	193,426		$	147,224
General & administrative		(33,484	)		(45,400	)		(28,243	)
Depreciation, depletion and amortization		(55,647	)		(53,674	)		(52,505	)
Interest expense		(11,811	)		(14,963	)		(15,980	)
Income taxes		(2,682	)		(2,641	)		(2,577	)

Income before non-controlling interest	$	160,005		$	76,748		$	47,919


Reconciliation of Selected Production Expenses to Combined Operating Expenses and Outside Purchases:
Selected Production Expenses	$	450,660		$	374,591		$	313,221
Production taxes and royalties		85,941			71,793			64,123

Combined operating expenses and outside purchases	$	536,601		$	446,384		$	377,344

F-44

Index to Financial Statements

ALLIANCE RESOURCE MANAGEMENT GP, LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003

21. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

A summary of the quarterly operating results for the Company is as follows (in thousands):


	Quarter Ended
	March 31, 2005		June 30, 2005(1)		September 30, 2005		December 31, 2005
Revenues	$	195,627	$	208,716	$	207,043	$	227,332
Operating income		43,156		44,869		37,946		47,946
Income before income taxes		39,787		41,619		35,197		46,084
Net income		1,676		3,014		2,901		4,784

	Quarter Ended
	March 31, 2004(2)		June 30, 2004		September 30, 2004(3)		December 31, 2004(4)
Revenues	$	157,824	$	162,546	$	158,261	$	174,658
Operating income		22,490		27,178		29,334		14,229
Income before income taxes		18,961		23,587		25,864		10,977
Net income		358		1,021		835		1,223

Operating income in the above table represents income from operations before interest expense.

(1)	The Company’s June 30, 2005 quarterly results were increased by $2.8 million due to the estimated direct expenses and costs attributable to the Vertical Belt Failure (Note 5).

(2)

The Company’s March 31, 2004 quarterly results were impacted by extra expenses associated with the Dotiki Fire Incident, in addition the Company recognized as an offset to operating expenses $2.9 million representing estimated insurance recoveries for expenses incurred as a result of the Dotiki Fire Incident (Note 4).

(3)

The Company’s September 30, 2004 quarterly results were impacted by an offset to operating expenses of $2.8 million due to the final settlement of insurance claims attributable to the Dotiki Fire Settlement and a net gain from insurance settlement of approximately $15.2 million attributable to the final settlement of insurance claims attributable to the Dotiki Fire Incident (Note 4).

(4)	The Company’s December 31, 2004 quarterly results were impacted by an accrual of $4.1 million reflecting the Company’s initial estimate of certain minimum costs attributable to the MC Mining Fire Incident that are not reimbursable under the Company’s insurance policies (Note 4).

F-45

Index to Financial Statements

SCHEDULE II

ALLIANCE RESOURCE MANAGEMENT GP, LLC

VALUATION AND QUALIFYING ACCOUNTS

YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003


	Balance At Beginning Of Year		Additions Charged To Income		Deductions		Balance At End Of Year
	(in thousands)
2005
Allowance for doubtful accounts	$	—	$	—	$	—	$	—

2004
Allowance for doubtful accounts	$	763	$	—	$	763	$	—

2003
Allowance for doubtful accounts	$	763	$	—	$	—	$	763

The Company established an allowance of $763,000 during 2001 due to the Company’s total credit exposure to Enron Corp., which filed for bankruptcy protection during December 2001. In 2004, the Company collected approximately $114,000 of this amount through the sale to a third-party of a bankruptcy claim relating to this receivable to a third-party. The remaining balance of $649,000 was written-off.

F-46

Index to Financial Statements

APPENDIX A

Amended and Restated Agreement

of Limited Partnership of Alliance Holdings GP, L.P.

Index to Financial Statements

AMENDED AND RESTATED

AGREEMENT OF LIMITED PARTNERSHIP

ALLIANCE HOLDINGS GP, L.P.

Index to Financial Statements

TABLE OF CONTENTS


		Page

ARTICLE I DEFINITIONS
Section 1.1	Definitions	A-1
Section 1.2	Construction	A-11

ARTICLE II ORGANIZATION
Section 2.1	Formation	A-11
Section 2.2	Name	A-12
Section 2.3	Registered Office; Registered Agent; Principal Office; Other Offices	A-12
Section 2.4	Purpose and Business	A-12
Section 2.5	Powers	A-12
Section 2.6	Power of Attorney	A-12
Section 2.7	Term	A-13
Section 2.8	Title to Partnership Assets	A-14
Section 2.9	Certain Undertakings Relating to the Separateness of the Partnership	A-14

ARTICLE III RIGHTS OF LIMITED PARTNERS
Section 3.1	Limitation of Liability	A-15
Section 3.2	Management of Business	A-15
Section 3.3	Outside Activities of the Limited Partners	A-15
Section 3.4	Rights of Limited Partners	A-15

ARTICLE IV CERTIFICATES; RECORD HOLDERS; TRANSFER OF PARTNERSHIP INTERESTS; REDEMPTION OF PARTNERSHIP INTERESTS
Section 4.1	Certificates	A-16
Section 4.2	Mutilated, Destroyed, Lost or Stolen Certificates	A-16
Section 4.3	Record Holders	A-17
Section 4.4	Transfer Generally	A-17
Section 4.5	Registration and Transfer of Limited Partner Interests	A-17
Section 4.6	Transfer of the General Partner Interest	A-18
Section 4.7	Restrictions on Transfers	A-18
Section 4.8	Citizenship Certificates; Non-citizen Assignees	A-19
Section 4.9	Redemption of Partnership Interests of Non-citizen Assignees	A-20

ARTICLE V CAPITAL CONTRIBUTIONS AND ISSUANCE OF PARTNERSHIP INTERESTS
Section 5.1	Organizational Issuances	A-21
Section 5.2	Contributions by the Underwriters	A-21
Section 5.3	Interest and Withdrawal	A-22
Section 5.4	Capital Accounts	A-22
Section 5.5	Issuances of Additional Partnership Securities	A-24
Section 5.6	No Preemptive Right	A-24
Section 5.7	Splits and Combinations	A-24
Section 5.8	Fully Paid and Non-Assessable Nature of Limited Partner Interests	A-25

A-i

Index to Financial Statements


		Page

ARTICLE VI ALLOCATIONS AND DISTRIBUTIONS
Section 6.1	Allocations for Capital Account Purposes	A-25
Section 6.2	Allocations for Tax Purposes	A-28
Section 6.3	Requirement and Characterization of Distributions; Distributions to Record Holders	A-30

ARTICLE VII MANAGEMENT AND OPERATION OF BUSINESS
Section 7.1	Management	A-30
Section 7.2	Certificate of Limited Partnership	A-32
Section 7.3	Restrictions on General Partner’s Authority	A-32
Section 7.4	Reimbursement of the General Partner	A-33
Section 7.5	Outside Activities	A-33
Section 7.6	Loans from the General Partner; Loans or Contributions from the Partnership; Contracts with Affiliates; Certain Restrictions on the General Partner	A-34
Section 7.7	Indemnification	A-35
Section 7.8	Liability of Indemnitees	A-36
Section 7.9	Resolution of Conflicts of Interest; Standards of Conduct and Modification of Duties	A-36
Section 7.10	Other Matters Concerning the General Partner	A-38
Section 7.11	Purchase or Sale of Partnership Securities	A-38
Section 7.12	Registration Rights of the General Partner and its Affiliates	A-38
Section 7.13	Reliance by Third Parties	A-41

ARTICLE VIII BOOKS, RECORDS, ACCOUNTING AND REPORTS
Section 8.1	Records and Accounting	A-42
Section 8.2	Fiscal Year	A-42
Section 8.3	Reports	A-42

ARTICLE IX TAX MATTERS
Section 9.1	Tax Returns and Information	A-42
Section 9.2	Tax Elections	A-42
Section 9.3	Tax Controversies	A-43
Section 9.4	Withholding	A-43

ARTICLE X ADMISSION OF PARTNERS
Section 10.1	Admission of Initial Limited Partners	A-43
Section 10.2	Admission of Successor General Partner	A-44
Section 10.3	Amendment of Agreement and Certificate of Limited Partnership	A-44

ARTICLE XI WITHDRAWAL OR REMOVAL OF PARTNERS
Section 11.1	Withdrawal of the General Partner	A-44
Section 11.2	Removal of the General Partner	A-45
Section 11.3	Interest of Departing General Partner and Successor General Partner	A-46
Section 11.4	Withdrawal of Limited Partners	A-47

A-ii

Index to Financial Statements


		Page
ARTICLE XII DISSOLUTION AND LIQUIDATION
Section 12.1	Dissolution	A-47
Section 12.2	Continuation of the Business of the Partnership After Dissolution	A-47
Section 12.3	Liquidator	A-48
Section 12.4	Liquidation	A-48
Section 12.5	Cancellation of Certificate of Limited Partnership	A-49
Section 12.6	Return of Contributions	A-49
Section 12.7	Waiver of Partition	A-49
Section 12.8	Capital Account Restoration	A-49

ARTICLE XIII AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS; RECORD DATE
Section 13.1	Amendments to be Adopted Solely by the General Partner	A-49
Section 13.2	Amendment Procedures	A-51
Section 13.3	Amendment Requirements	A-51
Section 13.4	Special Meetings	A-51
Section 13.5	Notice of a Meeting	A-52
Section 13.6	Record Date	A-52
Section 13.7	Adjournment	A-52
Section 13.8	Waiver of Notice; Approval of Meeting; Approval of Minutes	A-52
Section 13.9	Quorum	A-53
Section 13.10	Conduct of a Meeting	A-53
Section 13.11	Action Without a Meeting	A-53
Section 13.12	Voting and Other Rights	A-54

ARTICLE XIV MERGER, CONSOLIDATION OR CONVERSION
Section 14.1	Authority	A-54
Section 14.2	Procedure for Merger, Consolidation or Conversion	A-54
Section 14.3	Approval by Limited Partners	A-55
Section 14.4	Certificate of Merger	A-56
Section 14.5	Amendment of Partnership Agreement	A-57

ARTICLE XV RIGHT TO ACQUIRE LIMITED PARTNER INTERESTS
Section 15.1	Right to Acquire Limited Partner Interests	A-57

ARTICLE XVI GENERAL PROVISIONS
Section 16.1	Addresses and Notices	A-59
Section 16.2	Further Action	A-59
Section 16.3	Binding Effect	A-60
Section 16.4	Integration	A-60
Section 16.5	Creditors	A-60
Section 16.6	Waiver	A-60
Section 16.7	Counterparts	A-60
Section 16.8	Applicable Law	A-60
Section 16.9	Invalidity of Provisions	A-60
Section 16.10	Consent of Partners	A-60
Section 16.11	Facsimile Signatures.	A-60

A-iii

Index to Financial Statements

AMENDED AND RESTATED

AGREEMENT OF LIMITED PARTNERSHIP

ALLIANCE HOLDINGS GP, L.P.

THIS AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF ALLIANCE HOLDINGS GP, L.P. dated as of April , 2006 is entered into by and among Alliance GP, LLC, a Delaware limited liability company, as the General Partner, together with any other Persons who become Partners in the Partnership or parties hereto as provided herein. In consideration of the covenants, conditions and agreements contained herein, the parties hereto hereby agree as follows:

ARTICLE I

DEFINITIONS

Section 1.1 Definitions.

The following definitions shall be for all purposes, unless otherwise clearly indicated to the contrary, applied to the terms used in this Agreement.

“Additional Book Basis” means the portion of any remaining Carrying Value of an Adjusted Property that is attributable to positive adjustments made to such Carrying Value as a result of Book-Up Events. For purposes of determining the extent that Carrying Value constitutes Additional Book Basis:

(i) Any negative adjustment made to the Carrying Value of an Adjusted Property as a result of either a Book-Down Event or a Book-Up Event shall first be deemed to offset or decrease that portion of the Carrying Value of such Adjusted Property that is attributable to any prior positive adjustments made thereto pursuant to a Book-Up Event or Book-Down Event.

(ii) If Carrying Value that constitutes Additional Book Basis is reduced as a result of a Book-Down Event and the Carrying Value of other property is increased as a result of such Book-Down Event, an allocable portion of any such increase in Carrying Value shall be treated as Additional Book Basis; provided that the amount treated as Additional Book Basis pursuant hereto as a result of such Book-Down Event shall not exceed the amount by which the Aggregate Remaining Net Positive Adjustments after such Book-Down Event exceeds the remaining Additional Book Basis attributable to all of the Partnership’s Adjusted Property after such Book-Down Event (determined without regard to the application of this clause (ii) to such Book-Down Event).

“Additional Book Basis Derivative Items” means any Book Basis Derivative Items that are computed with reference to Additional Book Basis. To the extent that the Additional Book Basis attributable to all of the Partnership’s Adjusted Property as of the beginning of any taxable period exceeds the Aggregate Remaining Net Positive Adjustments as of the beginning of such period (the “Excess Additional Book Basis”), the Additional Book Basis Derivative Items for such period shall be reduced by the amount that bears the same ratio to the amount of Additional Book Basis Derivative Items determined without regard to this sentence as the Excess Additional Book Basis bears to the Additional Book Basis as of the beginning of such period.

“Additional Limited Partner” means a Person admitted to the Partnership as a Limited Partner pursuant to Section 4.5 and who is shown as such on the books and records of the Partnership.

“Adjusted Capital Account” means the Capital Account maintained for each Partner as of the end of each fiscal year of the Partnership, (a) increased by any amounts that such Partner is obligated to restore under the standards set by Treasury Regulation Section 1.704-1(b)(2)(ii)(c) (or is deemed obligated to restore under Treasury Regulation Sections 1.704-2(g) and 1.704-2(i)(5)) and (b) decreased by (i) the amount of all losses and

A-1

Index to Financial Statements

deductions that, as of the end of such fiscal year, are reasonably expected to be allocated to such Partner in subsequent years under Sections 704(e)(2) and 706(d) of the Code and Treasury Regulation Section 1.751-1(b)(2)(ii), and (ii) the amount of all distributions that, as of the end of such fiscal year, are reasonably expected to be made to such Partner in subsequent years in accordance with the terms of this Agreement or otherwise to the extent they exceed offsetting increases to such Partner’s Capital Account that are reasonably expected to occur during (or prior to) the year in which such distributions are reasonably expected to be made (other than increases as a result of a minimum gain chargeback pursuant to Section 6.1(d)(i) or 6.1(d)(ii)). The foregoing definition of Adjusted Capital Account is intended to comply with the provisions of Treasury Regulation Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith. The “Adjusted Capital Account” of a Partner in respect of a General Partner Interest, a Common Unit or any other Partnership Interest shall be the amount that such Adjusted Capital Account would be if such General Partner Interest, Common Unit or other Partnership Interest were the only interest in the Partnership held by a Partner from and after the date on which such General Partner Interest, Common Unit or other Partnership Interest was first issued.

“Adjusted Property” means any property the Carrying Value of which has been adjusted pursuant to Section 5.4(d)(i) or 5.4(d)(ii).

“Affiliate” means, with respect to any Person, any other Person that directly or indirectly through one or more intermediaries controls, is controlled by or is under common control with, the Person in question. As used herein, the term “control” means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a Person, whether through ownership of voting securities, by contract or otherwise.

“Aggregate Remaining Net Positive Adjustments” means, as of the end of any taxable period, the sum of the Remaining Net Positive Adjustments of all the Partners.

“Agreed Allocation” means any allocation, other than a Required Allocation, of an item of income, gain, loss or deduction pursuant to the provisions of Section 6.1, including, without limitation, a Curative Allocation (if appropriate to the context in which the term “Agreed Allocation” is used).

“Agreed Value” of any Contributed Property means the fair market value of such property or other consideration at the time of contribution as determined by the General Partner. The General Partner shall use such method as it determines to be appropriate to allocate the aggregate Agreed Value of Contributed Properties contributed to the Partnership in a single or integrated transaction among each separate property on a basis proportional to the fair market value of each Contributed Property.

“Agreement” means this Amended and Restated Agreement of Limited Partnership of Alliance Holdings GP, L.P., as it may be amended, supplemented or restated from time to time.

“Associate” means, when used to indicate a relationship with any Person, (a) any corporation or organization of which such Person is a director, officer or partner or is, directly or indirectly, the owner of 20% or more of any class of voting stock or other voting interest; (b) any trust or other estate in which such Person has at least a 20% beneficial interest or as to which such Person serves as trustee or in a similar fiduciary capacity; and (c) any relative or spouse of such Person, or any relative of such spouse, who has the same principal residence as such Person.

“Available Cash” means, with respect to any Quarter ending prior to the Liquidation Date,

(a) the sum of all cash and cash equivalents of the Partnership Group on hand on the date of determination of Available Cash with respect to such Quarter, less

(b) the amount of any cash reserves established by the General Partner to (i) provide for the proper conduct of the business of the Partnership (including reserves for future capital expenditures and for

A-2

Index to Financial Statements

anticipated future credit needs of the Partnership Group) subsequent to such Quarter, (ii) comply with applicable law or any loan agreement, security agreement, mortgage, debt instrument or other agreement or obligation to which any Group Member is a party or by which it is bound or its assets are subject, (iii) permit the MLP Managing General Partner to make capital contributions to the MLP to maintain its then current general partner interest in the MLP upon the issuance of additional partnership securities by the MLP or (iv) provide funds for distributions under Section 6.3 in respect of any one or more of the next four Quarters; provided, however, that disbursements made by a Group Member or cash reserves established, increased or reduced after the end of such Quarter but on or before the date of determination of Available Cash with respect to such Quarter shall be deemed to have been made, established, increased or reduced, for purposes of determining Available Cash, within such Quarter if the General Partner so determines.

Notwithstanding the foregoing, “Available Cash” with respect to the Quarter in which the Liquidation Date occurs and any subsequent Quarter shall equal zero.

“Board of Directors” means, with respect to the Board of Directors of the General Partner, its board of directors or managers, as applicable, if a corporation or limited liability company, or if a limited partnership, the board of directors or board of managers of the general partner of the General Partner.

“Book Basis Derivative Items” means any item of income, deduction, gain or loss included in the determination of Net Income or Net Loss that is computed with reference to the Carrying Value of an Adjusted Property (e.g., depreciation, depletion, or gain or loss with respect to an Adjusted Property).

“Book-Down Event” means an event that triggers a negative adjustment to the Capital Accounts of the Partners pursuant to Section 5.4(d).

“Book-Tax Disparity” means with respect to any item of Contributed Property or Adjusted Property, as of the date of any determination, the difference between the Carrying Value of such Contributed Property or Adjusted Property and the adjusted basis thereof for federal income tax purposes as of such date. A Partner’s share of the Partnership’s Book-Tax Disparities in all of its Contributed Property and Adjusted Property will be reflected by the difference between such Partner’s Capital Account balance as maintained pursuant to Section 5.4 and the hypothetical balance of such Partner’s Capital Account computed as if it had been maintained strictly in accordance with federal income tax accounting principles.

“Book-Up Event” means an event that triggers a positive adjustment to the Capital Accounts of the Partners pursuant to Section 5.4(d).

“Business Day” means Monday through Friday of each week, except that a legal holiday recognized as such by the government of the United States of America or the states of New York or Oklahoma shall not be regarded as a Business Day.

“Capital Account” means the capital account maintained for a Partner pursuant to Section 5.4. The “Capital Account” of a Partner in respect of a General Partner Interest, a Common Unit or any other Partnership Interest shall be the amount that such Capital Account would be if such General Partner Interest, Common Unit or other Partnership Interest were the only interest in the Partnership held by a Partner from and after the date on which such General Partner Interest, Common Unit or other Partnership Interest was first issued.

“Capital Contribution” means any cash, cash equivalents or the Net Agreed Value of Contributed Property that a Partner contributes to the Partnership pursuant to this Agreement.

“Carrying Value” means (a) with respect to a Contributed Property, the Agreed Value of such property reduced (but not below zero) by all depreciation, amortization and cost recovery deductions charged to the Partners’ Capital Accounts in respect of such Contributed Property, and (b) with respect to any other Partnership property, the adjusted basis of such property for federal income tax purposes, all as of the time of determination.

A-3

Index to Financial Statements

The Carrying Value of any property shall be adjusted from time to time in accordance with Sections 5.4(d)(i) and 5.4(d)(ii) and to reflect changes, additions or other adjustments to the Carrying Value for dispositions and acquisitions of Partnership properties, as deemed appropriate by the General Partner.

“Cause” means a court of competent jurisdiction has entered a final, non-appealable judgment finding the General Partner liable for actual fraud or willful misconduct in its capacity as a general partner of the Partnership.

“Certificate” means a certificate (i) substantially in the form of Exhibit A to this Agreement, (ii) issued in global form in accordance with the rules and regulations of the Depositary or (iii) in such other form as may be adopted by the General Partner, issued by the Partnership evidencing ownership of one or more Common Units, or a certificate, in such form as may be adopted by the General Partner, issued by the Partnership evidencing ownership of one or more other Partnership Securities.

“Certificate of Limited Partnership” means the Certificate of Limited Partnership of the Partnership filed with the Secretary of State of the State of Delaware as referenced in Section 2.1, as such Certificate of Limited Partnership may be amended, supplemented or restated from time to time.

“Citizenship Certification” means a properly completed certificate in such form as may be specified by the General Partner by which a Limited Partner certifies that he (and if he is a nominee holding for the account of another Person, that to the best of his knowledge such other Person) is an Eligible Citizen.

“Claim” has the meaning assigned to such term in Section 7.12(d).

“Closing Date” means the first date on which Common Units are sold by the Partnership to the Underwriters pursuant to the provisions of the Underwriting Agreement.

“Closing Price” has the meaning assigned to such term in Section 15.1(a).

“Code” means the Internal Revenue Code of 1986, as amended and in effect from time to time. Any reference herein to a specific section or sections of the Code shall be deemed to include a reference to any corresponding provision of any successor law.

“Combined Interest” has the meaning assigned to such term in Section 11.3(a).

“Commission” means the United States Securities and Exchange Commission.

“Common Unit” means a Partnership Interest representing a fractional part of the Partnership Interests of all Limited Partners, and having the rights and obligations specified with respect to Common Units in this Agreement.

“Conflicts Committee” means a committee of the Board of Directors of the General Partner composed entirely of two or more directors who are not (a) security holders, officers or employees of the General Partner, (b) officers, directors or employees of any Affiliate of the General Partner, including the MLP Managing General Partner, or (c) holders of any ownership interest in the Partnership Group other than Common Units, or holders of any ownership interest in the MLP Group, other than common units representing limited partner interests in the MLP and who also meet the independence standards required to serve on an audit committee of a board of directors established by the Securities Exchange Act and the rules and regulations of the Commission thereunder and by the National Securities Exchange on which the Common Units are listed or admitted for trading.

“Contributed Property” means each property or other asset, in such form as may be permitted by the Delaware Act, but excluding cash, contributed to the Partnership. Once the Carrying Value of a Contributed

A-4

Index to Financial Statements

Property is adjusted pursuant to Section 5.4(d), such property shall no longer constitute a Contributed Property, but shall be deemed an Adjusted Property.

“Contribution Agreement” means the Amended and Restated Contribution Agreement by and among the Partnership, the General Partner, Alliance Management Holdings, LLC, AMH II, LLC, Alliance Resource GP, LLC, the MLP Managing General Partner and ARM Holdings, Inc. dated as of April 14, 2006.

“Curative Allocation” means any allocation of an item of income, gain, deduction, loss or credit pursuant to the provisions of Section 6.1(d)(ix).

“Current Market Price” has the meaning assigned to such term in Section 15.1(a).

“Delaware Act” means the Delaware Revised Uniform Limited Partnership Act, 6 Del C. § 17-101, et seq., as amended, supplemented or restated from time to time, and any successor to such statute.

“Departing General Partner” means a former General Partner from and after the effective date of any withdrawal or removal of such former General Partner pursuant to Section 11.1 or 11.2.

“Depositary” means, with respect to any Units issued in global form, The Depository Trust Company and its successors and permitted assigns.

“Economic Risk of Loss” has the meaning set forth in Treasury Regulation Section 1.752-2(a).

“Eligible Citizen” means a Person qualified to own interests in real property in jurisdictions in which any Group Member does business or proposes to do business from time to time, and whose status as a Limited Partner the General Partner determines does not or would not subject such Group Member to a significant risk of cancellation or forfeiture of any of its properties or any interest therein.

“Event of Withdrawal” has the meaning assigned to such term in Section 11.1(a).

“General Partner” means Alliance GP, LLC, a Delaware limited liability company and its successors and permitted assigns that are admitted to the Partnership as general partner of the Partnership (except as the context otherwise requires).

“General Partner Interest” means the management and ownership interest, if any, of the General Partner in the Partnership (in its capacity as a general partner without reference to any Limited Partner Interest held by it), and includes any and all benefits to which a General Partner is entitled as provided in this Agreement, together with all obligations of a General Partner to comply with the terms and provisions of this Agreement.

“Group” means a Person that, with or through any of its Affiliates or Associates, has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting (except voting pursuant to a revocable proxy or consent given to such Person in response to a proxy or consent solicitation made to 10 or more Persons), exercising investment power or disposing of any Partnership Securities with any other Person that beneficially owns, or whose Affiliates or Associates beneficially own, directly or indirectly, Partnership Interests.

“Group Member” means a member of the Partnership Group.

“Holder” as used in Section 7.12 has the meaning assigned to such term in Section 7.12(a).

“Indemnified Persons” has the meaning assigned to such term in Section 7.12(c).

“Indemnitee” means (a) the General Partner, (b) any Departing General Partner, (c) any Person who is or was an Affiliate of the General Partner or any Departing General Partner, (d) any Person who is or was a

A-5

Index to Financial Statements

member, partner, officer, director, fiduciary or trustee of any Group Member, the General Partner or any Departing General Partner or any Affiliate of any Group Member, the General Partner or any Departing General Partner, (e) any Person who is or was serving at the request of the General Partner or any Departing General Partner or any Affiliate of the General Partner or any Departing General Partner as an officer, director, member, partner, fiduciary or trustee of another Person; provided, that a Person shall not be an Indemnitee by reason of providing, on a fee-for-services basis, trustee, fiduciary or custodial services and (f) any Person the General Partner designates as an “Indemnitee” for purposes of this Agreement.

“Initial Common Unit” means the Common Units sold in the Initial Offering.

“Initial Limited Partners” means the Persons listed on Schedule 1 hereto, in each case upon being admitted to the Partnership in accordance with Section 10.1.

“Initial Offering” means the initial offering and sale of Common Units to the public, as described in the Registration Statement.

“Issue Price” means the price at which a Unit is purchased from the Partnership, after taking into account any sales commission or underwriting discount charged to the Partnership.

“Limited Partner” means, unless the context otherwise requires, each Initial Limited Partner, each Limited Partner, each Additional Limited Partner and any Departing General Partner upon the change of its status from General Partner to Limited Partner pursuant to Section 11.3, in each case, in such Person’s capacity as a limited partner of the Partnership.

“Limited Partner Interest” means the ownership interest of a Limited Partner in the Partnership, which may be evidenced by Common Units or other Partnership Securities or a combination thereof or interest therein, and includes any and all benefits to which such Limited Partner is entitled as provided in this Agreement, together with all obligations of such Limited Partner to comply with the terms and provisions of this Agreement.

“Liquidation Date” means (a) in the case of an event giving rise to the dissolution of the Partnership of the type described in clauses (a) and (b) of the first sentence of Section 12.2, the date on which the applicable time period during which the holders of Outstanding Units have the right to elect to continue the business of the Partnership has expired without such an election being made, and (b) in the case of any other event giving rise to the dissolution of the Partnership, the date on which such event occurs.

“Liquidator” means one or more Persons selected by the General Partner to perform the functions described in Section 12.3 as liquidating trustee of the Partnership within the meaning of the Delaware Act.

“Merger Agreement” has the meaning assigned to such term in Section 14.1.

“MLP” means Alliance Resource Partners, L.P., a Delaware limited partnership, and any successors thereto.

“MLP Agreement” means the Second Amended and Restated Agreement of Limited Partnership of Alliance Resource Partners, L.P., as it may be amended, supplemented or restated from time to time.

“MLP Group” means the MLP and its Subsidiaries.

“MLP Managing General Partner” means Alliance Resource Management GP, LLC, a Delaware limited liability company and the managing general partner of the MLP, and any successor thereto.

“National Securities Exchange” means an exchange registered with the Commission under Section 6(a) of the Securities Exchange Act, and any successor to such statute, or the Nasdaq National Market or any successor thereto.

A-6

Index to Financial Statements

“Net Agreed Value” means, (a) in the case of any Contributed Property, the Agreed Value of such property reduced by any liabilities either assumed by the Partnership upon such contribution or to which such property is subject when contributed, and (b) in the case of any property distributed to a Partner by the Partnership, the Partnership’s Carrying Value of such property (as adjusted pursuant to Section 5.4(d)(ii)) at the time such property is distributed, reduced by any indebtedness either assumed by such Partner upon such distribution or to which such property is subject at the time of distribution, in either case, as determined under Section 752 of the Code.

“Net Income” means, for any taxable year, the excess, if any, of the Partnership’s items of income and gain (other than those items taken into account in the computation of Net Termination Gain or Net Termination Loss) for such taxable year over the Partnership’s items of loss and deduction (other than those items taken into account in the computation of Net Termination Gain or Net Termination Loss) for such taxable year. The items included in the calculation of Net Income shall be determined in accordance with Section 5.4(b) and shall not include any items specially allocated under Section 6.1(d); provided that the determination of the items that have been specially allocated under Section 6.1(d) shall be made as if Section 6.1(d) were not in this Agreement.

“Net Loss” means, for any taxable year, the excess, if any, of the Partnership’s items of loss and deduction (other than those items taken into account in the computation of Net Termination Gain or Net Termination Loss) for such taxable year over the Partnership’s items of income and gain (other than those items taken into account in the computation of Net Termination Gain or Net Termination Loss) for such taxable year. The items included in the calculation of Net Loss shall be determined in accordance with Section 5.4(b) and shall not include any items specially allocated under Section 6.1(d); provided that the determination of the items that have been specially allocated under Section 6.1(d) shall be made as if Section 6.1(d) were not in this Agreement.

“Net Positive Adjustments” means, with respect to any Partner, the excess, if any, of the total positive adjustments over the total negative adjustments made to the Capital Account of such Partner pursuant to Book-Up Events and Book-Down Events.

“Net Termination Gain” means, for any taxable year, the sum, if positive, of all items of income, gain, loss or deduction recognized by the Partnership after the Liquidation Date. The items included in the determination of Net Termination Gain shall be determined in accordance with Section 5.4(b) and shall not include any items of income, gain, loss or deduction specially allocated under Section 6.1(d).

“Net Termination Loss” means, for any taxable year, the sum, if negative, of all items of income, gain, loss or deduction recognized by the Partnership after the Liquidation Date. The items included in the determination of Net Termination Loss shall be determined in accordance with Section 5.4(b) and shall not include any items of income, gain, loss or deduction specially allocated under Section 6.1(d).

“Non-citizen Assignee” means a Person whom the General Partner has determined does not constitute an Eligible Citizen and as to whose Partnership Interest the General Partner has become the Limited Partner, pursuant to Section 4.8.

“Nonrecourse Built-in Gain” means with respect to any Contributed Properties or Adjusted Properties that are subject to a mortgage or pledge securing a Nonrecourse Liability, the amount of any taxable gain that would be allocated to the Partners pursuant to Sections 6.2(b)(i)(A), 6.2(b)(ii)(A) and 6.2(b)(iii) if such properties were disposed of in a taxable transaction in full satisfaction of such liabilities and for no other consideration.

“Nonrecourse Deductions” means any and all items of loss, deduction or expenditure (including, without limitation, any expenditure described in Section 705(a)(2)(B) of the Code) that, in accordance with the principles of Treasury Regulation Section 1.704-2(b), are attributable to a Nonrecourse Liability.

“Nonrecourse Liability” has the meaning set forth in Treasury Regulation Section 1.752-1(a)(2).

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Index to Financial Statements

“Notice of Election to Purchase” has the meaning assigned to such term in Section 15.1(b).

“Omnibus Agreement” means the Omnibus Agreement dated May 15, 2006 among the Partnership, the General Partners, the MLP, the MLP Managing General Partner, and Alliance Coal, LLC, as it may be amended, supplemented or restated from time to time.

“Opinion of Counsel” means a written opinion of counsel (who may be regular counsel to the Partnership or the General Partner or any of its Affiliates) in a form acceptable to the General Partner.

“Option Closing Date” means the date or dates on which any Common Units are sold by the Partnership to the Underwriters upon exercise of the Over-Allotment Option.

“Outstanding” means, with respect to Partnership Securities, all Partnership Securities that are issued by the Partnership and reflected as outstanding on the Partnership’s books and records as of the date of determination; provided, however, that if at any time any Person or Group (other than the General Partner or its Affiliates) beneficially owns 20% or more of the Outstanding Partnership Securities of any class then Outstanding, all Partnership Securities owned by such Person or Group shall not be voted on any matter and shall not be considered to be Outstanding when sending notices of a meeting of Limited Partners to vote on any matter (unless otherwise required by law), calculating required votes, determining the presence of a quorum or for other similar purposes under this Agreement, except that Common Units so owned shall be considered to be Outstanding for purposes of Section 11.1(b)(iv) (such Common Units shall not, however, be treated as a separate class of Partnership Securities for purposes of this Agreement); provided, further, that the foregoing limitation shall not apply (i) to any Person or Group who acquired 20% or more of any Outstanding Partnership Securities of any class then Outstanding directly from the General Partner or its Affiliates, (ii) to any Person or Group who acquired 20% or more of the Outstanding Partnership Securities of any class then Outstanding directly or indirectly from a Person or Group described in clause (i) provided that the General Partner shall have notified such Person or Group in writing that such limitation shall not apply or (iii) to any Person or Group who acquired 20% or more of the Partnership Securities issued by the Partnership with the prior approval of the Board of Directors.

“Over-Allotment Option” means the over-allotment option granted to the Underwriters by the Partnership pursuant to the Underwriting Agreement.

“Partner Nonrecourse Debt” has the meaning set forth in Treasury Regulation Section 1.704-2(b)(4).

“Partner Nonrecourse Debt Minimum Gain” has the meaning set forth in Treasury Regulation Section 1.704-2(i)(2).

“Partner Nonrecourse Deductions” means any and all items of loss, deduction or expenditure (including, without limitation, any expenditure described in Section 705(a)(2)(B) of the Code) that, in accordance with the principles of Treasury Regulation Section 1.704-2(i), are attributable to a Partner Nonrecourse Debt.

“Partners” means the General Partner and the Limited Partners.

“Partnership” means Alliance Holdings GP, L.P., a Delaware limited partnership.

“Partnership Group” means the Partnership and its Subsidiaries treated as a single consolidated entity, but excluding the MLP Group.

“Partnership Interest” means an interest in the Partnership, which shall include the General Partner Interests and Limited Partner Interests.

“Partnership Minimum Gain” means that amount determined in accordance with the principles of Treasury Regulation Section 1.704-2(d).

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Index to Financial Statements

“Partnership Security” means any class or series of equity interest in the Partnership (but excluding any options, rights, warrants and appreciation rights relating to an equity interest in the Partnership), including without limitation, Common Units.

“Percentage Interest” means, as of any date of determination, (a) as to any Unitholder holding Units, the product obtained by multiplying (i) 100% less the percentage applicable to clause (b) by (ii) the quotient obtained by dividing (A) the number of Units held by such Unitholder by (B) the total number of all Outstanding Units, and (b) as to the holders of additional Partnership Securities issued by the Partnership in accordance with Section 5.5, the percentage established as a part of such issuance.

“Person” means an individual or a corporation, limited liability company, partnership, joint venture, trust, unincorporated organization, association, government agency or political subdivision thereof or other entity.

“Pro Rata” means (a) when modifying Units or any class thereof, apportioned equally among all designated Units in accordance with their relative Percentage Interests, and (b) when modifying Partners or Record Holders, apportioned among all Partners or Record Holders, as the case may be, in accordance with their relative Percentage Interests.

“Purchase Date” means the date determined by the General Partner as the date for purchase of all Outstanding Units of a certain class (other than Units owned by the General Partner and its Affiliates) pursuant to Article XV.

“Quarter” means, unless the context requires otherwise, a fiscal quarter of the Partnership, or with respect to the first fiscal quarter of the Partnership after the Closing Date the portion of such fiscal quarter after the Closing Date.

“Recapture Income” means any gain recognized by the Partnership (computed without regard to any adjustment required by Section 734 or Section 743 of the Code) upon the disposition of any property or asset of the Partnership, which gain is characterized as ordinary income because it represents the recapture of deductions previously taken with respect to such property or asset.

“Record Date” means the date established by the General Partner or otherwise in accordance with this Agreement for determining (a) the identity of the Record Holders entitled to notice of, or to vote at, any meeting of Limited Partners or entitled to vote by ballot or give approval of Partnership action in writing without a meeting or entitled to exercise rights in respect of any lawful action of Limited Partners or (b) the identity of Record Holders entitled to receive any report or distribution or to participate in any offer.

“Record Holder” means the Person in whose name a Common Unit is registered on the books of the Transfer Agent as of the opening of business on a particular Business Day, or with respect to other Partnership Interests, the Person in whose name any such other Partnership Interest is registered on the books that the General Partner has caused to be kept as of the opening of business on such Business Day.

“Redeemable Interests” means any Partnership Interests for which a redemption notice has been given, and has not been withdrawn, pursuant to Section 4.9.

“Registration Statement” means the Registration Statement on Form S-1 (Registration No. 333-129883) as it has been or as it may be amended or supplemented from time to time, filed by the Partnership with the Commission under the Securities Act to register the offering and sale of the Common Units in the Initial Offering.

“Remaining Net Positive Adjustments” means as of the end of any taxable period, with respect to the Unitholders holding Common Units, the excess of (a) the Net Positive Adjustments of the Unitholders holding

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Index to Financial Statements

Common Units, as of the end of such period over (b) the sum of those Partners’ Share of Additional Book Basis Derivative Items for each prior taxable period.

“Required Allocations” means (a) any limitation imposed on any allocation of Net Losses or Net Termination Losses under Section 6.1(b) or 6.1(c)(ii) and (b) any allocation of an item of income, gain, loss or deduction pursuant to Sections 6.1(d)(i), 6.1(d)(ii), 6.1(d)(iv), 6.1(d)(vii) or 6.1(d)(viii).

“Residual Gain” or “Residual Loss” means any item of gain or loss, as the case may be, of the Partnership recognized for federal income tax purposes resulting from a sale, exchange or other disposition of a Contributed Property or Adjusted Property, to the extent such item of gain or loss is not allocated pursuant to Sections 6.2(b)(i)(A) or 6.2(b)(ii)(A), respectively, to eliminate Book-Tax Disparities.

“Securities Act” means the Securities Act of 1933, as amended, supplemented or restated from time to time and any successor to such statute.

“Securities Exchange Act” means the Securities Exchange Act of 1934, as amended, supplemented or restated from time to time and any successor to such statute.

“Services Agreement” means the Administrative Services Agreement dated April , 2006 among the Partnership, the General Partner, the MLP Managing General Partner and Alliance Coal, LLC, as it may be amended, supplemented or restated from time to time.

“Share of Additional Book Basis Derivative Items” means in connection with any allocation of Additional Book Basis Derivative Items for any taxable period, with respect to the Unitholders holding Common Units, the amount that bears the same ratio to such Additional Book Basis Derivative Items as the Unitholders’ Remaining Net Positive Adjustments as of the end of such period bears to the Aggregate Remaining Net Positive Adjustments as of that time.

“Special Approval” means approval by a majority of the members of the Conflicts Committee.

“Subsidiary” means, with respect to any Person, (a) a corporation of which more than 50% of the voting power of shares entitled (without regard to the occurrence of any contingency) to vote in the election of directors or other governing body of such corporation is owned, directly or indirectly, at the date of determination, by such Person, by one or more Subsidiaries of such Person or a combination thereof, (b) a partnership (whether general or limited) in which such Person or a Subsidiary of such Person is, at the date of determination, a general or limited partner of such partnership, but only if more than 50% of the partnership interests of such partnership (considering all of the partnership interests of the partnership as a single class) is owned, directly or indirectly, at the date of determination, by such Person, by one or more Subsidiaries of such Person, or a combination thereof, or (c) any other Person (other than a corporation or a partnership) in which such Person, one or more Subsidiaries of such Person, or a combination thereof, directly or indirectly, at the date of determination, has (i) at least a majority ownership interest or (ii) the power to elect or direct the election of a majority of the directors or other governing body of such Person.

“Surviving Business Entity” has the meaning assigned to such term in Section 14.2(b).

“Trading Day” has the meaning assigned to such term in Section 15.1(a).

“transfer” has the meaning assigned to such term in Section 4.4(a).

“Transfer Agent” means such bank, trust company or other Person (including the General Partner or one of its Affiliates) as shall be appointed from time to time by the Partnership to act as registrar and transfer agent for

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Index to Financial Statements

the Common Units; provided that if no Transfer Agent is specifically designated for any other Partnership Securities, the General Partner shall act in such capacity.

“Underwriter” means each Person named as an underwriter in Schedule I to the Underwriting Agreement who purchases Common Units pursuant thereto.

“Underwriting Agreement” means the Underwriting Agreement entered into in connection with the Initial Offering dated May 9, 2006 among the Underwriters, the Partnership and certain other parties, providing for the purchase of Common Units by such Underwriters.

“Unit” means a Partnership Interest that is designated as a “Unit” and shall include Common Units.

“Unit Majority” means at least a majority of the Outstanding Common Units voting together as a single class.

“Unitholders” means the holders of Units.

“Unrealized Gain” attributable to any item of Partnership property means, as of any date of determination, the excess, if any, of (a) the fair market value of such property as of such date (as determined under Section 5.4(d)) over (b) the Carrying Value of such property as of such date (prior to any adjustment to be made pursuant to Section 5.4(d) as of such date).

“Unrealized Loss” attributable to any item of Partnership property means, as of any date of determination, the excess, if any, of (a) the Carrying Value of such property as of such date (prior to any adjustment to be made pursuant to Section 5.4(d) as of such date) over (b) the fair market value of such property as of such date (as determined under Section 5.4(d)).

“U.S. GAAP” means United States generally accepted accounting principles consistently applied.

“Withdrawal Opinion of Counsel” has the meaning assigned to such term in Section 11.1(b).

Section 1.2 Construction.

Unless the context requires otherwise: (a) any pronoun used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns, pronouns and verbs shall include the plural and vice versa; (b) references to Articles and Sections refer to Articles and Sections of this Agreement; (c) the terms “include,” “includes” or “including” or words of like import shall be deemed to be followed by the words “without limitation;” and (d) the terms “hereof,” “herein” or “hereunder” refer to this Agreement as a whole and not to any particular provision of this Agreement. The table of contents and headings contained in this Agreement are for reference purposes only, and shall not affect in any way the meaning or interpretation of this Agreement.

ARTICLE II

ORGANIZATION

Section 2.1 Formation.

The Partnership was formed on November 10, 2005 pursuant to the Certificate of Limited Partnership as filed with the Secretary of State of the State of Delaware pursuant to the provisions of the Delaware Act. Except as expressly provided to the contrary in this Agreement, the rights, duties (including fiduciary duties), liabilities and obligations of the Partners and the administration, dissolution and termination of the Partnership shall be governed by the Delaware Act. All Partnership Interests shall constitute personal property of the owner thereof for all purposes.

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Index to Financial Statements

Section 2.2 Name.

The name of the Partnership shall be “Alliance Holdings GP, L.P.” The Partnership’s business may be conducted under any other name or names as determined by the General Partner, including the name of the General Partner. The words “Limited Partnership,” “LP,” “Ltd.” or similar words or letters shall be included in the Partnership’s name where necessary for the purpose of complying with the laws of any jurisdiction that so requires. The General Partner may change the name of the Partnership at any time and from time to time and shall notify the Limited Partners of such change in the next regular communication to the Limited Partners.

Section 2.3 Registered Office; Registered Agent; Principal Office; Other Offices.

Unless and until changed by the General Partner, the registered office of the Partnership in the State of Delaware shall be located at 1209 Orange Street, Suite 400, Wilmington, Delaware 19801, and the registered agent for service of process on the Partnership in the State of Delaware at such registered office shall be The Corporation Trust Company. The principal office of the Partnership shall be located at 1717 South Boulder Avenue, Tulsa, Oklahoma 74119 or such other place as the General Partner may from time to time designate by notice to the Limited Partners. The Partnership may maintain offices at such other place or places within or outside the State of Delaware as the General Partner deems necessary or appropriate. The address of the General Partner shall be 1717 South Boulder Avenue, Tulsa, Oklahoma 74119 or such other place as the General Partner may from time to time designate by notice to the Limited Partners.

Section 2.4 Purpose and Business.

The purpose and nature of the business to be conducted by the Partnership shall be to (a) engage directly in, or enter into or form any corporation, partnership, joint venture, limited liability company or other arrangement to engage indirectly in, any business activity that is approved by the General Partner and that lawfully may be conducted by a limited partnership organized pursuant to the Delaware Act and, in connection therewith, to exercise all of the rights and powers conferred upon the Partnership pursuant to the agreements relating to such business activity; and (b) do anything necessary or appropriate to the foregoing, including the making of capital contributions or loans to a Group Member, provided, however, that the General Partner shall not cause the Partnership to engage, directly or indirectly, in any business activity that the General Partner determines would cause the Partnership to be treated as an association taxable as a corporation or otherwise taxable as an entity for federal income tax purposes. To the fullest extent permitted by law, the General Partner shall have no duty or obligation to propose or approve, and may decline to propose or approve, the conduct by the Partnership of any business, free of any fiduciary duty or obligation whatsoever to the Partnership or any Limited Partner and, in declining to so propose or approve, shall not be required to act in good faith or pursuant to any other standard imposed by this Agreement, any other agreement contemplated hereby or under the Delaware Act or any other law, rule or regulation or at equity.

Section 2.5 Powers.

The Partnership shall be empowered to do any and all acts and things necessary, appropriate, proper, advisable, incidental to or convenient for the furtherance and accomplishment of the purposes and business described in Section 2.4 and for the protection and benefit of the Partnership.

Section 2.6 Power of Attorney.

(a) Each Limited Partner hereby constitutes and appoints the General Partner and, if a Liquidator (other than the General Partner) shall have been selected pursuant to Section 12.3, the Liquidator, severally (and any successor to either thereof by merger, transfer, assignment, election or otherwise) and each of their authorized officers and attorneys-in-fact, as the case may be, with full power of substitution, as his true and lawful agent and attorney-in-fact, with full power and authority in his name, place and stead, to:

(i) execute, swear to, acknowledge, deliver, file and record in the appropriate public offices (A) all certificates, documents and other instruments (including this Agreement and the Certificate of Limited

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Index to Financial Statements

Partnership and all amendments or restatements hereof or thereof) that the General Partner or the Liquidator determines to be necessary or appropriate to form, qualify or continue the existence or qualification of the Partnership as a limited partnership (or a partnership in which the limited partners have limited liability) in the State of Delaware and in all other jurisdictions in which the Partnership may conduct business or own property; (B) all certificates, documents and other instruments that the General Partner or the Liquidator determines to be necessary or appropriate to reflect, in accordance with its terms, any amendment, change, modification or restatement of this Agreement; (C) all certificates, documents and other instruments (including conveyances and a certificate of cancellation) that the General Partner or the Liquidator determines to be necessary or appropriate to reflect the dissolution and liquidation of the Partnership pursuant to the terms of this Agreement; (D) all certificates, documents and other instruments relating to the admission, withdrawal, removal or substitution of any Partner pursuant to, or other events described in, Article IV, X, XI or XII; (E) all certificates, documents and other instruments relating to the determination of the rights, preferences and privileges of any class or series of Partnership Securities issued pursuant to Section 5.5; and (F) all certificates, documents and other instruments (including agreements and a certificate of merger) relating to a merger, consolidation or conversion of the Partnership pursuant to Article XIV; and

(ii) execute, swear to, acknowledge, deliver, file and record all ballots, consents, approvals, waivers, certificates, documents and other instruments that the General Partner or the Liquidator determines to be necessary or appropriate to (A) make, evidence, give, confirm or ratify any vote, consent, approval, agreement or other action that is made or given by the Partners hereunder or is consistent with the terms of this Agreement or (B) effectuate the terms or intent of this Agreement; provided, that when required by Section 13.3 or any other provision of this Agreement that establishes a percentage of the Limited Partners or of the Limited Partners of any class or series required to take any action, the General Partner and the Liquidator may exercise the power of attorney made in this Section 2.6(a)(ii) only after the necessary vote, consent or approval of the Limited Partners or of the Limited Partners of such class or series, as applicable.

Nothing contained in this Section 2.6(a) shall be construed as authorizing the General Partner to amend this Agreement except in accordance with Article XIII or as may be otherwise expressly provided for in this Agreement.

(b) The foregoing power of attorney is hereby declared to be irrevocable and a power coupled with an interest, and it shall survive and, to the maximum extent permitted by law, not be affected by the subsequent death, incompetency, disability, incapacity, dissolution, bankruptcy or termination of any Limited Partner and the transfer of all or any portion of such Limited Partner’s Partnership Interest and shall extend to such Limited Partner’s heirs, successors, assigns and personal representatives. Each such Limited Partner hereby agrees to be bound by any representation made by the General Partner or the Liquidator acting in good faith pursuant to such power of attorney; and each such Limited Partner, to the maximum extent permitted by law, hereby waives any and all defenses that may be available to contest, negate or disaffirm the action of the General Partner or the Liquidator taken in good faith under such power of attorney. Each Limited Partner shall execute and deliver to the General Partner or the Liquidator, within 15 days after receipt of the request therefor, such further designation, powers of attorney and other instruments as the General Partner or the Liquidator may request in order to effectuate this Agreement and the purposes of the Partnership.

Section 2.7 Term.

The term of the Partnership commenced upon the filing of the Certificate of Limited Partnership in accordance with the Delaware Act and shall continue in existence until the dissolution of the Partnership in accordance with the provisions of Article XII. The existence of the Partnership as a separate legal entity shall continue until the cancellation of the Certificate of Limited Partnership as provided in the Delaware Act.

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Index to Financial Statements

Section 2.8 Title to Partnership Assets.

Title to Partnership assets, whether real, personal or mixed and whether tangible or intangible, shall be deemed to be owned by the Partnership as an entity, and no Partner, individually or collectively, shall have any ownership interest in such Partnership assets or any portion thereof. Title to any or all of the Partnership assets may be held in the name of the Partnership, the General Partner, one or more of its Affiliates or one or more nominees, as the General Partner may determine. The General Partner hereby declares and warrants that any Partnership assets for which record title is held in the name of the General Partner or one or more of its Affiliates or one or more nominees shall be held by the General Partner or such Affiliate or nominee for the use and benefit of the Partnership in accordance with the provisions of this Agreement; provided, however, that the General Partner shall use reasonable efforts to cause record title to such assets (other than those assets in respect of which the General Partner determines that the expense and difficulty of conveyancing makes transfer of record title to the Partnership impracticable) to be vested in the Partnership as soon as reasonably practicable; provided, further, that, prior to the withdrawal or removal of the General Partner or as soon thereafter as practicable, the General Partner shall use reasonable efforts to effect the transfer to the Partnership of record title to all Partnership assets held by the General Partner or its Affiliates and, prior to any such transfer, will provide for the use of such assets in a manner satisfactory to the General Partner. All Partnership assets shall be recorded as the property of the Partnership in its books and records, irrespective of the name in which record title to such Partnership assets is held.

Section 2.9 Certain Undertakings Relating to the Separateness of the Partnership.

(a) Separateness Generally. The Partnership shall conduct its business and operations separate and apart from those of any other Person (other than the General Partner) in accordance with this Section 2.9.

(b) Separate Records. The Partnership shall maintain (i) its books and records, (ii) its accounts, and (iii) its financial statements, separate from those of any other Person, except its consolidated Subsidiaries.

(c) Separate Assets. The Partnership shall not commingle or pool its funds or other assets with those of any other Person, except its consolidated Subsidiaries, and shall maintain its assets in a manner that is not costly or difficult to segregate, ascertain or otherwise identify as separate from those of any other Person.

(d) Separate Name. The Partnership shall (i) conduct its business in its own name, (ii) use separate stationery, invoices, and checks, (iii) correct any known misunderstanding regarding its separate identity, and (iv) generally hold itself out as a separate entity.

(e) Separate Credit. The Partnership shall not (i) pay its own liabilities from a source other than its own funds, (ii) guarantee or become obligated for the debts of any other Person, except its Subsidiaries, (iii) hold out its credit as being available to satisfy the obligations of any other Person, except its Subsidiaries, (iv) acquire obligations or debt securities of the General Partner or its Affiliates (other than the Partnership or its Subsidiaries), or (v) pledge its assets for the benefit of any Person or make loans or advances to any Person, except its Subsidiaries; provided that the Partnership may engage in any transaction described in clauses (ii)–(v) of this Section 2.9(e) if prior Special Approval has been obtained for such transaction and either (A) the Conflicts Committee has determined, or has obtained reasonable written assurance from a nationally recognized firm of independent public accountants or a nationally recognized investment banking or valuation firm, that the borrower or recipient of the credit extension is not then insolvent and will not be rendered insolvent as a result of such transaction or (B) in the case of transactions described in clause (iv), such transaction is completed through a public auction or a National Securities Exchange.

(f) Separate Formalities. The Partnership shall (i) observe all partnership formalities and other formalities required by its organizational documents, the laws of the jurisdiction of its formation, or other laws, rules, regulations and orders of governmental authorities exercising jurisdiction over it, (ii) engage in transactions with the General Partner and its Affiliates (other than another Group Member) in conformity with the requirements of Section 7.9, and (iii) promptly pay, from its own funds, and on a current basis, its allocable share of general and administrative expenses, capital expenditures, and costs for shared services

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Index to Financial Statements

performed by Affiliates of the General Partner (other than another Group Member). Each material contract between the Partnership or another Group Member, on the one hand, and the Affiliates of the General Partner (other than a Group Member), on the other hand, shall be in writing.

(g) No Effect. Failure by the General Partner or the Partnership to comply with any of the obligations set forth above shall not affect the status of the Partnership as a separate legal entity, with its separate assets and separate liabilities.

ARTICLE III

RIGHTS OF LIMITED PARTNERS

Section 3.1 Limitation of Liability.

The Limited Partners shall have no liability under this Agreement except as expressly provided in this Agreement or the Delaware Act.

Section 3.2 Management of Business.

No Limited Partner, in its capacity as such, shall participate in the operation, management or control (within the meaning of the Delaware Act) of the Partnership’s business, transact any business in the Partnership’s name or have the power to sign documents for or otherwise bind the Partnership. Any action taken by any Affiliate of the General Partner or any officer, director, employee, manager, member, general partner, agent or trustee of the General Partner or any of its Affiliates, or any officer, director, employee, manager, member, general partner, agent or trustee of a Group Member, in its capacity as such, shall not be deemed to be participation in the control of the business of the Partnership by a limited partner of the Partnership (within the meaning of Section 17-303(a) of the Delaware Act) and shall not affect, impair or eliminate the limitations on the liability of the Limited Partners under this Agreement.

Section 3.3 Outside Activities of the Limited Partners.

Subject to the provisions of Section 7.5 and the Omnibus Agreement, which shall continue to be applicable to the Persons referred to therein, regardless of whether such Persons shall also be Limited Partners, any Limited Partner shall be entitled to and may have business interests and engage in business activities in addition to those relating to the Partnership, including business interests and activities in direct competition with the Partnership Group or the MLP Group. Neither the Partnership nor any of the other Partners shall have any rights by virtue of this Agreement in any business ventures of any Limited Partner.

Section 3.4 Rights of Limited Partners.

(a) In addition to other rights provided by this Agreement or by applicable law, and except as limited by Section 3.4(b), each Limited Partner shall have the right, for a purpose reasonably related to such Limited Partner’s interest as a Limited Partner in the Partnership, upon reasonable written demand stating the purpose of such demand and at such Limited Partner’s own expense:

(i) to obtain true and full information regarding the status of the business and financial condition of the Partnership;

(ii) promptly after its becoming available, to obtain a copy of the Partnership’s federal, state and local income tax returns for each year;

(iii) to obtain a current list of the name and last known business, residence or mailing address of each Partner;

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Index to Financial Statements

(iv) to obtain a copy of this Agreement and the Certificate of Limited Partnership and all amendments thereto, together with a copy of the executed copies of all powers of attorney pursuant to which this Agreement, the Certificate of Limited Partnership and all amendments thereto have been executed;

(v) to obtain true and full information regarding the amount of cash and a description and statement of the Net Agreed Value of any other Capital Contribution by each Partner and that each Partner has agreed to contribute in the future, and the date on which each became a Partner; and

(vi) to obtain such other information regarding the affairs of the Partnership as is just and reasonable.

(b) Notwithstanding any other provision of this Agreement, the General Partner may keep confidential from the Limited Partners, for such period of time as the General Partner determines, (i) any information that the General Partner reasonably believes to be in the nature of trade secrets or (ii) other information the disclosure of which the General Partner believes (A) is not in the best interests of the Partnership Group, (B) could damage the Partnership Group or its consolidated business or (C) that any Group Member is required by law or by agreement with any third party to keep confidential (other than agreements with Affiliates of the Partnership the primary purpose of which is to circumvent the obligations set forth in this Section 3.4).

ARTICLE IV

CERTIFICATES; RECORD HOLDERS; TRANSFER OF PARTNERSHIP INTERESTS;

REDEMPTION OF PARTNERSHIP INTERESTS

Section 4.1 Certificates.

Prior to the Closing Date, the Partnership Interests will not be evidenced by a Certificate. Effective on the Closing Date, upon the Partnership’s issuance of Common Units to any Person, the Partnership shall issue, upon the request of such Person, one or more Certificates in the name of such Person evidencing the number of such Units being so issued. Certificates shall be executed on behalf of the Partnership by the Chairman of the Board, President or any Vice President and the Secretary or any Assistant Secretary of the General Partner. No Common Unit Certificate shall be valid for any purpose until it has been countersigned by the Transfer Agent; provided, however, that if the General Partner elects to issue Common Units in global form, the Common Unit Certificates shall be valid upon receipt of a certificate from the Transfer Agent certifying that the Common Units have been duly registered in accordance with the directions of the Partnership.

Section 4.2 Mutilated, Destroyed, Lost or Stolen Certificates.

(a) If Certificates are issued and any mutilated Certificate is surrendered to the Transfer Agent, the appropriate officers of the General Partner on behalf of the Partnership shall execute, and the Transfer Agent shall countersign and deliver in exchange therefor, a new Certificate evidencing the same number and type of Partnership Securities as the Certificate so surrendered.

(b) The appropriate officers of the General Partner on behalf of the Partnership shall execute and deliver, and the Transfer Agent shall countersign a new Certificate in place of any Certificate previously issued if the Record Holder of the Certificate:

(i) makes proof by affidavit, in form and substance satisfactory to the General Partner, that a previously issued Certificate has been lost, destroyed or stolen;

(ii) requests the issuance of a new Certificate before the General Partner has notice that the Certificate has been acquired by a purchaser for value in good faith and without notice of an adverse claim;

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(iii) if requested by the General Partner, delivers to the General Partner a bond, in form and substance satisfactory to the General Partner, with surety or sureties and with fixed or open penalty as the General Partner may direct to indemnify the Partnership, the Partners, the General Partner and the Transfer Agent against any claim that may be made on account of the alleged loss, destruction or theft of the Certificate; and

(iv) satisfies any other reasonable requirements imposed by the General Partner.

(c) If a Limited Partner fails to notify the General Partner within a reasonable period of time after he has notice of the loss, destruction or theft of a Certificate, and a transfer of the Limited Partner Interests represented by the Certificate is registered before the Partnership, the General Partner or the Transfer Agent receives such notification, the Limited Partner shall be precluded from making any claim against the Partnership, the General Partner or the Transfer Agent for such transfer or for a new Certificate.

(d) As a condition to the issuance of any new Certificate under this Section 4.2, the General Partner may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Transfer Agent) reasonably connected therewith.

Section 4.3 Record Holders.

The Partnership shall be entitled to recognize the Record Holder as the Limited Partner with respect to any Partnership Interest and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such Partnership Interest on the part of any other Person, regardless of whether the Partnership shall have actual or other notice thereof, except as otherwise provided by law or any applicable rule, regulation, guideline or requirement of any National Securities Exchange on which such Partnership Interests are listed or admitted for trading. Without limiting the foregoing, when a Person (such as a broker, dealer, bank, trust company or clearing corporation or an agent of any of the foregoing) is acting as nominee, agent or in some other representative capacity for another Person in acquiring and/or holding Partnership Interests, as between the Partnership on the one hand, and such other Persons on the other, such representative Person shall be the Record Holder of such Partnership Interest.

Section 4.4 Transfer Generally.

(a) The term “transfer,” when used in this Agreement with respect to a Partnership Interest, shall be deemed to refer to a transaction (i) by which the General Partner assigns its General Partner Interest to another Person who becomes the General Partner, and includes a sale, assignment, gift, pledge, encumbrance, hypothecation, mortgage, exchange, or any other disposition by law or otherwise or (ii) by which the holder of a Limited Partner Interest assigns such Limited Partner Interest to another Person who is or becomes a Limited Partner, and includes a sale, assignment, gift, exchange or any other disposition by law or otherwise, including any transfer upon foreclosure of any pledge, encumbrance, hypothecation or mortgage.

(b) No Partnership Interest shall be transferred, in whole or in part, except in accordance with the terms and conditions set forth in this Article IV. Any transfer or purported transfer of a Partnership Interest not made in accordance with this Article IV shall be null and void.

(c) Nothing contained in this Agreement shall be construed to prevent a disposition by any stockholder, member, partner or other owner of the General Partner of any or all of the issued and outstanding equity interests or other ownership interests in the General Partner, including through a merger or consolidation of the General Partner.

Section 4.5 Registration and Transfer of Limited Partner Interests.

(a) The General Partner shall keep or cause to be kept on behalf of the Partnership a register in which, subject to such reasonable regulations as it may prescribe and subject to the provisions of Section 4.5(b), the

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Partnership will provide for the registration and transfer of Limited Partner Interests. The Transfer Agent is hereby appointed registrar and transfer agent for the purpose of registering Common Units and transfers of such Common Units as herein provided. The Partnership shall not recognize transfers of Certificates evidencing Limited Partner Interests unless such transfers are effected in the manner described in this Section 4.5. Upon surrender of a Certificate for registration of transfer of any Limited Partner Interests evidenced by a Certificate, and subject to the provisions of Section 4.5(b), the appropriate officers of the General Partner on behalf of the Partnership shall execute and deliver, and in the case of Common Units, the Transfer Agent shall countersign and deliver, in the name of the holder or the designated transferee or transferees, as required pursuant to the holder’s instructions, one or more new Certificates evidencing the same aggregate number and type of Limited Partner Interests as was evidenced by the Certificate so surrendered.

(b) Except as otherwise provided in Section 4.8, the Partnership shall not recognize any transfer of Limited Partner Interests until the Certificates evidencing such Limited Partner Interests are surrendered for registration of transfer. No charge shall be imposed by the General Partner for such transfer; provided, that as a condition to the issuance of any new Certificate under this Section 4.5, the General Partner may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed with respect thereto.

(c) Subject to (i) the foregoing provisions of this Section 4.5, (ii) Section 4.3, (iii) Section 4.7, (iv) with respect to any series of Limited Partner Interests, the provisions of any statement of designations or amendment to this Agreement establishing such series, (v) any contractual provisions binding on any Limited Partner and (vi) provisions of applicable law including the Securities Act, Limited Partnership Interests shall be freely transferable.

Section 4.6 Transfer of the General Partner Interest.

(a) Subject to Section 4.6(c) below, prior to March 31, 2016, the General Partner shall not transfer all or any part of its General Partner Interest to a Person unless such transfer (i) has been approved by the prior written consent or vote of the holders of at least a majority of the Outstanding Common Units (excluding Common Units held by the General Partner and its Affiliates) or (ii) is of all, but not less than all, of its General Partner Interest to (A) an Affiliate of the General Partner (other than an individual) or (B) another Person (other than an individual) in connection with the merger or consolidation of the General Partner with or into another Person (other than an individual) or the transfer by the General Partner of all or substantially all of its assets to another Person (other than an individual).

(b) Subject to Section 4.6(c) below, on or after March 31, 2016, the General Partner may transfer all or any of its General Partner Interest without Unitholder approval.

(c) Notwithstanding anything herein to the contrary, no transfer by the General Partner of all or any part of its General Partner Interest to another Person shall be permitted unless (i) the transferee agrees to assume the rights and duties of the General Partner under this Agreement and to be bound by the provisions of this Agreement and (ii) the Partnership receives an Opinion of Counsel that such transfer would not result in the loss of limited liability of any Limited Partner or cause the Partnership to be treated as an association taxable as a corporation or otherwise to be taxed as an entity for federal income tax purposes (to the extent not already so treated or taxed). In the case of a transfer pursuant to and in compliance with this Section 4.6, the transferee or successor (as the case may be) shall, subject to compliance with the terms of Section 10.2, be admitted to the Partnership as the General Partner immediately prior to the transfer of the General Partner Interest, and the business of the Partnership shall continue without dissolution.

Section 4.7 Restrictions on Transfers.

(a) Except as provided in Section 4.7(b) below, but notwithstanding the other provisions of this Article IV, no transfer of any Partnership Interests shall be made if such transfer would (i) violate the then

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applicable federal or state securities laws or rules and regulations of the Commission, any state securities commission or any other governmental authority with jurisdiction over such transfer, (ii) terminate the existence or qualification of the Partnership under the laws of the jurisdiction of its formation, or (iii) cause the Partnership to be treated as an association taxable as a corporation or otherwise to be taxed as an entity for federal income tax purposes (to the extent not already so treated or taxed).

(b) The General Partner may impose restrictions on the transfer of Partnership Interests if it receives Opinion of Counsel that such restrictions are necessary to avoid a significant risk of the Partnership becoming taxable as a corporation or otherwise becoming taxable as an entity for federal income tax purposes. The General Partner may impose such restrictions by amending this Agreement; provided, however, that any amendment that would result in the delisting or suspension of trading of any class of Limited Partner Interests on the principal National Securities Exchange on which such class of Limited Partner Interests is then listed or admitted for trading must be approved, prior to such amendment being effected, by the holders of at least a majority of the Outstanding Limited Partner Interests of such class.

(c) Nothing contained in this Article IV, or elsewhere in this Agreement, shall preclude the settlement of any transactions involving Partnership Interests entered into through the facilities of any National Securities Exchange on which such Partnership Interests are listed or admitted for trading.

(d) In the event any Partnership Interest is evidenced in certificated form, each certificate evidencing Partnership Interests shall bear a conspicuous legend in substantially the following form:

THE HOLDER OF THIS SECURITY ACKNOWLEDGES FOR THE BENEFIT OF THE PARTNERSHIP THAT THIS SECURITY MAY NOT BE SOLD, OFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED IF SUCH TRANSFER WOULD (A) VIOLATE THE THEN APPLICABLE FEDERAL OR STATE SECURITIES LAWS OR RULES AND REGULATIONS OF THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION OR ANY OTHER GOVERNMENTAL AUTHORITY WITH JURISDICTION OVER SUCH TRANSFER, (B) TERMINATE THE EXISTENCE OR QUALIFICATION OF THE PARTNERSHIP UNDER THE LAWS OF THE STATE OF DELAWARE, OR (C) CAUSE THE PARTNERSHIP TO BE TREATED AS AN ASSOCIATION TAXABLE AS A CORPORATION OR OTHERWISE TO BE TAXED AS AN ENTITY FOR FEDERAL INCOME TAX PURPOSES (TO THE EXTENT NOT ALREADY SO TREATED OR TAXED). ALLIANCE GP, LLC, THE GENERAL PARTNER OF THE PARTNERSHIP, MAY IMPOSE ADDITIONAL RESTRICTIONS ON THE TRANSFER OF THIS SECURITY IF IT RECEIVES AN OPINION OF COUNSEL THAT SUCH RESTRICTIONS ARE NECESSARY TO AVOID A SIGNIFICANT RISK OF THE PARTNERSHIP BECOMING TAXABLE AS A CORPORATION OR OTHERWISE BECOMING TAXABLE AS AN ENTITY FOR FEDERAL INCOME TAX PURPOSES. THE RESTRICTIONS SET FORTH ABOVE SHALL NOT PRECLUDE THE SETTLEMENT OF ANY TRANSACTIONS INVOLVING THIS SECURITY ENTERED INTO THROUGH THE FACILITIES OF ANY NATIONAL SECURITIES EXCHANGE ON WHICH THIS SECURITY IS LISTED OR ADMITTED TO TRADING.

Section 4.8 Citizenship Certificates; Non-citizen Assignees.

(a) If any Group Member is or becomes subject to any federal, state or local law or regulation that the General Partner determines would create a substantial risk of cancellation or forfeiture of any property in which the Group Member has an interest based on the nationality, citizenship or other related status of a Limited Partner, the General Partner may request any Limited Partner to furnish to the General Partner, within 30 days after receipt of such request, an executed Citizenship Certification or such other information concerning his nationality, citizenship or other related status (or, if the Limited Partner is a nominee holding for the account of another Person, the nationality, citizenship or other related status of such Person) as the General Partner may request. If a Limited Partner fails to furnish to the General Partner within the aforementioned 30-day period such Citizenship Certification or other requested information or if upon receipt of such Citizenship Certification or other requested information the General Partner determines that

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a Limited Partner is not an Eligible Citizen, the Partnership Interests owned by such Limited Partner shall be subject to redemption in accordance with the provisions of Section 4.9. In addition, the General Partner may require that the status of any such Limited Partner be changed to that of a Non-citizen Assignee and, thereupon, the General Partner shall be substituted for such Non-citizen Assignee as the Limited Partner in respect of his Limited Partner Interests.

(b) The General Partner shall, in exercising voting rights in respect of Limited Partner Interests held by it on behalf of Non-citizen Assignees, distribute the votes in the same ratios as the votes of Partners (including the General Partner) in respect of Limited Partner Interests other than those of Non-citizen Assignees are cast, either for, against or abstaining as to the matter.

(c) Upon dissolution of the Partnership, a Non-citizen Assignee shall have no right to receive a distribution in kind pursuant to Section 12.4 but shall be entitled to the cash equivalent thereof, and the Partnership shall provide cash in exchange for an assignment of the Non-citizen Assignee’s share of any distribution in kind. Such payment and assignment shall be treated for Partnership purposes as a purchase by the Partnership from the Non-citizen Assignee of his Limited Partner Interest (representing his right to receive his share of such distribution in kind).

(d) At any time after he can and does certify that he has become an Eligible Citizen, a Non-citizen Assignee may, upon application to the General Partner, request that with respect to any Limited Partner Interests of such Non-citizen Assignee not redeemed pursuant to Section 4.9, such Non-citizen Assignee be admitted as a Limited Partner, and upon approval of the General Partner, such Non-citizen Assignee shall be admitted as a Limited Partner and shall no longer constitute a Non-citizen Assignee and the General Partner shall cease to be deemed to be the Limited Partner in respect of the Non-citizen Assignee’s Limited Partner Interests.

Section 4.9 Redemption of Partnership Interests of Non-citizen Assignees.

(a) If at any time a Limited Partner fails to furnish a Citizenship Certification or other information requested within the 30-day period specified in Section 4.8(a), or if upon receipt of such Citizenship Certification or other information the General Partner determines, with the advice of counsel, that a Limited Partner is not an Eligible Citizen, the Partnership may, unless the Limited Partner establishes to the satisfaction of the General Partner that such Limited Partner is an Eligible Citizen or has transferred his Partnership Interests to a Person who is an Eligible Citizen and who furnishes a Citizenship Certification to the General Partner prior to the date fixed for redemption as provided below, redeem the Limited Partner Interest of such Limited Partner as follows:

(i) The General Partner shall, not later than the 30th day before the date fixed for redemption, give notice of redemption to the Limited Partner, at his last address designated on the records of the Partnership or the Transfer Agent, by registered or certified mail, postage prepaid. The notice shall be deemed to have been given when so mailed. The notice shall specify the Redeemable Interests, the date fixed for redemption, the place of payment, that payment of the redemption price will be made upon surrender of the Certificate evidencing the Redeemable Interests and that on and after the date fixed for redemption no further allocations or distributions to which the Limited Partner would otherwise be entitled in respect of the Redeemable Interests will accrue or be made.

(ii) The aggregate redemption price for Redeemable Interests shall be an amount equal to the Current Market Price (the date of determination of which shall be the date fixed for redemption) of Limited Partner Interests of the class to be so redeemed multiplied by the number of Limited Partner Interests of each such class included among the Redeemable Interests. The redemption price shall be paid as determined by the General Partner, in cash or by delivery of a promissory note of the Partnership in the principal amount of the redemption price, bearing interest at the rate of 10% annually and payable in three equal annual installments of principal together with accrued interest, commencing one year after the redemption date.

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(iii) Upon surrender by or on behalf of the Limited Partner, at the place specified in the notice of redemption, of the Certificate evidencing the Redeemable Interests, duly endorsed in blank or accompanied by an assignment duly executed in blank, the Limited Partner or his duly authorized representative shall be entitled to receive the payment therefor.

(iv) After the redemption date, Redeemable Interests shall no longer constitute issued and Outstanding Limited Partner Interests.

(b) The provisions of this Section 4.9 shall also be applicable to Limited Partner Interests held by a Limited Partner as nominee of a Person determined to be other than an Eligible Citizen.

(c) Nothing in this Section 4.9 shall prevent the recipient of a notice of redemption from transferring his Limited Partner Interest before the redemption date if such transfer is otherwise permitted under this Agreement. Upon receipt of notice of such a transfer, the General Partner shall withdraw the notice of redemption, provided the transferee of such Limited Partner Interest certifies to the satisfaction of the General Partner in a Citizenship Certification that he is an Eligible Citizen. If the transferee fails to make such certification, such redemption shall be effected from the transferee on the original redemption date.

ARTICLE V

CAPITAL CONTRIBUTIONS AND ISSUANCE OF PARTNERSHIP INTERESTS

Section 5.1 Organizational Issuances.

Prior to the date hereof, the General Partner was admitted as the General Partner of the Partnership without any economic interest in the Partnership, and the Initial Limited Partners made certain Capital Contributions to the Partnership in exchange for cash and an interest in the Partnership and have been admitted as Limited Partners of the Partnership.

Section 5.2 Contributions by the Underwriters.

(a) On the Closing Date and pursuant to the Underwriting Agreement, each Underwriter shall contribute to the Partnership cash in an amount equal to the Issue Price per Initial Common Unit multiplied by the number of Common Units specified in the Underwriting Agreement to be purchased by such Underwriter at the Closing Date. In exchange for such Capital Contributions by the Underwriters, the Partnership shall issue Common Units to each Underwriter on whose behalf such Capital Contribution is made in an amount equal to the quotient obtained by dividing (i) the cash contribution to the Partnership by or on behalf of such Underwriter by (ii) the Issue Price per Initial Common Unit.

(b) Upon the exercise of the Over-Allotment Option, each Underwriter shall contribute to the Partnership cash in an amount equal to the Issue Price per Initial Common Unit, multiplied by the number of Common Units to be purchased by such Underwriter at the Option Closing Date. In exchange for such Capital Contributions by the Underwriters, the Partnership shall issue Common Units to each Underwriter on whose behalf such Capital Contribution is made in an amount equal to the quotient obtained by dividing (i) the cash contributions to the Partnership by or on behalf of such Underwriter by (ii) the Issue Price per Initial Common Unit. The Partnership shall use the proceeds from such Capital Contributions to redeem pro rata from the Initial Limited Partners that number of Common Units equal to the number of Common Units sold to the Underwriters in connection with the exercise of the Over-Allotment Option.

(c) Subject to Section 5.1, no Limited Partner Interests will be issued or issuable as of or at the Closing Date other than (i) the Common Units issuable pursuant to subparagraph (a) hereof in aggregate number equal to 12,500,000 Units and (ii) the “Option Units” as such term is used in the Underwriting Agreement issuable upon exercise of the Over-Allotment Option pursuant to subparagraph (b) hereof in an aggregate number of up to 1,875,000 additional Units and (iii) the Common Units issued to the Initial Limited Partners in aggregate number as determined by the Contribution Agreement.

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Section 5.3 Interest and Withdrawal.

No interest on Capital Contributions shall be paid by the Partnership. No Partner shall be entitled to the withdrawal or return of its Capital Contribution, except to the extent, if any, that distributions made pursuant to this Agreement or upon termination of the Partnership may be considered as such by law and then only to the extent provided for in this Agreement. Except to the extent expressly provided in this Agreement, no Partner shall have priority over any other Partner either as to the return of Capital Contributions or as to profits, losses or distributions. Any such return shall be a compromise to which all Partners agree within the meaning of Section 17-502(b) of the Delaware Act.

Section 5.4 Capital Accounts.

(a) The Partnership shall maintain for each Partner (or a beneficial owner of Partnership Interests held by a nominee in any case in which the nominee has furnished the identity of such owner to the Partnership in accordance with Section 6031(c) of the Code or any other method acceptable to the General Partner) owning a Partnership Interest a separate Capital Account with respect to such Partnership Interest in accordance with the rules of Treasury Regulation Section 1.704-1(b)(2)(iv). Such Capital Account shall be increased by (i) the amount of all Capital Contributions made to the Partnership with respect to such Partnership Interest pursuant to this Agreement and (ii) all items of Partnership income and gain (including income and gain exempt from tax) computed in accordance with Section 5.4(b) and allocated with respect to such Partnership Interest pursuant to Section 6.1, and decreased by (x) the amount of cash or Net Agreed Value of all actual and deemed distributions of cash or property made with respect to such Partnership Interest pursuant to this Agreement and (y) all items of Partnership deduction and loss computed in accordance with Section 5.4(b) and allocated with respect to such Partnership Interest pursuant to Section 6.1.

(b) For purposes of computing the amount of any item of income, gain, loss or deduction which is to be allocated pursuant to Article VI and is to be reflected in the Partners’ Capital Accounts, the determination, recognition and classification of any such item shall be the same as its determination, recognition and classification for federal income tax purposes (including any method of depreciation, cost recovery or amortization used for that purpose), provided, that:

(i) Solely for purposes of this Section 5.4, the Partnership shall be treated as owning directly its proportionate share (as determined by the General Partner based upon the provisions of the MLP Agreement) of all property owned by the MLP or any other Subsidiary that is classified as a partnership for federal income tax purposes.

(ii) All fees and other expenses incurred by the Partnership to promote the sale of (or to sell) a Partnership Interest that can neither be deducted nor amortized under Section 709 of the Code, if any, shall, for purposes of Capital Account maintenance, be treated as an item of deduction at the time such fees and other expenses are incurred and shall be allocated among the Partners pursuant to Section 6.1.

(iii) Except as otherwise provided in Treasury Regulation Section 1.704-1(b)(2)(iv)(m), the computation of all items of income, gain, loss and deduction shall be made without regard to any election under Section 754 of the Code which may be made by the Partnership and, as to those items described in Section 705(a)(1)(B) or 705(a)(2)(B) of the Code, without regard to the fact that such items are not includable in gross income or are neither currently deductible nor capitalized for federal income tax purposes. To the extent an adjustment to the adjusted tax basis of any Partnership asset pursuant to Section 734(b) or 743(b) of the Code is required, pursuant to Treasury Regulation Section 1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital Accounts, the amount of such adjustment in the Capital Accounts shall be treated as an item of gain or loss.

(iv) Any income, gain, loss or deduction attributable to the taxable disposition of any Partnership property shall be determined as if the adjusted basis of such property as of such date of disposition were equal in amount to the Partnership’s Carrying Value with respect to such property as of such date.

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(v) In accordance with the requirements of Section 704(b) of the Code, any deductions for depreciation, cost recovery or amortization attributable to any Contributed Property shall be determined as if the adjusted basis of such property on the date it was acquired by the Partnership were equal to the Agreed Value of such property. Upon an adjustment pursuant to Section 5.4(d) to the Carrying Value of any Partnership property subject to depreciation, cost recovery or amortization, any further deductions for such depreciation, cost recovery or amortization attributable to such property shall be determined (A) as if the adjusted basis of such property were equal to the Carrying Value of such property immediately following such adjustment and (B) using a rate of depreciation, cost recovery or amortization derived from the same method and useful life (or, if applicable, the remaining useful life) as is applied for federal income tax purposes; provided, however, that, if the asset has a zero adjusted basis for federal income tax purposes, depreciation, cost recovery or amortization deductions shall be determined using any method that the General Partner may adopt.

(vi) If the Partnership’s adjusted basis in a depreciable or cost recovery property is reduced for federal income tax purposes pursuant to Section 48(q)(1) or 48(q)(3) of the Code, the amount of such reduction shall, solely for purposes hereof, be deemed to be an additional depreciation or cost recovery deduction in the year such property is placed in service and shall be allocated among the Partners pursuant to Section 6.1. Any restoration of such basis pursuant to Section 48(q)(2) of the Code shall, to the extent possible, be allocated in the same manner to the Partners to whom such deemed deduction was allocated.

(c) A transferee of a Partnership Interest shall succeed to a pro rata portion of the Capital Account of the transferor relating to the Partnership Interest so transferred.

(d) (i) In accordance with Treasury Regulation Section 1.704-1(b)(2)(iv)(f), on an issuance of additional Partnership Interests for cash or Contributed Property, the issuance of Partnership Interests as consideration for the provision of services, or the conversion of the General Partner’s Combined Interest to Common Units pursuant to Section 11.3(b), the Capital Account of all Partners and the Carrying Value of each Partnership property immediately prior to such issuance shall be adjusted upward or downward to reflect any Unrealized Gain or Unrealized Loss attributable to such Partnership property, as if such Unrealized Gain or Unrealized Loss had been recognized on an actual sale of each such property immediately prior to such issuance and had been allocated to the Partners at such time pursuant to Section 6.1 in the same manner as any item of gain or loss actually recognized during such period would have been allocated. In determining such Unrealized Gain or Unrealized Loss, the aggregate cash amount and fair market value of all Partnership assets (including cash or cash equivalents) immediately prior to the issuance of additional Partnership Interests shall be determined by the General Partner using such method of valuation as it may adopt; provided, however, that the General Partner, in arriving at such valuation, must take fully into account the fair market value of the Partnership Interests of all Partners at such time. The General Partner shall allocate such aggregate value among the assets of the Partnership (in such manner as it determines) to arrive at a fair market value for individual properties.

(ii) In accordance with Treasury Regulation Section 1.704-1(b)(2)(iv)(f), immediately prior to any actual or deemed distribution to a Partner of any Partnership property (other than a distribution of cash that is not in redemption or retirement of a Partnership Interest), the Capital Accounts of all Partners and the Carrying Value of all Partnership property shall be adjusted upward or downward to reflect any Unrealized Gain or Unrealized Loss attributable to such Partnership property, as if such Unrealized Gain or Unrealized Loss had been recognized in a sale of such property immediately prior to such distribution for an amount equal to its fair market value, and had been allocated to the Partners, at such time, pursuant to Section 6.1 in the same manner as any item of gain or loss actually recognized during such period would have been allocated. In determining such Unrealized Gain or Unrealized Loss the aggregate cash amount and fair market value of all Partnership assets (including, without limitation, cash or cash equivalents) immediately prior to a distribution shall (A) in the case of an actual distribution that is not made pursuant to Section 12.4 or in the case of a deemed distribution, be determined and allocated in the same manner as that provided in Section 5.4(d)(i) or (B) in the case of

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a liquidating distribution pursuant to Section 12.4, be determined and allocated by the Liquidator using such method of valuation as it may adopt.

Section 5.5 Issuances of Additional Partnership Securities.

(a) The Partnership may issue additional Partnership Securities and options, rights, warrants and appreciation rights relating to the Partnership Securities for any Partnership purpose at any time and from time to time to such Persons for such consideration and on such terms and conditions as the General Partner shall determine, all without the approval of any Limited Partners.

(b) Each additional Partnership Interest authorized to be issued by the Partnership pursuant to Section 5.5(a) may be issued in one or more classes, or one or more series of any such classes, with such designations, preferences, rights, powers and duties (which may be senior to existing classes and series of Partnership Securities), as shall be fixed by the General Partner, including (i) the right to share in Partnership profits and losses or items thereof; (ii) the right to share in Partnership distributions; (iii) the rights upon dissolution and liquidation of the Partnership; (iv) whether, and the terms and conditions upon which the Partnership may or shall be required to redeem the Partnership Security (including sinking fund provisions); (v) whether such Partnership Interest is issued with the privilege of conversion or exchange and, if so, the terms and conditions of such conversion or exchange; (vi) the terms and conditions upon which each Partnership Interest will be issued, evidenced by certificates and assigned or transferred; (vii) the method for determining the Percentage Interest as to such Partnership Security; and (viii) the right, if any, of each such Partnership Interest to vote on Partnership matters, including matters relating to the relative designations, preferences, rights, powers and duties of such Partnership Interest.

(c) The General Partner is hereby authorized and directed to take all actions that it determines to be necessary or appropriate in connection with (i) each issuance of Partnership Securities and options, rights, warrants and appreciation rights relating to Partnership Securities pursuant to this Section 5.5, (ii) the admission of additional Limited Partners and (iii) all additional issuances of Partnership Securities. The General Partner shall determine the relative rights, powers and duties of the holders of the Units or other Partnership Securities being so issued. The General Partner shall do all things necessary to comply with the Delaware Act and is authorized and directed to do all things that it determines to be necessary or appropriate in connection with any future issuance of Partnership Securities, including compliance with any statute, rule, regulation or guideline of any federal, state or other governmental agency or any National Securities Exchange on which the Units or other Partnership Securities are listed or admitted for trading.

(d) No fractional Partnership Securities shall be issued by the Partnership. If a distribution, subdivision or combination of Units pursuant to Section 5.5 would result in the issuance of fractional Units, each fractional Unit shall be rounded to the nearest whole Unit (and a 0.5 Unit shall be rounded to the next higher Unit).

Section 5.6 No Preemptive Right.

No Person shall have any preemptive, preferential or other similar right with respect to the issuance of any Partnership Interest, whether unissued, held in the treasury or hereafter created.

Section 5.7 Splits and Combinations.

(a) Subject to Section 5.5(d), the Partnership may make a Pro Rata distribution of Partnership Securities to all Record Holders or may effect a subdivision or combination of Partnership Securities so long as, after any such event, each Partner shall have the same Percentage Interest in the Partnership as before such event, and any amounts calculated on a per Unit basis or stated as a number of Units are proportionately adjusted retroactive to the beginning of the Partnership.

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(b) Whenever such a distribution, subdivision or combination of Partnership Securities is declared, the General Partner shall select a Record Date as of which the distribution, subdivision or combination shall be effective and shall send notice thereof at least 20 days prior to such Record Date to each Record Holder as of a date not less than 10 days prior to the date of such notice. The General Partner also may cause a firm of independent public accountants selected by it to calculate the number of Partnership Securities to be held by each Record Holder after giving effect to such distribution, subdivision or combination. The General Partner shall be entitled to rely on any certificate provided by such firm as conclusive evidence of the accuracy of such calculation.

(c) Promptly following any such distribution, subdivision or combination, the Partnership may issue Certificates to the Record Holders of Partnership Securities as of the applicable Record Date representing the new number of Partnership Securities held by such Record Holders, or the General Partner may adopt such other procedures that it determines to be necessary or appropriate to reflect such changes. If any such combination results in a smaller total number of Partnership Securities Outstanding, the Partnership shall require, as a condition to the delivery to a Record Holder of such new Certificate, the surrender of any Certificate held by such Record Holder immediately prior to such Record Date.

Section 5.8 Fully Paid and Non-Assessable Nature of Limited Partner Interests.

All Limited Partner Interests issued pursuant to, and in accordance with the requirements of, this Article V shall be fully paid and non-assessable Limited Partner Interests in the Partnership, except as such non assessability may be affected by Section 17-607 of the Delaware Act.

ARTICLE VI

ALLOCATIONS AND DISTRIBUTIONS

Section 6.1 Allocations for Capital Account Purposes.

For purposes of maintaining the Capital Accounts and in determining the rights of the Partners among themselves, the Partnership’s items of income, gain, loss and deduction (computed in accordance with Section 5.4(b)) shall be allocated among the Partners in each taxable year (or portion thereof) as provided herein below.

(a) Net Income. After giving effect to the special allocations set forth in Section 6.1(d), and any allocations to other Partnership Securities, Net Income for each taxable year and all items of income, gain, loss and deduction taken into account in computing Net Income for such taxable year shall be allocated to the Partners in accordance with their respective Percentage Interests.

(b) Net Losses. After giving effect to the special allocations set forth in Section 6.1(d), and any allocations to other Partnership Securities, Net Losses for each taxable period and all items of income, gain, loss and deduction taken into account in computing Net Losses for such taxable period shall be allocated to the Partners in accordance with their respective Percentage Interests; provided that Net Losses shall not be allocated pursuant to this Section 6.1(b) to the extent that such allocation would cause any Unitholder to have a deficit balance in its Adjusted Capital Account at the end of such taxable year (or increase any existing deficit balance in its Adjusted Capital Account), instead any such Net Losses shall be allocated to Partners with positive Adjusted Capital Account balances in accordance with their Percentage Interests until such positive Adjusted Capital Accounts are reduced to zero, and thereafter to the General Partner.

(c) Net Termination Gains and Losses. After giving effect to the special allocations set forth in Section 6.1(d), all items of income, gain, loss and deduction taken into account in computing Net Termination Gain or Net Termination Loss for such taxable period shall be allocated in the same manner as such Net Termination Gain or Net Termination Loss is allocated hereunder. All allocations under this Section 6.1(c) shall be made after Capital Account balances have been adjusted by all other allocations

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Index to Financial Statements

provided under this Section 6.1 and after all distributions of Available Cash provided under Section 6.3 have been made; provided, however, that solely for purposes of this Section 6.1(c), Capital Accounts shall not be adjusted for distributions made pursuant to Section 12.4.

(i) If a Net Termination Gain is recognized (or deemed recognized pursuant to Section 5.4(d)), such Net Termination Gain shall be allocated among the Partners in the following manner (and the Capital Accounts of the Partners shall be increased by the amount so allocated in each of the following subclauses, in the order listed, before an allocation is made pursuant to the next succeeding subclause):

A. First, to each Partner having a deficit balance in its Capital Account, in the proportion that such deficit balance bears to the total deficit balances in the Capital Accounts of all Partners, until each such Partner has been allocated Net Termination Gain equal to any such deficit balance in its Capital Account; and

B. Second, 100% to all Partners in accordance with their Percentage Interests;

(ii) If a Net Termination Loss is recognized (or deemed recognized pursuant to Section 5.4(d)), such Net Termination Loss shall be allocated among the Partners in the following manner:

A. First, 100% to all Partners holding Common Units, Pro Rata, until the Capital Account in respect of each Unit then Outstanding has been reduced to zero; and

B. Second, the balance, if any, to the General Partner.

(d) Special Allocations. Notwithstanding any other provision of this Section 6.1, the following special allocations shall be made for such taxable period:

(i) Partnership Minimum Gain Chargeback. Notwithstanding any other provision of this Section 6.1, if there is a net decrease in Partnership Minimum Gain during any Partnership taxable period, each Partner shall be allocated items of Partnership income and gain for such period (and, if necessary, subsequent periods) in the manner and amounts provided in Treasury Regulation Sections 1.704-2(f)(6), 1.704-2(g)(2) and 1.704-2(j)(2)(i), or any successor provision. For purposes of this Section 6.1(d), each Partner’s Adjusted Capital Account balance shall be determined, and the allocation of income or gain required hereunder shall be effected, prior to the application of any other allocations pursuant to this Section 6.1(d) with respect to such taxable period (other than an allocation pursuant to Sections 6.1(d)(v) and 6.1(d)(vi)). This Section 6.1(d)(i) is intended to comply with the Partnership Minimum Gain chargeback requirement in Treasury Regulation Section 1.704-2(f) and shall be interpreted consistently therewith.

(ii) Chargeback of Partner Nonrecourse Debt Minimum Gain. Notwithstanding the other provisions of this Section 6.1 (other than Section 6.1(d)(i)), except as provided in Treasury Regulation Section 1.704-2(i)(4), if there is a net decrease in Partner Nonrecourse Debt Minimum Gain during any Partnership taxable period, any Partner with a share of Partner Nonrecourse Debt Minimum Gain at the beginning of such taxable period shall be allocated items of Partnership income and gain for such period (and, if necessary, subsequent periods) in the manner and amounts provided in Treasury Regulation Sections 1.704-2(i)(4) and 1.704-2(j)(2)(ii), or any successor provisions. For purposes of this Section 6.1(d), each Partner’s Adjusted Capital Account balance shall be determined, and the allocation of income or gain required hereunder shall be effected, prior to the application of any other allocations pursuant to this Section 6.1(d), other than Section 6.1(d)(i) and other than an allocation pursuant to Sections 6.1(d)(v) and 6.1(d)(vi), with respect to such taxable period. This Section 6.1(d)(ii) is intended to comply with the chargeback of items of income and gain requirement in Treasury Regulation Section 1.704-2(i)(4) and shall be interpreted consistently therewith.

(iii) Qualified Income Offset. In the event any Partner unexpectedly receives any adjustments, allocations or distributions described in Treasury Regulation Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), or 1.704-1(b)(2)(ii)(d)(6), items of Partnership income and gain shall be specially allocated to such Partner in an amount and manner sufficient to eliminate, to the extent

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required by the Treasury Regulations promulgated under Section 704(b) of the Code, the deficit balance, if any, in its Adjusted Capital Account created by such adjustments, allocations or distributions as quickly as possible unless such deficit balance is otherwise eliminated pursuant to Section 6.1(d)(i) or (ii).

(iv) Gross Income Allocations. In the event any Partner has a deficit balance in its Capital Account at the end of any Partnership taxable period in excess of the sum of (A) the amount such Partner is required to restore pursuant to the provisions of this Agreement and (B) the amount such Partner is deemed obligated to restore pursuant to Treasury Regulation Sections 1.704-2(g) and 1.704-2(i)(5), such Partner shall be specially allocated items of Partnership gross income and gain in the amount of such excess as quickly as possible; provided, that an allocation pursuant to this Section 6.1(d)(iv) shall be made only if and to the extent that such Partner would have a deficit balance in its Capital Account as adjusted after all other allocations provided for in this Section 6.1 have been tentatively made as if this Section 6.1(d)(iv) were not in this Agreement.

(v) Nonrecourse Deductions. Nonrecourse Deductions for any taxable period shall be allocated to the Partners in accordance with their respective Percentage Interests. If the General Partner determines that the Partnership’s Nonrecourse Deductions should be allocated in a different ratio to satisfy the safe harbor requirements of the Treasury Regulations promulgated under Section 704(b) of the Code, the General Partner is authorized, upon notice to the other Partners, to revise the prescribed ratio to the numerically closest ratio that does satisfy such requirements.

(vi) Partner Nonrecourse Deductions. Partner Nonrecourse Deductions for any taxable period shall be allocated 100% to the Partner that bears the Economic Risk of Loss with respect to the Partner Nonrecourse Debt to which such Partner Nonrecourse Deductions are attributable in accordance with Treasury Regulation Section 1.704-2(i). If more than one Partner bears the Economic Risk of Loss with respect to a Partner Nonrecourse Debt, such Partner Nonrecourse Deductions attributable thereto shall be allocated between or among such Partners in accordance with the ratios in which they share such Economic Risk of Loss.

(vii) Nonrecourse Liabilities. For purposes of Treasury Regulation Section 1.752-3(a)(3), the Partners agree that Nonrecourse Liabilities of the Partnership in excess of the sum of (A) the amount of Partnership Minimum Gain and (B) the total amount of Nonrecourse Built-in Gain shall be allocated among the Partners in accordance with their respective Percentage Interests.

(viii) Code Section 754 Adjustments. To the extent an adjustment to the adjusted tax basis of any Partnership asset pursuant to Section 734(b) or 743(b) of the Code is required, pursuant to Treasury Regulation Section 1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital Accounts, the amount of such adjustment to the Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis), and such item of gain or loss shall be specially allocated to the Partners in a manner consistent with the manner in which their Capital Accounts are required to be adjusted pursuant to such Section of the Treasury Regulations.

(ix) Curative Allocation

A. Notwithstanding any other provision of this Section 6.1, other than the Required Allocations, the Required Allocations shall be taken into account in making the Agreed Allocations so that, to the extent possible, the net amount of items of income, gain, loss and deduction allocated to each Partner pursuant to the Required Allocations and the Agreed Allocations, together, shall be equal to the net amount of such items that would have been allocated to each such Partner under the Agreed Allocations had the Required Allocations and the related Curative Allocation not otherwise been provided in this Section 6.1. Notwithstanding the preceding sentence, Required Allocations relating to (1) Nonrecourse Deductions shall not be taken into account except to the extent that there has been a decrease in Partnership Minimum Gain and (2) Partner Nonrecourse Deductions shall not be taken into account except to the extent that there has been a decrease in Partner Nonrecourse Debt Minimum Gain. Allocations pursuant

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Index to Financial Statements

to this Section 6.1(d)(ix)(A) shall only be made with respect to Required Allocations to the extent the General Partner determines that such allocations will otherwise be inconsistent with the economic agreement among the Partners. Further, allocations pursuant to this Section 6.1(d)(ix)(A) shall be deferred with respect to allocations pursuant to clauses (1) and (2) hereof to the extent the General Partner determines that such allocations are likely to be offset by subsequent Required Allocations.

B. The General Partner shall, with respect to each taxable period, (1) apply the provisions of Section 6.1(d)(ix)(A) in whatever order is most likely to minimize the economic distortions that might otherwise result from the Required Allocations, and (2) divide all allocations pursuant to Section 6.1(d)(ix)(A) among the Partners in a manner that is likely to minimize such economic distortions.

(x) Corrective Allocations. In the event of any allocation of Additional Book Basis Derivative Items or any Book-Down Event or any recognition of a Net Termination Loss, the following rules shall apply:

A. In the case of any negative adjustments to the Capital Accounts of the Partners resulting from a Book-Down Event or from the recognition of a Net Termination Loss, such negative adjustment (1) shall first be allocated, to the extent of the Aggregate Remaining Net Positive Adjustments, in such a manner, as determined by the General Partner, that to the extent possible the aggregate Capital Accounts of the Partners will equal the amount that would have been the Capital Account balance of the Partners if no prior Book-Up Events had occurred, and (2) any negative adjustment in excess of the Aggregate Remaining Net Positive Adjustments shall be allocated pursuant to Section 6.1(c) hereof.

B. In making the allocations required under this Section 6.1(d)(ix), the General Partner may apply whatever conventions or other methodology it determines will satisfy the purpose of this Section 6.1(d)(ix).

Section 6.2 Allocations for Tax Purposes.

(a) Except as otherwise provided herein, for federal income tax purposes, each item of income, gain, loss and deduction shall be allocated among the Partners in the same manner as its correlative item of “book” income, gain, loss or deduction is allocated pursuant to Section 6.1.

(b) In an attempt to eliminate Book-Tax Disparities attributable to a Contributed Property or Adjusted Property, items of income, gain, loss, depreciation, amortization and cost recovery deductions shall be allocated for federal income tax purposes among the Partners as follows:

(i) (A) In the case of a Contributed Property, such items attributable thereto shall be allocated among the Partners in the manner provided under Section 704(c) of the Code that takes into account the variation between the Agreed Value of such property and its adjusted basis at the time of contribution; and (B) any item of Residual Gain or Residual Loss attributable to a Contributed Property shall be allocated among the Partners in the same manner as its correlative item of “book” gain or loss is allocated pursuant to Section 6.1.

(ii) (A) In the case of an Adjusted Property, such items shall (1) first, be allocated among the Partners in a manner consistent with the principles of Section 704(c) of the Code to take into account the Unrealized Gain or Unrealized Loss attributable to such property and the allocations thereof pursuant to Section 5.4(d)(i) or 5.4(d)(ii), and (2) second, in the event such property was originally a Contributed Property, be allocated among the Partners in a manner consistent with Section 6.2(b)(i)(A); and (B) any item of Residual Gain or Residual Loss attributable to an Adjusted Property shall be allocated among the Partners in the same manner as its correlative item of “book” gain or loss is allocated pursuant to Section 6.1.

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(iii) The General Partner shall apply the principles of Treasury Regulation Section 1.704-3(d) to eliminate Book-Tax Disparities, except as otherwise determined by the General Partner with respect to any goodwill in the Partnership.

(c) For the proper administration of the Partnership and for the preservation of uniformity of the Limited Partner Interests (or any class or classes thereof), the General Partner shall (i) adopt such conventions as it deems appropriate in determining the amount of depreciation, amortization and cost recovery deductions; (ii) make special allocations for federal income tax purposes of income (including, without limitation, gross income) or deductions; and (iii) amend the provisions of this Agreement as appropriate (x) to reflect the proposal or promulgation of Treasury Regulations under Section 704(b) or Section 704(c) of the Code or (y) otherwise to preserve or achieve uniformity of the Limited Partner Interests (or any class or classes thereof). The General Partner may adopt such conventions, make such allocations and make such amendments to this Agreement as provided in this Section 6.1(c) only if such conventions, allocations or amendments would not have a material adverse effect on the Partners, the holders of any class or classes of Limited Partner Interests issued and Outstanding or the Partnership, and if such allocations are consistent with the principles of Section 704 of the Code.

(d) The General Partner may determine to depreciate or amortize the portion of an adjustment under Section 743(b) of the Code attributable to unrealized appreciation in any Adjusted Property (to the extent of the unamortized Book-Tax Disparity) using a predetermined rate derived from the depreciation or amortization method and useful life applied to the Partnership’s common basis of such property, despite any inconsistency of such approach with Treasury Regulation Section 1.167(c)-1(a)(6) or any successor regulations thereto. If the General Partner determines that such reporting position cannot reasonably be taken, the General Partner may adopt depreciation and amortization conventions under which all purchasers acquiring Limited Partner Interests in the same month would receive depreciation and amortization deductions, based upon the same applicable rate as if they had purchased a direct interest in the Partnership’s property. If the General Partner chooses not to utilize such aggregate method, the General Partner may use any other depreciation and amortization conventions to preserve the uniformity of the intrinsic tax characteristics of any Limited Partner Interests, so long as such conventions would not have a material adverse effect on the Limited Partners or the Record Holders of any class or classes of Limited Partner Interests.

(e) Any gain allocated to the Partners upon the sale or other taxable disposition of any Partnership asset shall, to the extent possible, after taking into account other required allocations of gain pursuant to this Section 6.2, be characterized as Recapture Income in the same proportions and to the same extent as such Partners (or their predecessors in interest) have been allocated any deductions directly or indirectly giving rise to the treatment of such gains as Recapture Income.

(f) All items of income, gain, loss, deduction and credit recognized by the Partnership for federal income tax purposes and allocated to the Partners in accordance with the provisions hereof shall be determined without regard to any election under Section 754 of the Code that may be made by the Partnership; provided, however, that such allocations, once made, shall be adjusted (in the manner determined by the General Partner) to take into account those adjustments permitted or required by Sections 734 and 743 of the Code.

(g) Each item of Partnership income, gain, loss and deduction, shall for federal income tax purposes, be determined on an annual basis and prorated on a monthly basis and shall be allocated to the Partners as of the opening of the National Securities Exchange on which the Common Units are then traded on the first Business Day of each month; provided, however, that (i) such items for the period beginning on the Closing Date and ending on the last day of the month in which the Option Closing Date or the expiration of the Over-Allotment Option occurs shall be allocated to the Partners as of the opening of the National Securities Exchange on which the Common Units are then traded on the first Business Day of the next succeeding month; and provided, further, that gain or loss on a sale or other disposition of any assets of the Partnership or any other extraordinary item of income or loss realized and recognized other than in the ordinary course

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of business, as determined by the General Partner, shall be allocated to the Partners as of the opening of the National Securities Exchange on which the Common Units are then traded on the first Business Day of the month in which such gain or loss is recognized for federal income tax purposes. The General Partner may revise, alter or otherwise modify such methods of allocation to the extent permitted or required by Section 706 of the Code and the regulations or rulings promulgated thereunder.

(h) Allocations that would otherwise be made to a Limited Partner under the provisions of this Article VI shall instead be made to the beneficial owner of Limited Partner Interests held by a nominee in any case in which the nominee has furnished the identity of such owner to the Partnership in accordance with Section 6031(c) of the Code or any other method determined by the General Partner.

Section 6.3 Requirement and Characterization of Distributions; Distributions to Record Holders.

(a) Within 50 days following the end of each Quarter commencing with the Quarter ending on June 30, 2006, an amount equal to 100% of Available Cash with respect to such Quarter shall, subject to Section 17-607 of the Delaware Act, be distributed in accordance with this Article VI by the Partnership to the Partners in accordance with their respective Percentage Interests as of the Record Date selected by the General Partner. All distributions required to be made under this Agreement shall be made subject to Section 17-607 of the Delaware Act.

(b) Notwithstanding Section 6.3(a), in the event of the dissolution and liquidation of the Partnership, all receipts received during or after the Quarter in which the Liquidation Date occurs shall be applied and distributed solely in accordance with, and subject to the terms and conditions of, Section 12.4.

(c) The General Partner may treat taxes paid by the Partnership on behalf of, or amounts withheld with respect to, all or less than all of the Partners, as a distribution of Available Cash to such Partners.

(d) Each distribution in respect of a Partnership Interest shall be paid by the Partnership, directly or through the Transfer Agent or through any other Person or agent, only to the Record Holder of such Partnership Interest as of the Record Date set for such distribution. Such payment shall constitute full payment and satisfaction of the Partnership’s liability in respect of such payment, regardless of any claim of any Person who may have an interest in such payment by reason of an assignment or otherwise.

ARTICLE VII

MANAGEMENT AND OPERATION OF BUSINESS

Section 7.1 Management.

(a) The General Partner shall conduct, direct and manage all activities of the Partnership. Except as otherwise expressly provided in this Agreement, all management powers over the business and affairs of the Partnership shall be exclusively vested in the General Partner, and no Limited Partner shall have any management power over the business and affairs of the Partnership. In addition to the powers now or hereafter granted a general partner of a limited partnership under applicable law or that are granted to the General Partner under any other provision of this Agreement, the General Partner, subject to Section 7.3, shall have full power and authority to do all things and on such terms as it determines to be necessary or appropriate to conduct the business of the Partnership, to exercise all powers set forth in Section 2.5 and to effectuate the purposes set forth in Section 2.4, including the following:

(i) the making of any expenditures, the lending or borrowing of money, the assumption or guarantee of, or other contracting for, indebtedness and other liabilities, the issuance of evidences of indebtedness, including indebtedness that is convertible into Partnership Securities, and the incurring of any other obligations;

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Index to Financial Statements

(ii) the making of tax, regulatory and other filings, or rendering of periodic or other reports to governmental or other agencies having jurisdiction over the business or assets of the Partnership;

(iii) the acquisition, disposition, mortgage, pledge, encumbrance, hypothecation or exchange of any or all of the assets of the Partnership or the merger or other combination of the Partnership with or into another Person (the matters described in this clause (iii) being subject, however, to any prior approval that may be required by Section 7.3 and Article XIV);

(iv) the use of the assets of the Partnership (including cash on hand) for any purpose consistent with the terms of this Agreement, including the financing of the conduct of the operations of the Partnership, its Subsidiaries and the MLP; subject to Section 7.6(a), the lending of funds to other Persons; the repayment or guarantee of obligations of the Partnership, its Subsidiaries and the MLP and the making of capital contributions to any member of the Partnership, its Subsidiaries and the MLP;

(v) the negotiation, execution and performance of any contracts, conveyances or other instruments (including instruments that limit the liability of the Partnership under contractual arrangements to all or particular assets of the Partnership, with the other party to the contract to have no recourse against the General Partner or its assets other than its interest in the Partnership, even if same results in the terms of the transaction being less favorable to the Partnership than would otherwise be the case);

(vi) the distribution of Partnership cash;

(vii) the selection and dismissal of employees (including employees having titles such as “president,” “vice president,” “secretary” and “treasurer”) and agents, outside attorneys, accountants, consultants and contractors and the determination of their compensation and other terms of employment or hiring;

(viii) the maintenance of insurance for the benefit of the Partnership, the Partners and Indemnitees;

(ix) the formation of, or acquisition of an interest in, and the contribution of property and the making of loans to, any further limited or general partnerships, joint ventures, limited liability companies, corporations or other relationships (including the acquisition of interests in, and the contributions of property to, the MLP and its Subsidiaries from time to time) subject to the restrictions set forth in Section 2.4;

(x) the control of any matters affecting the rights and obligations of the Partnership, including the bringing and defending of actions at law or in equity and otherwise engaging in the conduct of litigation, arbitration or mediation and the incurring of legal expense and the settlement of claims and litigation;

(xi) the indemnification of any Person against liabilities and contingencies to the extent permitted by law;

(xii) the entering into of listing agreements with any National Securities Exchange and the delisting of some or all of the Limited Partner Interests from, or requesting that trading be suspended on, any such exchange (subject to any prior approval that may be required under Section 4.7);

(xiii) the purchase, sale or other acquisition or disposition of Partnership Securities, or the issuance of options, rights, warrants and appreciation rights relating to Partnership Securities;

(xiv) the undertaking of any action in connection with the Partnership’s participation in the management of the MLP through its ownership of the MLP Managing General Partner;

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Index to Financial Statements

(xv) the registering for resale under the Securities Act and applicable state securities laws, the Partnership Securities held by the General Partner or any Affiliate of the General Partner; provided, however, that such registration for resale of any Partnership Security shall be subject to certain restrictions and limitations; and

(xvi) the approval and authorization of any action taken by the MLP Managing General Partner to limit or modify the incentive distribution rights in the MLP held by the MLP Managing General Partner, if the General Partner determines that such limitation or modification does not adversely affect the Limited Partners (including any particular class of Partnership Interests as compared to other classes of Partnership Interests) in any material respect.

(b) Notwithstanding any other provision of this Agreement, the Delaware Act or any applicable law, rule or regulation, each of the Partners and each other Person who may acquire an interest in Partnership Securities hereby (i) approves, ratifies and confirms the execution, delivery and performance by the parties thereto of the Underwriting Agreement, the Omnibus Agreement and the other agreements described in or filed as exhibits to the Registration Statement that are related to the transactions contemplated by the Registration Statement; (ii) agrees that the General Partner (on its own or through any officer of the Partnership) is authorized to execute, deliver and perform the agreements referred to in clause (i) of this sentence and the other agreements, acts, transactions and matters described in or contemplated by the Registration Statement on behalf of the Partnership without any further act, approval or vote of the Partners or the other Persons who may acquire an interest in Partnership Securities; and (iii) agrees that the execution, delivery or performance by the General Partner, any Group Member or any Affiliate of any of them, of this Agreement or any agreement authorized or permitted under this Agreement (including the exercise by the General Partner or any Affiliate of the General Partner of the rights accorded pursuant to Article XV), shall not constitute a breach by the General Partner of any duty that the General Partner may owe the Partnership or the Limited Partners or any other Persons under this Agreement (or any other agreements) or of any duty stated or implied by law or equity.

Section 7.2 Certificate of Limited Partnership.

The General Partner has caused the Certificate of Limited Partnership to be filed with the Secretary of State of the State of Delaware as required by the Delaware Act and shall use all reasonable efforts to cause to be filed such other certificates or documents that the General Partner determines to be necessary or appropriate for the formation, continuation, qualification and operation of a limited partnership (or a partnership in which the limited partners have limited liability) in the State of Delaware or any other state in which the Partnership may elect to do business or own property. To the extent the General Partner determines such action to be necessary or appropriate, the General Partner shall file amendments to and restatements of the Certificate of Limited Partnership and do all things to maintain the Partnership as a limited partnership (or a partnership or other entity in which the limited partners have limited liability) under the laws of the State of Delaware or of any other state in which the Partnership may elect to do business or own property. Subject to the terms of Section 3.4(a), the General Partner shall not be required, before or after filing, to deliver or mail a copy of the Certificate of Limited Partnership, any qualification document or any amendment thereto to any Limited Partner.

Section 7.3 Restrictions on General Partner’s Authority.

Except as provided in Articles XII and XIV, the General Partner may not sell, exchange or otherwise dispose of all or substantially all of the assets of the Partnership Group, taken as a whole, in a single transaction or a series of related transactions (including by way of merger, consolidation or other combination) or approve on behalf of the Partnership or its Subsidiaries the sale, exchange or other disposition of all or substantially all of the assets of the MLP Group, without the approval of holders of a Unit Majority; provided however that this provision shall not preclude or limit the General Partner’s ability to mortgage, pledge, hypothecate or grant a security interest in all or substantially all of the assets of the Partnership Group and shall not apply to any forced sale of any or all of the assets of the Partnership Group pursuant to the foreclosure of, or other realization upon,

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Index to Financial Statements

any such encumbrance. Without the approval of holders of a majority of Outstanding Units, the General Partner shall not, on behalf of the Partnership, except as permitted under Sections 4.6, 11.1 and 11.2, elect or cause the Partnership to elect a successor general partner of the Partnership.

Section 7.4 Reimbursement of the General Partner.

(a) Except as provided in this Section 7.4 and elsewhere in this Agreement, the General Partner shall not be compensated for its services as general partner or managing member of any Group Member.

(b) The General Partner shall be reimbursed on a monthly basis, or such other reasonable basis as the General Partner may determine, for (i) all direct and indirect expenses it incurs or payments it makes on behalf of the Partnership Group (including salary, bonus, incentive compensation and other amounts paid to any Person including Affiliates of the General Partner to perform services for the Partnership Group or for the General Partner in the discharge of its duties to the Partnership Group), and (ii) all other expenses allocable to the Partnership Group or otherwise incurred by the General Partner in connection with operating the Partnership Group’s business (including expenses allocated to the General Partner by its Affiliates). The General Partner shall determine the expenses that are allocable to the Partnership Group. Reimbursements pursuant to this Section 7.4 shall be in addition to any reimbursement to the General Partner as a result of indemnification pursuant to Section 7.7.

(c) The General Partner, without the approval of the Limited Partners (who shall have no right to vote in respect thereof), may propose and adopt on behalf of the Partnership Group employee benefit plans, employee programs and employee practices (including plans, programs and practices involving the issuance of Partnership Securities or options to purchase or rights, warrants or appreciation rights relating to Partnership Securities), or cause the Partnership to issue Partnership Securities in connection with, or pursuant to, any employee benefit plan, employee program or employee practice maintained or sponsored by the General Partner or any one of its Affiliates, in each case for the benefit of employees of the General Partner, any Group Member or any Affiliate, or any of them, in respect of services performed, directly or indirectly, for the benefit of the Partnership Group or the MLP Group. The Partnership agrees to issue and sell to the General Partner or any of its Affiliates any Partnership Securities that the General Partner or such Affiliate is obligated to provide to any employees pursuant to any such employee benefit plans, employee programs or employee practices. Expenses incurred by the General Partner in connection with any such plans, programs and practices (including the net cost to the General Partner or such Affiliate of Partnership Securities purchased by the General Partner or such Affiliate from the Partnership to fulfill options or awards under such plans, programs and practices) shall be reimbursed in accordance with Section 7.4(b). Any and all obligations of the General Partner under any employee benefit plans, employee programs or employee practices adopted by the General Partner as permitted by this Section 7.4(c) shall constitute obligations of the General Partner hereunder and shall be assumed by any successor General Partner approved pursuant to Section 11.1 or 11.2 or the transferee of or successor to all of the General Partner’s General Partner Interest.

Section 7.5 Outside Activities.

(a) After the Closing Date, the General Partner, for so long as it is the general partner of the Partnership (i) agrees that its sole business will be to act as the general partner or managing member, as the case may be, of the Partnership and any other partnership or limited liability company of which the Partnership is, directly or indirectly, a partner or managing member and to undertake activities that are ancillary or related thereto (including being a limited partner in the Partnership) and (ii) shall not engage in any business or activity or incur any debts or liabilities except in connection with or incidental to (A) its performance as general partner or managing member of one or more Group Members or as described in or contemplated by the Registration Statement or (B) the acquiring, owning or disposing of debt or equity securities in any Group Member.

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(b) Except as specifically restricted by Section 7.5(a) or by the Omnibus Agreement, each Group Member and Indemnitee other than the General Partner shall have the right to engage in businesses of every type and description and other activities for profit and to engage in and possess an interest in other business ventures of any and every type or description, whether in businesses engaged in or anticipated to be engaged in by any Group Member or any member of the MLP Group, independently or with others, including business interests and activities in direct competition with the business and activities of any Group Member or any member of the MLP Group, and none of the same shall constitute a breach of this Agreement or any duty expressed or implied by law to any Group Member, any member of the MLP Group or any Partner. Neither any Group Member, any Limited Partner nor any other Person shall have any rights by virtue of this Agreement, the MLP Agreement or the partnership relationship established hereby or thereby in any business ventures of any Group Member or any Indemnitee.

(c) Subject to the terms of Sections 7.5(a) and 7.5(b) and the Omnibus Agreement, but otherwise notwithstanding anything to the contrary in this Agreement, (i) the engaging in competitive activities by any Group Member or any Indemnitee (other than the General Partner) in accordance with the provisions of this Section 7.5 is hereby approved by the Partnership and all Partners, (ii) it shall be deemed not to be a breach of any fiduciary duties or any other obligation of any type whatsoever of the General Partner for any Group Member or any Indemnitee (other than the General Partner) to engage in such business interests and activities in preference to or to the exclusion of the Partnership Group or the members of the MLP Group, and (iii) none of the General Partner, any Group Member nor any Indemnitee shall have any obligation hereunder or as a result of any duty expressed or implied by law to present business opportunities to the Partnership, any other Group Member, any member of the MLP Group or any Indemnitee.

(d) The General Partner and any of its Affiliates may acquire Units or other Partnership Securities in addition to those acquired on the Closing Date and, except as otherwise provided in this Agreement, shall be entitled to exercise all rights of a General Partner or Limited Partner, as applicable, relating to such Units or Partnership Securities.

(e) The term “Affiliates” when used in Section 7.5(d) with respect to the General Partner shall not include any Group Member or any Subsidiary of the Group Member.

(f) Anything in this Agreement to the contrary notwithstanding, to the extent that any provision of this Agreement purports or is interpreted to have the effect of restricting the fiduciary duties that might otherwise, as a result of Delaware or other applicable law, be owed by the General Partner to the Partnership and its Limited Partners, or to constitute a waiver or consent by the Limited Partners to any such restriction, such provisions shall be inapplicable and have no effect in determining whether the General Partner has complied with its fiduciary duties in connection with determinations made by it under this Section 7.5.

Section 7.6 Loans from the General Partner; Loans or Contributions from the Partnership; Contracts with Affiliates; Certain Restrictions on the General Partner.

(a) The General Partner or any of its Affiliates may, but shall be under no obligation to, lend to any Group Member, and any Group Member may borrow from the General Partner or any of its Affiliates, funds needed or desired by the Group Member for such periods of time and in such amounts as the General Partner may determine; provided, however, that in any such case the lending party may not charge the borrowing party interest at a rate greater than the rate that would be charged the borrowing party or impose terms less favorable to the borrowing party than would be charged or imposed on the borrowing party by unrelated lenders on comparable loans made on an arm’s-length basis (without reference to the lending party’s financial abilities or guarantees) all as determined by the General Partner. The borrowing party shall reimburse the lending party for any costs (other than any additional interest costs) incurred by the lending party in connection with the borrowing of such funds. For purposes of this Section 7.6(a) and Section 7.6(b), the term “Group Member” shall include any Affiliate of a Group Member that is controlled by the Group Member. No Group Member may lend funds to the General Partner or any of its Affiliates (other than another Group Member).

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Index to Financial Statements

(b) The Partnership may lend or contribute to any Group Member, and any Group Member may borrow from the Partnership, funds on terms and conditions determined by the General Partner provided, however, that the Partnership may not charge the Group Member interest at a rate less than the rate that would be charged to the Group Member (without reference to the General Partner’s financial abilities or guarantees) by unrelated lenders on comparable loans. The foregoing authority shall be exercised by the General Partner in its sole discretion and shall not create any right or benefit in favor of any Group Member or any other Person.

Section 7.7 Indemnification.

(a) To the fullest extent permitted by law but subject to the limitations expressly provided in this Agreement, all Indemnitees shall be indemnified and held harmless by the Partnership from and against any and all losses, claims, damages, liabilities, joint or several, expenses (including legal fees and expenses), judgments, fines, penalties, interest, settlements or other amounts arising from any and all claims, demands, actions, suits or proceedings, whether civil, criminal, administrative or investigative, in which any Indemnitee may be involved, or is threatened to be involved, as a party or otherwise, by reason of its status as an Indemnitee; provided, that the Indemnitee shall not be indemnified and held harmless if there has been a final and non-appealable judgment entered by a court of competent jurisdiction determining that, in respect of the matter for which the Indemnitee is seeking indemnification pursuant to this Section 7.7, the Indemnitee acted in bad faith or engaged in fraud, willful misconduct, or in the case of a criminal matter, acted with knowledge that the Indemnitee’s conduct was unlawful; provided, further, no indemnification pursuant to this Section 7.7 shall be available to the General Partner or its Affiliates (other than a Group Member) with respect to its or their obligations incurred pursuant to the Underwriting Agreement (other than obligations incurred by the General Partner on behalf of the Partnership). Any indemnification pursuant to this Section 7.7 shall be made only out of the assets of the Partnership, it being agreed that the General Partner shall not be personally liable for such indemnification and shall have no obligation to contribute or loan any monies or property to the Partnership to enable it to effectuate such indemnification.

(b) To the fullest extent permitted by law, expenses (including legal fees and expenses) incurred by an Indemnitee who is indemnified pursuant to Section 7.7(a) in defending any claim, demand, action, suit or proceeding shall, from time to time, be advanced by the Partnership prior to a determination that the Indemnitee is not entitled to be indemnified upon receipt by the Partnership of any undertaking by or on behalf of the Indemnitee to repay such amount if it shall be determined that the Indemnitee is not entitled to be indemnified as authorized in this Section 7.7.

(c) The indemnification provided by this Section 7.7 shall be in addition to any other rights to which an Indemnitee may be entitled under any agreement, pursuant to any vote of the holders of Outstanding Limited Partner Interests entitled to vote on such matter, as a matter of law or otherwise, both as to actions in the Indemnitee’s capacity as an Indemnitee and as to actions in any other capacity (including any capacity under the Underwriting Agreement), and shall continue as to an Indemnitee who has ceased to serve in such capacity and shall inure to the benefit of the heirs, successors, assigns and administrators of the Indemnitee.

(d) The Partnership may purchase and maintain (or reimburse the General Partner or its Affiliates for the cost of) insurance, on behalf of the General Partner, its Affiliates and such other Persons as the General Partner shall determine, against any liability that may be asserted against, or expense that may be incurred by, such Person in connection with the Partnership’s activities or such Person’s activities on behalf of the Partnership, regardless of whether the Partnership would have the power to indemnify such Person against such liability under the provisions of this Agreement.

(e) For purposes of this Section 7.7, the Partnership shall be deemed to have requested an Indemnitee to serve as fiduciary of an employee benefit plan whenever the performance by it of its duties to the Partnership also imposes duties on, or otherwise involves services by, it to the plan or participants or beneficiaries of the plan; excise taxes assessed on an Indemnitee with respect to an employee benefit plan pursuant to applicable law shall constitute “fines” within the meaning of Section 7.7(a); and action taken or

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Index to Financial Statements

omitted by it with respect to any employee benefit plan in the performance of its duties for a purpose reasonably believed by it to be in the best interest of the participants and beneficiaries of the plan shall be deemed to be for a purpose that is in the best interests of the Partnership.

(f) In no event may an Indemnitee subject the Limited Partners to personal liability by reason of the indemnification provisions set forth in this Agreement.

(g) An Indemnitee shall not be denied indemnification in whole or in part under this Section 7.7 because the Indemnitee had an interest in the transaction with respect to which the indemnification applies if the transaction was otherwise permitted by the terms of this Agreement.

(h) The provisions of this Section 7.7 are for the benefit of the Indemnitees, their heirs, successors, assigns and administrators and shall not be deemed to create any rights for the benefit of any other Persons.

(i) No amendment, modification or repeal of this Section 7.7 or any provision hereof shall in any manner terminate, reduce or impair the right of any past, present or future Indemnitee to be indemnified by the Partnership, nor the obligations of the Partnership to indemnify any such Indemnitee under and in accordance with the provisions of this Section 7.7 as in effect immediately prior to such amendment, modification or repeal with respect to claims arising from or relating to matters occurring, in whole or in part, prior to such amendment, modification or repeal, regardless of when such claims may arise or be asserted.

Section 7.8 Liability of Indemnitees.

(a) Notwithstanding anything to the contrary set forth in this Agreement, no Indemnitee shall be liable for monetary damages to the Partnership, the Limited Partners or any other Persons who have acquired interests in the Partnership Securities, for losses sustained or liabilities incurred as a result of any act or omission of an Indemnitee unless there has been a final and non-appealable judgment entered by a court of competent jurisdiction determining that, in respect of the matter in question, the Indemnitee acted in bad faith or engaged in fraud, willful misconduct or, in the case of a criminal matter, acted with knowledge that the Indemnitee’s conduct was criminal.

(b) Subject to its obligations and duties as General Partner set forth in Section 7.1(a), the General Partner may exercise any of the powers granted to it by this Agreement and perform any of the duties imposed upon it hereunder either directly or by or through its agents, and the General Partner shall not be responsible for any misconduct or negligence on the part of any such agent appointed by the General Partner in good faith.

(c) To the extent that, at law or in equity, an Indemnitee has duties (including fiduciary duties) and liabilities relating thereto to the Partnership or to the Partners, the General Partner and any other Indemnitee acting in connection with the Partnership’s business or affairs shall not be liable to the Partnership or to any Partner for its good faith reliance on the provisions of this Agreement.

(d) Any amendment, modification or repeal of this Section 7.8 or any provision hereof shall be prospective only and shall not in any way affect the limitations on the liability of the Indemnitees under this Section 7.8 as in effect immediately prior to such amendment, modification or repeal with respect to claims arising from or relating to matters occurring, in whole or in part, prior to such amendment, modification or repeal, regardless of when such claims may arise or be asserted, and provided such Person became an Indemnitee hereunder prior to such amendment, modification or repeal.

Section 7.9 Resolution of Conflicts of Interest; Standards of Conduct and Modification of Duties.

(a) Unless otherwise expressly provided in this Agreement, whenever a potential conflict of interest exists or arises between the General Partner or any of its Affiliates, on the one hand, and the Partnership, any Group Member or any Partner, on the other, any resolution or course of action by the General Partner or

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Index to Financial Statements

its Affiliates in respect of such conflict of interest shall be permitted and deemed approved by all Partners, and shall not constitute a breach of this Agreement or of any agreement contemplated herein or therein, or of any duty stated or implied by law or equity, if the resolution or course of action in respect of such conflict of interest is (i) approved by Special Approval, (ii) approved by the vote of a majority of the Common Units (excluding Common Units owned by the General Partner and its Affiliates), (iii) on terms no less favorable to the Partnership than those generally being provided to or available from unrelated third parties or (iv) fair and reasonable to the Partnership, taking into account the totality of the relationships between the parties involved (including other transactions that may be particularly favorable or advantageous to the Partnership). The General Partner shall be authorized but not required in connection with its resolution of such conflict of interest to seek Special Approval of such resolution, and the General Partner may also adopt a resolution or course of action that has not received Special Approval. If Special Approval is not sought and the Board of Directors of the General Partner determines that the resolution or course of action taken with respect to a conflict of interest satisfies either of the standards set forth in clauses (iii) or (iv) above, then it shall be presumed that, in making its decision, the Board of Directors acted in good faith, and in any proceeding brought by any Limited Partner or by or on behalf of such Limited Partner or any other Limited Partner or the Partnership challenging such approval, the Person bringing or prosecuting such proceeding shall have the burden of overcoming such presumption. Notwithstanding anything to the contrary in this Agreement or any duty otherwise existing at law or equity, the existence of the conflicts of interest described in the Registration Statement are hereby approved by all Partners and shall not constitute a breach of this Agreement.

(b) Whenever the General Partner makes a determination or takes or declines to take any other action, or any of its Affiliates causes it to do so, in its capacity as the general partner of the Partnership as opposed to in its individual capacity, whether under this Agreement, or any other agreement contemplated hereby or otherwise, then unless another express standard is provided for in this Agreement, the General Partner, or such Affiliates causing it to do so, shall make such determination or take or decline to take such other action in good faith and shall not be subject to any other or different standards imposed by this Agreement, any other agreement contemplated hereby or under the Delaware Act or any other law, rule or regulation or at equity. In order for a determination or other action to be in “good faith” for purposes of this Agreement, the Person or Persons making such determination or taking or declining to take such other action must believe that the determination or other action is in the best interests of the Partnership.

(c) Whenever the General Partner makes a determination or takes or declines to take any other action, or any of its Affiliates causes it to do so, in its individual capacity as opposed to in its capacity as a general partner of the Partnership, whether under this Agreement or any other agreement contemplated hereby or otherwise, then the General Partner, or such Affiliates causing it to do so, are entitled to make such determination or to take or decline to take such other action free of any fiduciary duty or obligation whatsoever to the Partnership, any Limited Partner, and the General Partner, or such Affiliates causing it to do so, shall not be required to act in good faith or pursuant to any other standard imposed by this Agreement, any other agreement contemplated hereby or under the Delaware Act or any other law, rule or regulation or at equity. By way of illustration and not of limitation, whenever the phrase, “at the option of the General Partner,” or some variation of that phrase, is used in this Agreement, it indicates that the General Partner is acting in its individual capacity. For the avoidance of doubt, whenever the General Partner votes or transfers its Partnership Units, or refrains from voting or transferring its Partnership Units, it shall be acting in its individual capacity.

(d) Notwithstanding anything to the contrary in this Agreement, the General Partner and its Affiliates shall have no duty or obligation, express or implied, to (i) sell or otherwise dispose of any asset of the Partnership Group other than in the ordinary course of business or (ii) permit any Group Member to use any facilities or assets of the General Partner and its Affiliates, except as may be provided in contracts entered into from time to time specifically dealing with such use. Any determination by the General Partner or any of its Affiliates to enter into such contracts shall be at its option.

(e) Except as expressly set forth in this Agreement, neither the General Partner nor any other Indemnitee shall have any duties or liabilities, including fiduciary duties, to the Partnership or any Limited

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Index to Financial Statements

Partner and the provisions of this Agreement, to the extent that they restrict or otherwise modify the duties and liabilities, including fiduciary duties, of the General Partner or any other Indemnitee otherwise existing at law or in equity, are agreed by the Partners to replace such other duties and liabilities of the General Partner or such other Indemnitee.

(f) The Unitholders hereby authorize the General Partner, on behalf of the Partnership as a partner or member of a Group Member, to approve of actions by the general partner or managing member of such Group Member similar to those actions permitted to be taken by the General Partner pursuant to this Section 7.9.

Section 7.10 Other Matters Concerning the General Partner.

(a) The General Partner may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, debenture or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties.

(b) The General Partner may consult with legal counsel, accountants, appraisers, management consultants, investment bankers and other consultants and advisers selected by it, and any act taken or omitted to be taken in reliance upon the opinion (including an Opinion of Counsel) of such Persons as to matters that the General Partner reasonably believes to be within such Person’s professional or expert competence shall be conclusively presumed to have been done or omitted in good faith and in accordance with such opinion.

(c) The General Partner shall have the right, in respect of any of its powers or obligations hereunder, to act through any of its duly authorized officers, a duly appointed attorney or attorneys-in-fact or the duly authorized officers of the Partnership. Each such attorney shall, to the extent provided by the General Partner in the power of attorney, have full power and authority to do and perform each and every act and duty that is permitted or required to be done by the General Partner hereunder.

Section 7.11 Purchase or Sale of Partnership Securities.

The General Partner may cause the Partnership to purchase or otherwise acquire Partnership Securities, which shall be held by the Partnership as treasury securities unless they are expressly canceled by action of an appropriate officer of the General Partner. As long as Partnership Securities are held by any Group Member, such Partnership Securities shall not be considered Outstanding for any purpose, except as otherwise provided herein. The General Partner or any of its Affiliates may also purchase or otherwise acquire and sell or otherwise dispose of Partnership Securities for their own account, subject to the provisions of Articles IV and X.

Section 7.12 Registration Rights of the General Partner and its Affiliates.

(a) If (i) the General Partner or any Affiliate of the General Partner (including for purposes of this Section 7.12, any Person that is an Affiliate of the General Partner at the date hereof notwithstanding that it may later cease to be an Affiliate of the General Partner) holds Partnership Securities that it desires to sell and (ii) Rule 144 of the Securities Act (or any successor rule or regulation to Rule 144) or another exemption from registration is not available to enable such holder of such Partnership Securities (the “Holder”) to dispose of the number of such Partnership Securities it desires to sell at the time it desires to do so without registration under the Securities Act, then at the option and upon the request of the Holder, the Partnership shall file with the Commission as promptly as practicable after receiving such request, and use all commercially reasonable efforts to cause to become effective no later than 120 days after the date of filing of the registration statement and remain effective for a period of not less than six months following its effective date or such shorter period as shall terminate when all Partnership Securities covered by such registration statement have been sold, a registration statement under the Securities Act registering the

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Index to Financial Statements

offering and sale of the number of Partnership Securities specified by the Holder; provided, however, that the Partnership shall not be required to effect more than three registrations pursuant to this Section 7.12(a) and Section 7.12(b); and provided further, however, that if the Conflicts Committee determines in good faith that the requested registration would be materially detrimental to the Partnership and its Partners because such registration would (x) materially interfere with a significant acquisition, reorganization or other similar transaction involving the Partnership or the MLP, (y) require premature disclosure of material information that the Partnership has a bona fide business purpose for preserving as confidential or (z) render the Partnership unable to comply with requirements under applicable securities laws, then the Partnership shall have the right to postpone such requested registration for a period of not more than three months after receipt of the Holder’s request, such right pursuant to this Section 7.12(a) or Section 7.12(b) not to be utilized more than once in any twelve-month period. Except as provided in the preceding sentence, the Partnership shall be deemed not to have used all commercially reasonable efforts to keep the registration statement effective during the applicable period if it voluntarily takes any action that would result in Holders of Partnership Securities covered thereby not being able to offer and sell such Partnership Securities at any time during such period, unless such action is required by applicable law. In connection with any registration pursuant to the first sentence of this Section 7.12(a), the Partnership shall (i) promptly prepare and file (A) such documents as may be necessary to register or qualify the securities subject to such registration under the securities laws of such states as the Holder shall reasonably request; provided, however, that no such qualification shall be required in any jurisdiction where, as a result thereof, the Partnership would become subject to general service of process or to taxation or qualification to do business as a foreign corporation or partnership doing business in such jurisdiction solely as a result of such registration, and (B) such documents as may be necessary to apply for listing or to list the Partnership Securities subject to such registration on such National Securities Exchange as the Holder shall reasonably request, and (ii) do any and all other acts and things that may be necessary or appropriate to enable the Holder to consummate a public sale of such Partnership Securities in such states. Except as set forth in Section 7.12(d), all costs and expenses of any such registration and offering (other than the underwriting discounts and commissions) shall be paid by the Partnership, without reimbursement by the Holder.

(b) If any Holder holds Partnership Securities that it desires to sell and Rule 144 of the Securities Act (or any successor rule or regulation to Rule 144) or another exemption from registration is not available to enable such Holder to dispose of the number of Partnership Securities it desires to sell at the time it desires to do so without registration under the Securities Act, then at the option and upon the request of the Holder, the Partnership shall file with the Commission as promptly as practicable after receiving such request, and use all commercially reasonable efforts to cause to become effective no later than 120 days after the date of filing of the registration statement and remain effective for a period of not less than six months following its effective date or such shorter period as shall terminate when all Partnership Securities covered by such shelf registration statement have been sold, a “shelf” registration statement covering the Partnership Securities specified by the Holder on an appropriate form under Rule 415 under the Securities Act, or any similar rule that may be adopted by the Commission; provided, however, that the Partnership shall not be required to effect more than three registrations pursuant to Section 7.12(a) and this Section 7.12(b); and provided further, however, that if the Conflicts Committee determines in good faith that any offering under, or the use of any prospectus forming a part of, the shelf registration statement would be materially detrimental to the Partnership and its Partners because such offering or use would (x) materially interfere with a significant acquisition, reorganization or other similar transaction involving the Partnership or the MLP, (y) require premature disclosure of material information that the Partnership has a bona fide business purpose for preserving as confidential or (z) render the Partnership unable to comply with requirements under applicable securities laws, then the Partnership shall have the right to suspend such offering or use for a period of not more than three months after receipt of the Holder’s request, such right pursuant to Section 7.12(a) or this Section 7.12(b) not to be utilized more than once in any twelve-month period. Except as provided in the preceding sentence, the Partnership shall be deemed not to have used all commercially reasonable efforts to keep the shelf registration statement effective during the applicable period if it voluntarily takes any action that would result in Holders of Partnership Securities covered thereby not being able to offer and sell such

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Index to Financial Statements

Partnership Securities at any time during such period, unless such action is required by applicable law. In connection with any shelf registration pursuant to this Section 7.12(b), the Partnership shall (i) promptly prepare and file (A) such documents as may be necessary to register or qualify the securities subject to such shelf registration under the securities laws of such states as the Holder shall reasonably request; provided, however, that no such qualification shall be required in any jurisdiction where, as a result thereof, the Partnership would become subject to general service of process or to taxation or qualification to do business as a foreign corporation or partnership doing business in such jurisdiction solely as a result of such shelf registration, and (B) such documents as may be necessary to apply for listing or to list the Partnership Securities subject to such shelf registration on such National Securities Exchange as the Holder shall reasonably request, and (ii) do any and all other acts and things that may be necessary or appropriate to enable the Holder to consummate a public sale of such Partnership Securities in such states. Except as set forth in Section 7.12(d), all costs and expenses of any such shelf registration and offering (other than the underwriting discounts and commissions) shall be paid by the Partnership, without reimbursement by the Holder.

(c) If the Partnership shall at any time propose to file a registration statement under the Securities Act for an offering of equity securities of the Partnership for cash (other than an offering relating solely to an employee benefit plan), the Partnership shall use all reasonable efforts to include such number or amount of securities held by the Holder in such registration statement as the Holder shall request; provided, that the Partnership is not required to make any effort or take an action to so include the securities of the Holder once the registration statement is declared effective by the Commission, including any registration statement providing for the offering from time to time of securities pursuant to Rule 415 of the Securities Act. If the proposed offering pursuant to this Section 7.12(c) shall be an underwritten offering, then, in the event that the managing underwriter or managing underwriters of such offering advise the Partnership and the Holder in writing that in their opinion the inclusion of all or some of the Holder’s Partnership Securities would adversely and materially affect the success of the offering, the Partnership shall include in such offering only that number or amount, if any, of securities held by the Holder that, in the opinion of the managing underwriter or managing underwriters, will not so adversely and materially affect the offering. Except as set forth in Section 7.12(d), all costs and expenses of any such registration and offering (other than the underwriting discounts and commissions) shall be paid by the Partnership, without reimbursement by the Holder.

(d) If underwriters are engaged in connection with any registration referred to in this Section 7.12, the Partnership shall provide indemnification, representations, covenants, opinions and other assurance to the underwriters in form and substance reasonably satisfactory to such underwriters. Further, in addition to and not in limitation of the Partnership’s obligation under Section 7.7, the Partnership shall, to the fullest extent permitted by law, indemnify and hold harmless the Holder, its officers, directors and each Person who controls the Holder (within the meaning of the Securities Act) and any agent thereof (collectively, “Indemnified Persons”) from and against any and all losses, claims, damages, liabilities, joint or several, expenses (including legal fees and expenses), judgments, fines, penalties, interest, settlements or other amounts arising from any and all claims, demands, actions, suits or proceedings, whether civil, criminal, administrative or investigative, in which any Indemnified Person may be involved, or is threatened to be involved, as a party or otherwise, under the Securities Act or otherwise (hereinafter referred to in this Section 7.12(d) as a “claim” and in the plural as “claims”) based upon, arising out of or resulting from any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which any Partnership Securities were registered under the Securities Act or any state securities or Blue Sky laws, in any preliminary prospectus (if used prior to the effective date of such registration statement), or in any summary or final prospectus or in any amendment or supplement thereto (if used during the period the Partnership is required to keep the registration statement current), or arising out of, based upon or resulting from the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements made therein not misleading; provided, however, that the Partnership shall not be liable to any Indemnified Person to the extent that any such claim arises out of, is based upon or results from an untrue statement or alleged untrue statement or omission or alleged omission

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Index to Financial Statements

made in such registration statement, such preliminary, summary or final prospectus or such amendment or supplement, in reliance upon and in conformity with written information furnished to the Partnership by or on behalf of such Indemnified Person specifically for use in the preparation thereof.

(e) The provisions of Sections 7.12(a), 7.12(b) and 7.12(c) shall continue to be applicable with respect to the General Partner (and any of the General Partner’s Affiliates) after it ceases to be a Partner of the Partnership, during a period of two years subsequent to the effective date of such cessation and for so long thereafter as is required for the Holder to sell all of the Partnership Securities with respect to which it has requested during such two-year period inclusion in a registration statement otherwise filed or that a registration statement be filed; provided, however, that the Partnership shall not be required to file successive registration statements covering the same Partnership Securities for which registration was demanded during such two-year period. The provisions of Section 7.12(d) shall continue in effect thereafter.

(f) The rights to cause the Partnership to register Partnership Securities pursuant to this Section 7.12 may be assigned (but only with all related obligations) by a Holder to a transferee or assignee of such Partnership Securities, provided (i) the Partnership is, within a reasonable time after such transfer, furnished with written notice of the name and address of such transferee or assignee and the Partnership Securities with respect to which such registration rights are being assigned; and (ii) such transferee or assignee agrees in writing to be bound by and subject to the terms set forth in this Section 7.12.

(g) Any request to register Partnership Securities pursuant to this Section 7.12 shall (i) specify the Partnership Securities intended to be offered and sold by the Person making the request, (ii) express such Person’s present intent to offer such Partnership Securities for distribution, (iii) describe the nature or method of the proposed offer and sale of Partnership Securities, and (iv) contain the undertaking of such Person to provide all such information and materials and take all action as may be required in order to permit the Partnership to comply with all applicable requirements in connection with the registration of such Partnership Securities.

Section 7.13 Reliance by Third Parties.

Notwithstanding anything to the contrary in this Agreement, any Person dealing with the Partnership shall be entitled to assume that the General Partner and any officer of the General Partner authorized by the General Partner to act on behalf of and in the name of the Partnership has full power and authority to encumber, sell or otherwise use in any manner any and all assets of the Partnership and to enter into any authorized contracts on behalf of the Partnership, and such Person shall be entitled to deal with the General Partner or any such officer as if it were the Partnership’s sole party in interest, both legally and beneficially. Each Limited Partner hereby waives any and all defenses or other remedies that may be available against such Person to contest, negate or disaffirm any action of the General Partner or any such officer in connection with any such dealing. In no event shall any Person dealing with the General Partner or any such officer or its representatives be obligated to ascertain that the terms of this Agreement have been complied with or to inquire into the necessity or expedience of any act or action of the General Partner or any such officer or its representatives. Each and every certificate, document or other instrument executed on behalf of the Partnership by the General Partner or any such officer or its representatives shall be conclusive evidence in favor of any and every Person relying thereon or claiming thereunder that (a) at the time of the execution and delivery of such certificate, document or instrument, this Agreement was in full force and effect, (b) the Person executing and delivering such certificate, document or instrument was duly authorized and empowered to do so for and on behalf of the Partnership and (c) such certificate, document or instrument was duly executed and delivered in accordance with the terms and provisions of this Agreement and is binding upon the Partnership.

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Index to Financial Statements

ARTICLE VIII

BOOKS, RECORDS, ACCOUNTING AND REPORTS

Section 8.1 Records and Accounting.

The General Partner shall keep or cause to be kept at the principal office of the Partnership appropriate books and records with respect to the Partnership’s business, including all books and records necessary to provide to the Limited Partners any information required to be provided pursuant to Section 3.4(a). Any books and records maintained by or on behalf of the Partnership in the regular course of its business, including the record of the Record Holders of Units or other Partnership Securities, books of account and records of Partnership proceedings, may be kept on, or be in the form of, computer disks, hard drives, punch cards, magnetic tape, photographs, micrographics or any other information storage device; provided, that the books and records so maintained are convertible into clearly legible written form within a reasonable period of time. The books of the Partnership shall be maintained, for financial reporting purposes, on an accrual basis in accordance with U.S. GAAP.

Section 8.2 Fiscal Year.

The fiscal year of the Partnership shall be a calendar year ending December 31.

Section 8.3 Reports.

(a) As soon as practicable, but in no event later than 120 days after the close of each fiscal year of the Partnership, the General Partner shall cause to be furnished or made available , by any reasonable means (including posting on the Partnership’s website), to each Record Holder of a Unit as of a date selected by the General Partner, an annual report containing financial statements of the Partnership for such fiscal year of the Partnership, presented in accordance with U.S. GAAP, including a balance sheet and statements of operations, Partnership equity and cash flows, such statements to be audited by a firm of independent public accountants selected by the General Partner.

(b) As soon as practicable, but in no event later than 90 days after the close of each Quarter except the last Quarter of each fiscal year, the General Partner shall cause to be furnished or made available, by any reasonable means (including posting on the Partnership’s website), to each Record Holder of a Unit, as of a date selected by the General Partner, a report containing unaudited financial statements of the Partnership and such other information as may be required by applicable law, regulation or rule of any National Securities Exchange on which the Units are listed or admitted for trading, or as the General Partner determines to be necessary or appropriate.

ARTICLE IX

TAX MATTERS

Section 9.1 Tax Returns and Information.

The Partnership shall timely file all returns of the Partnership that are required for federal, state and local income tax purposes on the basis of the accrual method and a taxable year ending on December 31. The tax information reasonably required by Record Holders for federal and state income tax reporting purposes with respect to a taxable year shall be furnished to them within 90 days of the close of the calendar year in which the Partnership’s taxable year ends. The classification, realization and recognition of income, gain, losses and deductions and other items shall be on the accrual method of accounting for federal income tax purposes.

Section 9.2 Tax Elections.

(a) The Partnership shall make the election under Section 754 of the Code in accordance with applicable regulations thereunder, subject to the reservation of the right to seek to revoke any such election

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Index to Financial Statements

upon the General Partner’s determination that such revocation is in the best interests of the Limited Partners. Notwithstanding any other provision herein contained, for the purposes of computing the adjustments under Section 743(b) of the Code, the General Partner shall be authorized (but not required) to adopt a convention whereby the price paid by a transferee of a Limited Partner Interest will be deemed to be the lowest quoted closing price of the Limited Partner Interests on any National Securities Exchange on which such Limited Partner Interests are listed or admitted for trading during the calendar month in which such transfer is deemed to occur pursuant to Section 6.2(g) without regard to the actual price paid by such transferee.

(b) Except as otherwise provided herein, the General Partner shall determine whether the Partnership should make any other elections permitted by the Code.

Section 9.3 Tax Controversies.

Subject to the provisions hereof, the General Partner is designated as the Tax Matters Partner (as defined in the Code) and is authorized and required to represent the Partnership (at the Partnership’s expense) in connection with all examinations of the Partnership’s affairs by tax authorities, including resulting administrative and judicial proceedings, and to expend Partnership funds for professional services and costs associated therewith. Each Partner agrees to cooperate with the General Partner and to do or refrain from doing any or all things reasonably required by the General Partner to conduct such proceedings.

Section 9.4 Withholding.

Notwithstanding any other provision of this Agreement, the General Partner is authorized to take any action that may be required to cause the Partnership to comply with any withholding requirements established under the Code or any other federal, state or local law including, without limitation, pursuant to Sections 1441, 1442, 1445 and 1446 of the Code. To the extent that the Partnership is required or elects to withhold and pay over to any taxing authority any amount resulting from the allocation or distribution of income to any Partner (including, without limitation, by reason of Section 1446 of the Code), the General Partner may treat the amount withheld as a distribution of cash pursuant to Section 6.3 in the amount of such withholding from such Partner.

ARTICLE X

ADMISSION OF PARTNERS

Section 10.1 Admission of Initial Limited Partners.

(a) By acceptance of the transfer of any Limited Partner Interests in accordance with this Section 10.1 or the issuance of any Limited Partner Interests in a merger or consolidation pursuant to Article XIV, and except as provided in Section 4.8, each transferee of a Limited Partner Interest (including any nominee holder or an agent or representative acquiring such Limited Partner Interests for the account of another Person) (i) shall be admitted to the Partnership as a Limited Partner with respect to the Limited Partner Interests so transferred to such Person when any such transfer or admission is reflected in the books and records of the Partnership, with or without execution of this Agreement, (ii) shall become bound by the terms of, and shall be deemed to have executed, this Agreement, (iii) shall become the Record Holder of the Limited Partner Interests so transferred, (iv) represents that the transferee has the capacity, power and authority to enter into this Agreement, (v) grants the powers of attorney set forth in this Agreement and (vi) makes the consents and waivers contained in this Agreement. The transfer of any Limited Partner Interests and the admission of any new Limited Partner shall not constitute an amendment to this Agreement. A Person may become a Record Holder of a Limited Partner Interest without the consent or approval of any of the Partners. A Person may not become a Limited Partner without acquiring a Limited Partner Interest and until such Person is reflected in the books and records of the Partnership as the Record Holder of such Limited Partner Interest. The rights and obligations of a Person who is a Non-citizen Assignee shall be determined in accordance with Section 4.8 hereof.

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Index to Financial Statements

(b) The name and mailing address of each Limited Partner shall be listed on the books and records of the Partnership maintained for such purpose by the Partnership or the Transfer Agent. The General Partner shall update the books and records of the Partnership from time to time as necessary to reflect accurately the information therein (or shall cause the Transfer Agent to do so, as applicable). A Limited Partner Interest may be represented by a Certificate, as provided in Section 4.1 hereof.

(c) Any transfer of a Limited Partner Interest shall not entitle the transferee to share in the profits and losses, to receive distributions, to receive allocations of income, gain, loss, deduction or credit or any similar item or to any other rights to which the transferor was entitled until the transferee becomes a Limited Partner pursuant to Section 10.1(a).

Section 10.2 Admission of Successor General Partner.

A successor General Partner approved pursuant to Section 11.1 or 11.2 or the transferee of or successor to all of the General Partner Interest pursuant to Section 4.6 who is proposed to be admitted as a successor General Partner shall be admitted to the Partnership as the General Partner effective immediately prior to the withdrawal or removal of the predecessor or transferring General Partner pursuant to Section 11.1 or 11.2 or the transfer of such General Partner’s General Partner Interest pursuant to Section 4.6; provided, however, that no such successor shall be admitted to the Partnership until compliance with the terms of Section 4.6 has occurred and such successor has executed and delivered such other documents or instruments as may be required to effect such admission. Any such successor shall, subject to the terms hereof, carry on the business of the Partnership without dissolution.

Section 10.3 Amendment of Agreement and Certificate of Limited Partnership.

To effect the admission to the Partnership of any Partner, the General Partner shall take all steps necessary and appropriate under the Delaware Act to amend the records of the Partnership to reflect such admission and, if necessary, to prepare as soon as practicable an amendment to this Agreement and, if required by law, the General Partner shall prepare and file an amendment to the Certificate of Limited Partnership, and the General Partner may for this purpose, among others, exercise the power of attorney granted pursuant to Section 2.6.

ARTICLE XI

WITHDRAWAL OR REMOVAL OF PARTNERS

Section 11.1 Withdrawal of the General Partner.

(a) The General Partner shall be deemed to have withdrawn from the Partnership upon the occurrence of any one of the following events (each such event herein referred to as an “Event of Withdrawal”):

(i) the General Partner voluntarily withdraws from the Partnership by giving written notice to the other Partners;

(ii) the General Partner transfers all of its rights as General Partner pursuant to Section 4.6;

(iii) the General Partner is removed pursuant to Section 11.2;

(iv) the General Partner (A) makes a general assignment for the benefit of creditors; (B) files a voluntary bankruptcy petition for relief under Chapter 7 of the United States Bankruptcy Code; (C) files a petition or answer seeking for itself a liquidation, dissolution or similar relief (but not a reorganization) under any law; (D) files an answer or other pleading admitting or failing to contest the material allegations of a petition filed against the General Partner in a proceeding of the type described in clauses (A)-(C) of this Section 11.1(a)(iv); or (E) seeks, consents to or acquiesces in the appointment of a trustee (but not a debtor-in-possession), receiver or liquidator of the General Partner or of all or any substantial part of its properties;

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(v) a final and non-appealable order of relief under Chapter 7 of the United States Bankruptcy Code is entered by a court with appropriate jurisdiction pursuant to a voluntary or involuntary petition by or against the General Partner; or

(vi) (A) in the event the General Partner is a corporation, a certificate of dissolution or its equivalent is filed for the General Partner, or 90 days expire after the date of notice to the General Partner of revocation of its charter without a reinstatement of its charter, under the laws of its state of incorporation; (B) in the event the General Partner is a partnership or a limited liability company, the dissolution and commencement of winding up of the General Partner; (C) in the event the General Partner is acting in such capacity by virtue of being a trustee of a trust, the termination of the trust; (D) in the event the General Partner is a natural person, his death or adjudication of incompetency; and (E) otherwise in the event of the termination of the General Partner.

If an Event of Withdrawal specified in Section 11.1(a)(iv), (v) or (vi)(A), (B), (C) or (E) occurs, the withdrawing General Partner shall give notice to the Limited Partners within 30 days after such occurrence. The Partners hereby agree that only the Events of Withdrawal described in this Section 11.1 shall result in the withdrawal of the General Partner from the Partnership.

(b) Withdrawal of the General Partner from the Partnership upon the occurrence of an Event of Withdrawal shall not constitute a breach of this Agreement under the following circumstances: (i) at any time during the period beginning on the Closing Date and ending at 12:00 midnight, Central Standard Time, on March 31, 2016, the General Partner voluntarily withdraws by giving at least 90 days’ advance notice of its intention to withdraw to the Limited Partners; provided that prior to the effective date of such withdrawal, the withdrawal is approved by Unitholders holding at least a majority of the Outstanding Common Units (excluding Common Units held by the General Partner and its Affiliates) and the General Partner delivers to the Partnership an Opinion of Counsel (“Withdrawal Opinion of Counsel”) that such withdrawal (following the selection of the successor General Partner) would not result in the loss of the limited liability of any Limited Partner or any Group Member or cause any Group Member to be treated as an association taxable as a corporation or otherwise to be taxed as an entity for federal income tax purposes (to the extent not previously treated or taxed as such); (ii) at any time after 12:00 midnight, Central Standard Time, on March 31, 2016, the General Partner voluntarily withdraws by giving at least 90 days’ advance notice to the Unitholders, such withdrawal to take effect on the date specified in such notice; (iii) at any time that the General Partner ceases to be the General Partner pursuant to Section 11.1(a)(ii) or is removed pursuant to Section 11.2; or (iv) notwithstanding clause (i) of this sentence, at any time that the General Partner voluntarily withdraws by giving at least 90 days’ advance notice of its intention to withdraw to the Limited Partners, such withdrawal to take effect on the date specified in the notice, if at the time such notice is given one Person and its Affiliates (other than the General Partner and its Affiliates) own beneficially or of record or control at least 50% of the Outstanding Units. The withdrawal of the General Partner from the Partnership upon the occurrence of an Event of Withdrawal shall also constitute the withdrawal of the General Partner as general partner or managing member, to the extent applicable, of the other Group Members. If the General Partner gives a notice of withdrawal pursuant to Section 11.1(a)(i), the holders of a Unit Majority, may, prior to the effective date of such withdrawal, elect a successor General Partner. The Person so elected as successor General Partner shall automatically become the successor general partner or managing member, to the extent applicable, of the other Group Members of which the General Partner is a general partner or a managing member. If, prior to the effective date of the General Partner’s withdrawal pursuant to Section 11.1(a)(i), a successor is not selected by the Unitholders as provided herein or the Partnership does not receive a Withdrawal Opinion of Counsel, the Partnership shall be dissolved in accordance with Section 12.1. Any successor General Partner elected in accordance with the terms of this Section 11.1 shall be subject to the provisions of Section 10.2.

Section 11.2 Removal of the General Partner.

The General Partner may be removed if such removal is approved by the Unitholders holding at least 66²/3% of the Outstanding Units (including Units held by the General Partner and its Affiliates). Any such action

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Index to Financial Statements

by such holders for removal of the General Partner must also provide for the election of a successor General Partner by the Unitholders holding a majority of Outstanding Units (including Units held by the General Partner and its Affiliates). Such removal shall be effective immediately following the admission of a successor General Partner pursuant to Section 10.2. The removal of the General Partner shall also automatically constitute the removal of the General Partner as general partner or managing member, to the extent applicable, of the other Group Members of which the General Partner is a general partner or a managing member. If a Person is elected as a successor General Partner in accordance with the terms of this Section 11.2, such Person shall, upon admission pursuant to Section 10.2, automatically become a successor general partner or managing member, to the extent applicable, of the other Group Members of which the General Partner is a general partner or a managing member. The right of the holders of Outstanding Units to remove the General Partner shall not exist or be exercised unless the Partnership has received an opinion opining as to the matters covered by a Withdrawal Opinion of Counsel. Any successor General Partner elected in accordance with the terms of this Section 11.2 shall be subject to the provisions of Section 10.2.

Section 11.3 Interest of Departing General Partner and Successor General Partner.

(a) In the event of (i) withdrawal of the General Partner under circumstances where such withdrawal does not violate this Agreement or (ii) removal of the General Partner by the holders of Outstanding Units under circumstances where Cause does not exist, if a successor General Partner is elected in accordance with the terms of Section 11.1 or 11.2, the Departing General Partner shall have the option exercisable prior to the effective date of the departure of such Departing General Partner to require its successor to purchase (x) its General Partner Interest and (y) its general partner interest (or equivalent interest), if any, in the other Group Members ((x) and (y) collectively, the “Combined Interest”) in exchange for an amount in cash equal to the fair market value of such Combined Interest, such amount to be determined and payable as of the effective date of its departure or, if there is not agreement as to the fair market value of such Combined Interest at the effective date of departure, within ten (10) days after such fair market value is determined pursuant to this Section 11.3(a). If the General Partner is removed by the Unitholders under circumstances where Cause exists or if the General Partner withdraws under circumstances where such withdrawal violates this Agreement, and if a successor General Partner is elected in accordance with the terms of Section 11.1 or 11.2 (or if the business of the Partnership is continued pursuant to Section 12.2 and the successor General Partner is not the former General Partner), such successor shall have the option, exercisable prior to the effective date of the departure of such Departing General Partner (or, in the event the business of the Partnership is continued, prior to the date the business of the Partnership is continued), to purchase the Combined Interest of the Departing General Partner for such fair market value of such Combined Interest of the Departing General Partner. In either event, the Departing General Partner shall be entitled to receive all reimbursements due such Departing General Partner pursuant to Section 7.4, including any employee-related liabilities (including severance liabilities), incurred in connection with the termination of any employees employed by the Departing General Partner for the benefit of the Partnership or the other Group Members.

For purposes of this Section 11.3(a), the fair market value of a Departing General Partner’s Combined Interest shall be determined by agreement between the Departing General Partner and its successor or, failing agreement within 30 days after the effective date of such Departing General Partner’s departure, by an independent investment banking firm or other independent expert selected by the Departing General Partner and its successor, which, in turn, may rely on other experts, and the determination of which shall be conclusive as to such matter. If such parties cannot agree upon one independent investment banking firm or other independent expert within 45 days after the effective date of such departure, then the Departing General Partner shall designate an independent investment banking firm or other independent expert, the Departing General Partner’s successor shall designate an independent investment banking firm or other independent expert, and such firms or experts shall mutually select a third independent investment banking firm or independent expert, which third independent investment banking firm or other independent expert shall determine the fair market value of the Combined Interest of the Departing General Partner. In making its determination, such third independent

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investment banking firm or other independent expert may consider the then current trading price of Units on any National Securities Exchange on which Units are then listed or admitted for trading, the value of the Partnership’s assets, the rights and obligations of the Departing General Partner and other factors it may deem relevant.

(b) If the Combined Interest is not purchased in the manner set forth in Section 11.3(a), the Departing General Partner (or its transferee) shall become a Limited Partner and its Combined Interest shall be converted into Common Units pursuant to a valuation made by an investment banking firm or other independent expert selected pursuant to Section 11.3(a), without reduction in such Partnership Interest (but subject to proportionate dilution by reason of the admission of its successor). Any successor General Partner shall indemnify the Departing General Partner (or its transferee) as to all debts and liabilities of the Partnership arising on or after the date on which the Departing General Partner (or its transferee) becomes a Limited Partner. For purposes of this Agreement, conversion of the Combined Interest of the Departing General Partner to Common Units will be characterized as if such General Partner (or its transferee) contributed its Combined Interest to the Partnership in exchange for the newly issued Common Units.

Section 11.4 Withdrawal of Limited Partners.

No Limited Partner shall have any right to withdraw from the Partnership; provided, however, that when a transferee of a Limited Partner’s Limited Partner Interest becomes a Record Holder of the Limited Partner Interest so transferred, such transferring Limited Partner shall cease to be a Limited Partner with respect to the Limited Partner Interest so transferred.

ARTICLE XII

DISSOLUTION AND LIQUIDATION

Section 12.1 Dissolution.

The Partnership shall not be dissolved by the admission of Additional Limited Partners or by the admission of a successor General Partner in accordance with the terms of this Agreement. Upon the removal or withdrawal of the General Partner, if a successor General Partner is elected pursuant to Section 11.1 or 11.2, the Partnership shall not be dissolved and such successor General Partner shall continue the business of the Partnership. The Partnership shall dissolve, and (subject to Section 12.2) its affairs shall be wound up, upon:

(a) an Event of Withdrawal of the General Partner as provided in Section 11.1(a) (other than Section 11.1(a)(ii)), unless a successor is elected and an Opinion of Counsel is received as provided in Section 11.1(b) or 11.2 and such successor is admitted to the Partnership pursuant to Section 10.2;

(b) an election to dissolve the Partnership by the General Partner that is approved by the holders of a Unit Majority;

(d) at any time there are no Limited Partners, unless the Partnership is continued without dissolution in accordance with the Delaware Act.

Section 12.2 Continuation of the Business of the Partnership After Dissolution.

Upon (a) dissolution of the Partnership following an Event of Withdrawal caused by the withdrawal or removal of the General Partner as provided in Section 11.1(a)(i) or (iii) and the failure of the Partners to select a successor to such Departing General Partner pursuant to Section 11.1 or 11.2, then within 90 days thereafter, or (b) dissolution of the Partnership upon an event constituting an Event of Withdrawal as defined in

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Section 11.1(a)(iv), (v) or (vi), then, to the maximum extent permitted by law, within 180 days thereafter, the holders of a Unit Majority may elect to continue the Partnership on the same terms and conditions set forth in this Agreement by appointing as a the successor General Partner a Person approved by the holders of a Unit Majority. Unless such an election is made within the applicable time period as set forth above, the Partnership shall conduct only activities necessary to wind up its affairs. If such an election is so made, then:

(i) the Partnership shall continue without dissolution unless earlier dissolved in accordance with this Article XII;

(ii) if the successor General Partner is not the former General Partner, then the interest of the former General Partner shall be treated in the manner provided in Section 11.3; and

(iii) the successor General Partner shall be admitted to the Partnership as General Partner, effective as of the Event of Withdrawal, by agreeing in writing to be bound by this Agreement; provided, that the right of the holders of a Unit Majority to approve a successor General Partner and to continue the business of the Partnership shall not exist and may not be exercised unless the Partnership has received an Opinion of Counsel that (x) the exercise of the right would not result in the loss of limited liability of any Limited Partner and (y) neither the Partnership nor the MLP would be treated as an association taxable as a corporation or otherwise be taxable as an entity for federal income tax purposes upon the exercise of such right to continue (to the extent not already so treated or taxed).

Section 12.3 Liquidator.

Upon dissolution of the Partnership, unless the Partnership is continued pursuant to Section 12.2, the General Partner shall select one or more Persons to act as Liquidator. The Liquidator (if other than the General Partner) shall be entitled to receive such compensation for its services as may be approved by holders of at least a majority of the Outstanding Common Units voting as a single class. The Liquidator (if other than the General Partner) shall agree not to resign at any time without 15 days’ prior notice and may be removed at any time, with or without cause, by notice of removal approved by holders of at least a majority of the Outstanding Common Units voting as a single class. Upon dissolution, removal or resignation of the Liquidator, a successor and substitute Liquidator (who shall have and succeed to all rights, powers and duties of the original Liquidator) shall within 30 days thereafter be approved by holders of at least a majority of the Outstanding Common Units voting as a single class. The right to approve a successor or substitute Liquidator in the manner provided herein shall be deemed to refer also to any such successor or substitute Liquidator approved in the manner herein provided. Except as expressly provided in this Article XII, the Liquidator approved in the manner provided herein shall have and may exercise, without further authorization or consent of any of the parties hereto, all of the powers conferred upon the General Partner under the terms of this Agreement (but subject to all of the applicable limitations, contractual and otherwise, upon the exercise of such powers, other than the limitation on sale set forth in Section 7.3) necessary or appropriate to carry out the duties and functions of the Liquidator hereunder for and during the period of time required to complete the winding up and liquidation of the Partnership as provided for herein.

Section 12.4 Liquidation.

The Liquidator shall proceed to dispose of the assets of the Partnership, discharge its liabilities, and otherwise wind up its affairs in such manner and over such period as the Liquidator determines to be in the best interest of the Partners, subject to Section 17-804 of the Delaware Act and the following:

(a) Disposition of Assets. The assets may be disposed of by public or private sale or by distribution in kind to one or more Partners on such terms as the Liquidator and such Partner or Partners may agree. If any property is distributed in kind, the Partner receiving the property shall be deemed for purposes of Section 12.4(c) to have received cash equal to its fair market value; and contemporaneously therewith, appropriate cash distributions must be made to the other Partners. The Liquidator may defer liquidation or distribution of the Partnership’s assets for a reasonable time if it determines that an immediate sale or

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distribution of all or some of the Partnership’s assets would be impractical or would cause undue loss to the Partners. The Liquidator may distribute the Partnership’s assets, in whole or in part, in kind if it determines that a sale would be impractical or would cause undue loss to the Partners.

(b) Discharge of Liabilities. Liabilities of the Partnership include amounts owed to the Liquidator as compensation for serving in such capacity (subject to the terms of Section 12.3) and amounts to Partners otherwise than in respect of their distribution rights under Article VI. With respect to any liability that is contingent, conditional or unmatured or is otherwise not yet due and payable, the Liquidator shall either settle such claim for such amount as it thinks appropriate or establish a reserve of cash or other assets to provide for its payment. When paid, any unused portion of the reserve shall be distributed as additional liquidation proceeds.

(c) Liquidation Distributions. All property and all cash in excess of that required to discharge liabilities as provided in Section 12.4(b) shall be distributed to the Partners in accordance with, and to the extent of, the positive balances in their respective Capital Accounts, as determined after taking into account all Capital Account adjustments (other than those made by reason of distributions pursuant to this Section 12.4(c)) for the taxable year of the Partnership during which the liquidation of the Partnership occurs (with such date of occurrence being determined pursuant to Treasury Regulation Section 1.704-1(b)(2)(ii)(g)), and such distribution shall be made by the end of such taxable year (or, if later, within 90 days after said date of such occurrence).

Section 12.5 Cancellation of Certificate of Limited Partnership.

Upon the completion of the distribution of Partnership cash and property as provided in Section 12.4 in connection with the liquidation of the Partnership, the Certificate of Limited Partnership and all qualifications of the Partnership as a foreign limited partnership in jurisdictions other than the State of Delaware shall be canceled and such other actions as may be necessary to terminate the Partnership shall be taken.

Section 12.6 Return of Contributions.

The General Partner shall not be personally liable for, and shall have no obligation to contribute or loan any monies or property to the Partnership to enable it to effectuate, the return of the Capital Contributions of the Limited Partners or Unitholders, or any portion thereof, it being expressly understood that any such return shall be made solely from Partnership assets.

Section 12.7 Waiver of Partition.

To the maximum extent permitted by law, each Partner hereby waives any right to partition of the Partnership property.

Section 12.8 Capital Account Restoration.

No Partner shall have any obligation to restore any negative balance in its Capital Account upon liquidation of the Partnership.

ARTICLE XIII

AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS; RECORD DATE

Section 13.1 Amendments to be Adopted Solely by the General Partner.

Each Partner agrees that the General Partner, without the approval of any Partner, may amend any provision of this Agreement and execute, swear to, acknowledge, deliver, file and record whatever documents may be required in connection therewith, to reflect:

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(a) a change in the name of the Partnership, the location of the principal place of business of the Partnership, the registered agent of the Partnership or the registered office of the Partnership;

(b) the admission, substitution, withdrawal or removal of Partners in accordance with this Agreement;

(c) a change that the General Partner determines to be necessary or appropriate to qualify or continue the qualification of the Partnership as a limited partnership or a partnership in which the Limited Partners have limited liability under the laws of any state or to ensure that the Group Members will not be treated as associations taxable as corporations or otherwise taxed as entities for federal income tax purposes;

(d) a change that the General Partner determines (i) does not adversely affect the Limited Partners (including any particular class of Partnership Interests as compared to other classes of Partnership Interests) in any material respect, (ii) to be necessary or appropriate to (A) satisfy any requirements, conditions or guidelines contained in any opinion, directive, order, ruling or regulation of any federal or state agency or judicial authority or contained in any federal or state statute (including the Delaware Act) or (B) facilitate the trading of the Limited Partner Interests (including the division of any class or classes of Outstanding Limited Partner Interests into different classes to facilitate uniformity of tax consequences within such classes of Limited Partner Interests) or comply with any rule, regulation, guideline or requirement of any National Securities Exchange on which the Limited Partner Interests are or will be listed, (iii) to be necessary or appropriate in connection with action taken by the General Partner pursuant to Section 5.7 or (iv) to be required to effect the intent expressed in the Registration Statement or the intent of the provisions of this Agreement or is otherwise contemplated by this Agreement;

(e) a change in the fiscal year or taxable year of the Partnership and any other changes that the General Partner determines to be necessary or appropriate as a result of a change in the fiscal year or taxable year of the Partnership including, if the General Partner shall so determine, a change in the definition of “Quarter” and the dates on which distributions are to be made by the Partnership;

(f) an amendment that is necessary, in the Opinion of Counsel, to prevent the Partnership, or the General Partner or its directors, officers, trustees or agents from in any manner being subjected to the provisions of the Investment Company Act of 1940, as amended, the Investment Advisers Act of 1940, as amended, or “plan asset” regulations adopted under the Employee Retirement Income Security Act of 1974, as amended, regardless of whether such are substantially similar to plan asset regulations currently applied or proposed by the United States Department of Labor;

(g) an amendment that the General Partner determines to be necessary or appropriate in connection with the authorization of issuance of any class or series of Partnership Securities pursuant to Section 5.5;

(h) any amendment expressly permitted in this Agreement to be made by the General Partner acting alone;

(i) an amendment effected, necessitated or contemplated by a Merger Agreement approved in accordance with Section 14.3;

(j) an amendment that the General Partner determines to be necessary or appropriate to reflect and account for the formation by the Partnership of, or investment by the Partnership in, any corporation, partnership, joint venture, limited liability company or other entity, in connection with the conduct by the Partnership of activities permitted by the terms of Section 2.4;

(k) an amendment effected, necessitated or contemplated by an amendment to the MLP Agreement that requires MLP unitholders to provide a statement, certificate or other proof of evidence to the MLP regarding whether such unitholder is subject to United States federal income tax on the income generated by the MLP;

(l) a merger or conveyance pursuant to Section 14.3(d); or

(m) any other amendments substantially similar to the foregoing.

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Section 13.2 Amendment Procedures.

Except as provided in Sections 13.1 and 13.3, all amendments to this Agreement shall be made in accordance with the following requirements. Amendments to this Agreement may be proposed only by the General Partner; provided, however, that the General Partner shall have no duty or obligation to propose any amendment to this Agreement and may decline to do so free of any fiduciary duty or obligation whatsoever to the Partnership or any Limited Partner and, in declining to propose an amendment to the fullest extent permitted by law, shall not be required to act in good faith or pursuant to any other standard imposed by this Agreement, any other agreement contemplated hereby or under the Delaware Act or any other law, rule or regulation or at equity. A proposed amendment shall be effective upon its approval by the General Partner and the holders of a Unit Majority, unless a greater or different percentage is required under this Agreement or by Delaware law. Each proposed amendment that requires the approval of the holders of a specified percentage of Outstanding Units shall be set forth in a writing that contains the text of the proposed amendment. If such an amendment is proposed, the General Partner shall seek the written approval of the requisite percentage of Outstanding Units or call a meeting of the Unitholders to consider and vote on such proposed amendment. The General Partner shall notify all Record Holders upon final adoption of any such proposed amendments.

Section 13.3 Amendment Requirements.

(a) Notwithstanding the provisions of Sections 13.1 and 13.2, no provision of this Agreement that establishes a percentage of Outstanding Units (including Units deemed owned by the General Partner and its Affiliates) required to take any action shall be amended, altered, changed, repealed or rescinded in any respect that would have the effect of reducing such voting percentage unless such amendment is approved by the written consent or the affirmative vote of holders of Outstanding Units whose aggregate Outstanding Units constitute not less than the voting requirement sought to be reduced.

(b) Notwithstanding the provisions of Sections 13.1 and 13.2, no amendment to this Agreement may (i) enlarge the obligations of any Limited Partner without its consent, unless such shall be deemed to have occurred as a result of an amendment approved pursuant to Section 13.3(c) or (ii) enlarge the obligations of, restrict in any way any action by or rights of, or reduce in any way the amounts distributable, reimbursable or otherwise payable to the General Partner or any of its Affiliates without the General Partner consent, which consent may be given or withheld at its option.

(c) Except as provided in Section 14.3, and without limitation of the General Partner’s authority to adopt amendments to this Agreement without the approval of any Partners as contemplated in Section 13.1, any amendment that would have a material adverse effect on the rights or preferences of any class of Partnership Interests in relation to other classes of Partnership Interests must be approved by the holders of not less than a majority of the Outstanding Partnership Interests of the class affected.

(d) Notwithstanding any other provision of this Agreement, except for amendments pursuant to Section 13.1 and except as otherwise provided by Section 14.3(b), no amendments shall become effective without the approval of the holders of at least 90% of the Outstanding Units voting as a single class unless the Partnership obtains an Opinion of Counsel to the effect that such amendment will not affect the limited liability of any Limited Partner under applicable law.

(e) Except as provided in Section 13.1, this Section 13.3 shall only be amended with the approval of the holders of at least 90% of the Outstanding Units.

Section 13.4 Special Meetings.

All acts of Limited Partners to be taken pursuant to this Agreement shall be taken in the manner provided in this Article XIII. Special meetings of the Limited Partners may be called by the General Partner or by Limited Partners owning 20% or more of the Outstanding Partnership Securities of the class or classes for which a meeting is proposed. Limited Partners shall call a special meeting by delivering to the General Partner one or

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more requests in writing stating that the signing Limited Partners wish to call a special meeting and indicating the general or specific purposes for which the special meeting is to be called. Within 60 days after receipt of such a call from Limited Partners or within such greater time as may be reasonably necessary for the Partnership to comply with any statutes, rules, regulations, listing agreements or similar requirements governing the holding of a meeting or the solicitation of proxies for use at such a meeting, the General Partner shall send a notice of the meeting to the Limited Partners either directly or indirectly through the Transfer Agent. A meeting shall be held at a time and place determined by the General Partner on a date not less than 10 days nor more than 60 days after the mailing of notice of the meeting. Limited Partners shall not vote on matters that would cause the Limited Partners to be deemed to be taking part in the management and control of the business and affairs of the Partnership so as to jeopardize the Limited Partners’ limited liability under the Delaware Act or the law of any other state in which the Partnership is qualified to do business.

Section 13.5 Notice of a Meeting.

Notice of a meeting called pursuant to Section 13.4 shall be given to the Record Holders of the class or classes of Limited Partner Interests for which a meeting is proposed in writing by mail or other means of written communication in accordance with Section 16.1. The notice shall be deemed to have been given at the time when deposited in the mail or sent by other means of written communication.

Section 13.6 Record Date.

For purposes of determining the Limited Partners entitled to notice of or to vote at a meeting of the Limited Partners or to give approvals without a meeting as provided in Section 13.11 the General Partner may set a Record Date, which shall not be less than 10 nor more than 60 days before (a) the date of the meeting (unless such requirement conflicts with any rule, regulation, guideline or requirement of any National Securities Exchange on which the Limited Partner Interests are listed or admitted for trading, in which case the rule, regulation, guideline or requirement of such National Securities Exchange shall govern) or (b) in the event that approvals are sought without a meeting, the date by which Limited Partners are requested in writing by the General Partner to give such approvals. If the General Partner does not set a Record Date, then (a) the Record Date for determining the Limited Partners entitled to notice of or to vote at a meeting of the Limited Partners shall be the close of business on the day immediately preceding the day on which notice is given, and (b) the Record Date for determining the Limited Partners entitled to give approvals without a meeting shall be the date the first written approval is deposited with the Partnership in care of the General Partner in accordance with Section 13.11.

Section 13.7 Adjournment.

When a meeting is adjourned to another time or place, notice need not be given of the adjourned meeting and a new Record Date need not be fixed, if the time and place thereof are announced at the meeting at which the adjournment is taken, unless such adjournment shall be for more than 45 days. At the adjourned meeting, the Partnership may transact any business which might have been transacted at the original meeting. If the adjournment is for more than 45 days or if a new Record Date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given in accordance with this Article XIII.

Section 13.8 Waiver of Notice; Approval of Meeting; Approval of Minutes.

The transactions of any meeting of Limited Partners, however called and noticed, and whenever held, shall be as valid as if it had occurred at a meeting duly held after regular call and notice, if a quorum is present, either in person or by proxy. Attendance of a Limited Partner at a meeting shall constitute a waiver of notice of the meeting, except when the Limited Partner attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened; and except that attendance at a meeting is not a waiver of any right to disapprove the consideration of

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matters required to be included in the notice of the meeting, but not so included, if the disapproval is expressly made at the meeting.

Section 13.9 Quorum.

The holders of a majority of the Outstanding Partnership Securities of the class or classes for which a meeting has been called (including Limited Partner Interests deemed owned by the General Partner) represented in person or by proxy shall constitute a quorum at a meeting of Limited Partners of such class or classes unless any such action by the Limited Partners requires approval by holders of a greater percentage of such Limited Partner Interests, in which case the quorum shall be such greater percentage. At any meeting of the Limited Partners duly called and held in accordance with this Agreement at which a quorum is present, the act of Limited Partners holding Outstanding Partnership Securities that in the aggregate represent a majority of the Outstanding Partnership Securities entitled to vote and be present in person or by proxy at such meeting shall be deemed to constitute the act of all Limited Partners, unless a greater or different percentage is required with respect to such action under the provisions of this Agreement, in which case the act of the Limited Partners holding Outstanding Partnership Securities that in the aggregate represent at least such greater or different percentage shall be required. The Limited Partners present at a duly called or held meeting at which a quorum is present may continue to transact business until adjournment, notwithstanding the withdrawal of enough Limited Partners to leave less than a quorum, if any action taken (other than adjournment) is approved by the required percentage of Outstanding Partnership Securities specified in this Agreement (including Outstanding Partnership Securities deemed owned by the General Partner). In the absence of a quorum any meeting of Limited Partners may be adjourned from time to time by the affirmative vote of holders of at least a majority of the Outstanding Partnership Securities entitled to vote at such meeting (including Outstanding Partnership Securities deemed owned by the General Partner) represented either in person or by proxy, but no other business may be transacted, except as provided in Section 13.7.

Section 13.10 Conduct of a Meeting.

The General Partner shall have full power and authority concerning the manner of conducting any meeting of the Limited Partners or solicitation of approvals in writing, including the determination of Persons entitled to vote, the existence of a quorum, the satisfaction of the requirements of Section 13.4, the conduct of voting, the validity and effect of any proxies and the determination of any controversies, votes or challenges arising in connection with or during the meeting or voting. The General Partner shall designate a Person to serve as chairman of any meeting and shall further designate a Person to take the minutes of any meeting. All minutes shall be kept with the records of the Partnership maintained by the General Partner. The General Partner may make such other regulations consistent with applicable law and this Agreement as it may deem advisable concerning the conduct of any meeting of the Limited Partners or solicitation of approvals in writing, including regulations in regard to the appointment of proxies, the appointment and duties of inspectors of votes and approvals, the submission and examination of proxies and other evidence of the right to vote, and the revocation of approvals, proxies and votes in writing.

Section 13.11 Action Without a Meeting.

If authorized by the General Partner, any action that may be taken at a meeting of the Limited Partners may be taken without a meeting if an approval in writing setting forth the action so taken is signed by Limited Partners owning not less than the minimum percentage of the Outstanding Limited Partner Interests (including Limited Partner Interests deemed owned by the General Partner) that would be necessary to authorize or take such action at a meeting at which all the Limited Partners were present and voted (unless such provision conflicts with any rule, regulation, guideline or requirement of any National Securities Exchange on which the Limited Partner Interests are listed or admitted for trading, in which case the rule, regulation, guideline or requirement of such exchange shall govern). Prompt notice of the taking of action without a meeting shall be given to the Limited Partners who have not approved in writing. The General Partner may specify that any written ballot

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submitted to Limited Partners for the purpose of taking any action without a meeting shall be returned to the Partnership within the time period, which shall be not less than 20 days, specified by the General Partner. If a ballot returned to the Partnership does not vote all of the Limited Partner Interests held by the Limited Partners, the Partnership shall be deemed to have failed to receive a ballot for the Limited Partner Interests that were not voted. If approval of the taking of any action by the Limited Partners is solicited by any Person other than by or on behalf of the General Partner, the written approvals shall have no force and effect unless and until (a) they are deposited with the Partnership in care of the General Partner, (b) approvals sufficient to take the action proposed are dated as of a date not more than 90 days prior to the date sufficient approvals are deposited with the Partnership and (c) an Opinion of Counsel is delivered to the General Partner to the effect that the exercise of such right and the action proposed to be taken with respect to any particular matter (i) will not cause the Limited Partners to be deemed to be taking part in the management and control of the business and affairs of the Partnership so as to jeopardize the Limited Partners’ limited liability, and (ii) is otherwise permissible under the state statutes then governing the rights, duties and liabilities of the Partnership and the Partners.

Section 13.12 Voting and Other Rights.

(a) Only those Record Holders of the Limited Partner Interests on the Record Date set pursuant to Section 13.6 (and also subject to the limitations contained in the definition of “Outstanding”) shall be entitled to notice of, and to vote at, a meeting of Limited Partners or to act with respect to matters as to which the holders of the Outstanding Limited Partner Interests have the right to vote or to act. All references in this Agreement to votes of, or other acts that may be taken by, the Outstanding Limited Partner Interests shall be deemed to be references to the votes or acts of the Record Holders of such Outstanding Limited Partner Interests.

(b) With respect to Limited Partner Interests that are held for a Person’s account by another Person (such as a broker, dealer, bank, trust company or clearing corporation, or an agent of any of the foregoing), in whose name such Limited Partner Interests are registered, such other Person shall, in exercising the voting rights in respect of such Limited Partner Interests on any matter, and unless the arrangement between such Persons provides otherwise, vote such Limited Partner Interests in favor of, and at the direction of, the Person who is the beneficial owner, and the Partnership shall be entitled to assume it is so acting without further inquiry. The provisions of this Section 13.12(b) (as well as all other provisions of this Agreement) are subject to the provisions of Section 4.3.

ARTICLE XIV

MERGER, CONSOLIDATION OR CONVERSION

Section 14.1 Authority.

The Partnership may merge or consolidate with or into one or more corporations, limited liability companies, statutory trusts or associations, real estate investment trusts, common law trusts or unincorporated businesses, including a partnership (whether general or limited (including a limited liability partnership)) or convert into any such entity, whether such entity is formed under the laws of the State of Delaware or any other state of the United States of America, pursuant to a written agreement of merger or consolidation (“Merger Agreement”) or a written plan of conversion (“Plan of Conversion”), as the case may be, in accordance with this Article XIV.

Section 14.2 Procedure for Merger, Consolidation or Conversion.

(a) Merger, consolidation or conversion of the Partnership pursuant to this Article XIV requires the prior consent of the General Partner, provided, however, that, to the maximum extent permitted by law, the General Partner shall have no duty or obligation to consent to any merger, consolidation or conversion of

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the Partnership and may decline to do so free of any fiduciary duty or obligation whatsoever to the Partnership, any Limited Partner and, in declining to consent to a merger, consolidation or conversion, shall not be required to act in good faith or pursuant to any other standard imposed by this Agreement, any other agreement contemplated hereby or under the Delaware Act or any other law, rule or regulation or at equity.

(b) If the General Partner shall determine to consent to the merger or consolidation, the General Partner shall approve the Merger Agreement, which shall set forth:

(i) the names and jurisdictions of formation or organization of each of the business entities proposing to merge or consolidate;

(ii) the name and jurisdiction of formation or organization of the business entity that is to survive the proposed merger or consolidation (the “Surviving Business Entity”);

(iii) the terms and conditions of the proposed merger or consolidation;

(iv) the manner and basis of exchanging or converting the equity securities of each constituent business entity for, or into, cash, property or interests, rights, securities or obligations of the Surviving Business Entity; and (i) if any general or limited partner interests, securities or rights of any constituent business entity are not to be exchanged or converted solely for, or into, cash, property or general or limited partner interests, rights, securities or obligations of the Surviving Business Entity, the cash, property or interests, rights, securities or obligations of any general or limited partnership, corporation, trust, limited liability company, unincorporated business or other entity (other than the Surviving Business Entity) which the holders of such general or limited partner interests, securities or rights are to receive in exchange for, or upon conversion of their interests, securities or rights, and (ii) in the case of securities represented by certificates, upon the surrender of such certificates, which cash, property or general or limited partner interests, rights, securities or obligations of the Surviving Business Entity or any general or limited partnership, corporation, trust, limited liability company, unincorporated business or other entity (other than the Surviving Business Entity), or evidences thereof, are to be delivered;

(v) a statement of any changes in the constituent documents or the adoption of new constituent documents (the articles or certificate of incorporation, articles of trust, declaration of trust, certificate or agreement of limited partnership, operating agreement or other similar charter or governing document) of the Surviving Business Entity to be effected by such merger or consolidation;

(vi) the effective time of the merger, which may be the date of the filing of the certificate of merger pursuant to Section 14.4 or a later date specified in or determinable in accordance with the Merger Agreement (provided, that if the effective time of the merger is to be later than the date of the filing of such certificate of merger, the effective time shall be fixed at a date or time certain at or prior to the time of the filing of such certificate of merger and stated therein); and

(vii) such other provisions with respect to the proposed merger or consolidation that the General Partner determines to be necessary or appropriate.

(c) If the General Partner shall determine to consent to the conversion, the General Partner may approve and adopt a Plan of Conversion containing such terms and conditions that the General Partner determines to be necessary or appropriate.

Section 14.3 Approval by Limited Partners.

(a) Except as provided in Section 14.3(d), the General Partner, upon its approval of the Merger Agreement or Plan of Conversion, as the case may be, shall direct that the Merger Agreement or the Plan of Conversion, as applicable, be submitted to a vote of Limited Partners, whether at a special meeting or by written consent, in either case in accordance with the requirements of Article XIII. A copy or a summary of the Merger Agreement or the Plan of Conversion, as applicable, shall be included in or enclosed with the notice of a special meeting or the written consent.

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(b) Except as provided in Section 14.3(d), the Merger Agreement or the Plan of Conversion, as applicable, shall be approved upon receiving the affirmative vote or consent of the holders of a Unit Majority.

(c) Except as provided in Section 14.3(d), after such approval by vote or consent of the Limited Partners, and at any time prior to the filing of the certificate of merger or a certificate of conversion pursuant to Section 14.4, the merger, consolidation or conversion may be abandoned pursuant to provisions therefor, if any, set forth in the Merger Agreement or the Plan of Conversion, as the case may be.

(d) Notwithstanding anything else contained in this Article XIV or in this Agreement, the General Partner is permitted without Limited Partner approval, to convert the Partnership or any Group Member into a new limited liability entity, to merge the Partnership or any Group Member into, or convey all of the Partnership’s assets to, another limited liability entity which shall be newly formed and shall have no assets, liabilities or operations at the time of such conversion, merger or conveyance other than those it receives from the Partnership or other Group Member if (i) the General Partner has received an Opinion of Counsel that the merger or conveyance, as the case may be, would not result in the loss of the limited liability of any Limited Partner or cause the Partnership or the MLP to be treated as an association taxable as a corporation or otherwise to be taxed as an entity for federal income tax purposes (to the extent not previously treated as such), (ii) the sole purpose of such conversion, merger or conveyance is to effect a mere change in the legal form of the Partnership into another limited liability entity and (iii) the governing instruments of the new entity provide the Limited Partners and the General Partner with the same rights and obligations as are herein contained.

(e) Additionally, notwithstanding anything else contained in this Article XIV or in this Agreement, the General Partner is permitted, without Limited Partner approval, to merge or consolidate the Partnership with or into another entity if (i) the General Partner has received an Opinion of Counsel that the merger or consolidation, as the case may be, would not result in the loss of the limited liability of any Limited Partner or cause the Partnership to be treated as an association taxable as a corporation or otherwise to be taxed as an entity for federal income tax purposes, (ii) the merger or consolidation would not result in an amendment to the Partnership Agreement, other than any amendments that could be adopted pursuant to Section 13.1, (iii) the Partnership is the Surviving Business Entity in such merger or consolidation, (iv) each Partnership Unit outstanding immediately prior to the effective date of the merger or consolidation is to be an identical Partnership Unit of the Partnership after the effective date of the merger or consolidation, and (v) the number of Partnership Securities to be issued by the Partnership in such merger or consolidation do not exceed 20% of the Partnership Securities Outstanding immediately prior to the effective date of such merger or consolidation.

Section 14.4 Certificate of Merger.

(a) Upon the required approval, if any, by the General Partner and the Unitholders of a Merger Agreement or a Plan of Conversion, as the case may be, a certificate of merger or certificate of conversion, as applicable, shall be executed and filed with the Secretary of State of the State of Delaware in conformity with the requirements of the Delaware Act.

(b) At the effective time of the certificate of merger:

(i) all of the rights, privileges and powers of each of the business entities that has merged or consolidated, and all property, real, personal and mixed, and all debts due to any of those business entities and all other things and causes of action belonging to each of those business entities, shall be vested in the Surviving Business Entity and after the merger or consolidation shall be the property of the Surviving Business Entity to the extent they were of each constituent business entity;

(ii) the title to any real property vested by deed or otherwise in any of those constituent business entities shall not revert and is not in any way impaired because of the merger or consolidation;

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(iii) all rights of creditors and all liens on or security interests in property of any of those constituent business entities shall be preserved unimpaired; and

(iv) all debts, liabilities and duties of those constituent business entities shall attach to the Surviving Business Entity and may be enforced against it to the same extent as if the debts, liabilities and duties had been incurred or contracted by it.

(i) the Partnership shall continue to exist, without interruption, but in the organizational form of the converted entity rather than in its prior organizational form;

(ii) all rights, title, and interests to all real estate and other property owned by the Partnership shall continue to be owned by the converted entity in its new organizational form without reversion or impairment, without further act or deed, and without any transfer or assignment having occurred, but subject to any existing liens or other encumbrances thereon;

(iii) all liabilities and obligations of the Partnership shall continue to be liabilities and obligations of the converted entity in its new organizational form without impairment or diminution by reason of the conversion;

(iv) all rights of creditors or other parties with respect to or against the prior interest holders or other owners of the Partnership in their capacities as such in existence as of the effective time of the conversion will continue in existence as to those liabilities and obligations and may be pursued by such creditors and obligees as if the conversion did not occur;

(v) a proceeding pending by or against the Partnership or by or against any of Partners in their capacities as such may be continued by or against the converted entity in its new organizational form and by or against the prior partners without any need for substitution of parties; and

(vi) the Partnership Securities that are to be converted into partnership interests, shares, evidences of ownership, or other securities in the converted entity as provided in the Plan of Conversion or certificate of conversion shall be so converted, and Partners shall be entitled only to the rights provided in the Plan of Conversion or certificate of conversion.

(d) A merger, consolidation or conversion effected pursuant to this Article shall not be deemed to result in a transfer or assignment of assets or liabilities from one entity to another.

Section 14.5 Amendment of Partnership Agreement.

Pursuant to Section 17-211(g) of the Delaware Act, an agreement of merger or consolidation approved in accordance with Section 17-211(b) of the Delaware Act may (a) effect any amendment to this Agreement or (b) effect the adoption of a new partnership agreement for a limited partnership if it is the Surviving Business Entity. Any such amendment or adoption made pursuant to this Section 14.5 shall be effective at the effective time or date of the merger or consolidation.

ARTICLE XV

RIGHT TO ACQUIRE LIMITED PARTNER INTERESTS

Section 15.1 Right to Acquire Limited Partner Interests.

(a) Notwithstanding any other provision of this Agreement, if at any time less than 15% of the total Limited Partner Interests of any class then Outstanding is held by Persons other than the General Partner and its Affiliates, the General Partner shall then have the right, which right it may assign and transfer in whole or in part to the Partnership or any Affiliate of the General Partner, exercisable at its option, to purchase all,

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but not less than all, of such Limited Partner Interests of such class then Outstanding held by Persons other than the General Partner and its Affiliates, at the greater of (x) the Current Market Price as of the date three days prior to the date that the notice described in Section 15 is mailed and (y) the highest price paid by a General Partner or any of its Affiliates for any such Limited Partner Interest of such class purchased during the 90-day period preceding the date that the notice described in Section 15.1(b) is mailed. As used in this Agreement, (i) “Current Market Price” as of any date of any class of Limited Partner Interests listed or admitted to trading on any National Securities Exchange means the average of the daily Closing Prices (as hereinafter defined) per limited partner interest of such class for the 20 consecutive Trading Days (as hereinafter defined) immediately prior to such date; (ii) “Closing Price” for any day means the last sale price on such day, regular way, or in case no such sale takes place on such day, the average of the closing bid and asked prices on such day, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted for trading on the principal National Securities Exchange on which such Limited Partner Interests of such class are listed or admitted to trading or, if such Limited Partner Interests of such class are not listed or admitted to trading on any National Securities Exchange, the last quoted price on such day or, if not so quoted, the average of the high bid and low asked prices on such day in the over-the-counter market, as reported by the Nasdaq National Market or any other system then in use, or, if on any such day such Limited Partner Interests of such class are not quoted by any such organization, the average of the closing bid and asked prices on such day as furnished by a professional market maker making a market in such Limited Partner Interests of such class selected by the General Partner, or if on any such day no market maker is making a market in such Limited Partner Interests of such class, the fair value of such Limited Partner Interests on such day as determined by the General Partner; and (iii) “Trading Day” means a day on which the principal National Securities Exchange on which such Limited Partner Interests of any class are listed or admitted to trading is open for the transaction of business or, if Limited Partner Interests of a class are not listed or admitted to trading on any National Securities Exchange, a day on which banking institutions in New York City generally are open.

(b) If the General Partner, any Affiliate of the General Partner or the Partnership elects to exercise the right to purchase Limited Partner Interests granted pursuant to Section 15.1(a), the General Partner shall deliver to the Transfer Agent notice of such election to purchase (the “Notice of Election to Purchase”) and shall cause the Transfer Agent to mail a copy of such Notice of Election to Purchase to the Record Holders of Limited Partner Interests of such class (as of a Record Date selected by the General Partner) at least 10, but not more than 60, days prior to the Purchase Date. Such Notice of Election to Purchase shall also be published for a period of at least three consecutive days in at least two daily newspapers of general circulation printed in the English language and published in the Borough of Manhattan, New York. The Notice of Election to Purchase shall specify the Purchase Date and the price (determined in accordance with Section 15.1(a)) at which Limited Partner Interests will be purchased and state that the General Partner, its Affiliate or the Partnership, as the case may be, elects to purchase such Limited Partner Interests, upon surrender of Certificates representing such Limited Partner Interests in exchange for payment, at such office or offices of the Transfer Agent as the Transfer Agent may specify, or as may be required by any National Securities Exchange on which such Limited Partner Interests are listed or admitted for trading. Any such Notice of Election to Purchase mailed to a Record Holder of Limited Partner Interests at his address as reflected in the records of the Transfer Agent shall be conclusively presumed to have been given regardless of whether the owner receives such notice. On or prior to the Purchase Date, the General Partner, its Affiliate or the Partnership, as the case may be, shall deposit with the Transfer Agent cash in an amount sufficient to pay the aggregate purchase price of all of such Limited Partner Interests to be purchased in accordance with this Section 15.1. If the Notice of Election to Purchase shall have been duly given as aforesaid at least 10 days prior to the Purchase Date, and if on or prior to the Purchase Date the deposit described in the preceding sentence has been made for the benefit of the holders of Limited Partner Interests subject to purchase as provided herein, then from and after the Purchase Date, notwithstanding that any Certificate shall not have been surrendered for purchase, all rights of the holders of such Limited Partner Interests (including any rights pursuant to Articles IV, V, VI, and XII) shall thereupon cease, except the right to receive the purchase price (determined in accordance with Section 15.1(a)) for Limited Partner

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Interests therefor, without interest, upon surrender to the Transfer Agent of the Certificates representing such Limited Partner Interests, and such Limited Partner Interests shall thereupon be deemed to be transferred to the General Partner, its Affiliate or the Partnership, as the case may be, on the record books of the Transfer Agent and the Partnership, and the General Partner or any Affiliate of the General Partner, or the Partnership, as the case may be, shall be deemed to be the owner of all such Limited Partner Interests from and after the Purchase Date and shall have all rights as the owner of such Limited Partner Interests (including all rights as owner of such Limited Partner Interests pursuant to Articles IV, V, VI and XII).

(c) At any time from and after the Purchase Date, a holder of an Outstanding Limited Partner Interest subject to purchase as provided in this Section 15.1 may surrender his Certificate evidencing such Limited Partner Interest to the Transfer Agent in exchange for payment of the amount described in Section 15.1(a), therefor, without interest thereon.

ARTICLE XVI

GENERAL PROVISIONS

Section 16.1 Addresses and Notices.

Any notice, demand, request, report or proxy materials required or permitted to be given or made to a Partner under this Agreement shall be in writing and shall be deemed given or made when delivered in person or when sent by first class United States mail or by other means of written communication to the Partner at the address described below. Any notice, payment or report to be given or made to a Partner hereunder shall be deemed conclusively to have been given or made, and the obligation to give such notice or report or to make such payment shall be deemed conclusively to have been fully satisfied, upon sending of such notice, payment or report to the Record Holder of such Partnership Securities at his address as shown on the records of the Transfer Agent or as otherwise shown on the records of the Partnership, regardless of any claim of any Person who may have an interest in such Partnership Securities by reason of any assignment or otherwise. An affidavit or certificate of making of any notice, payment or report in accordance with the provisions of this Section 16.1 executed by the General Partner, the Transfer Agent or the mailing organization shall be prima facie evidence of the giving or making of such notice, payment or report. If any notice, payment or report addressed to a Record Holder at the address of such Record Holder appearing on the books and records of the Transfer Agent or the Partnership is returned by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver it, such notice, payment or report and any subsequent notices, payments and reports shall be deemed to have been duly given or made without further mailing (until such time as such Record Holder or another Person notifies the Transfer Agent or the Partnership of a change in his address) if they are available for the Partner at the principal office of the Partnership for a period of one year from the date of the giving or making of such notice, payment or report to the other Partners. Any notice to the Partnership shall be deemed given if received by the General Partner at the principal office of the Partnership designated pursuant to Section 2.3. The General Partner may rely and shall be protected in relying on any notice or other document from a Partner or other Person if believed by it to be genuine.

Section 16.2 Further Action.

The parties shall execute and deliver all documents, provide all information and take or refrain from taking action as may be necessary or appropriate to achieve the purposes of this Agreement.

Section 16.3 Binding Effect.

This Agreement shall be binding upon and inure to the benefit of the parties hereto and their heirs, executors, administrators, successors, legal representatives and permitted assigns.

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Section 16.4 Integration.

This Agreement constitutes the entire agreement among the parties hereto pertaining to the subject matter hereof and supersedes all prior agreements and understandings pertaining thereto.

Section 16.5 Creditors.

None of the provisions of this Agreement shall be for the benefit of, or shall be enforceable by, any creditor of the Partnership.

Section 16.6 Waiver.

No failure by any party to insist upon the strict performance of any covenant, duty, agreement or condition of this Agreement or to exercise any right or remedy consequent upon a breach thereof shall constitute waiver of any such breach of any other covenant, duty, agreement or condition.

Section 16.7 Counterparts.

This Agreement may be executed in counterparts, all of which together shall constitute an agreement binding on all the parties hereto, notwithstanding that all such parties are not signatories to the original or the same counterpart. Each party shall become bound by this Agreement immediately upon affixing its signature hereto or, in the case of a Person acquiring a Limited Partner Interest pursuant to Section 10.1(a) without execution hereof.

Section 16.8 Applicable Law.

This Agreement shall be construed in accordance with and governed by the laws of the State of Delaware, without regard to the principles of conflicts of law.

Section 16.9 Invalidity of Provisions.

If any provision of this Agreement is or becomes invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby.

Section 16.10 Consent of Partners.

Each Partner hereby expressly consents and agrees that, whenever in this Agreement it is specified that an action may be taken upon the affirmative vote or consent of less than all of the Partners, such action may be so taken upon the concurrence of less than all of the Partners and each Partner shall be bound by the results of such action.

Section 16.11 Facsimile Signatures. The use of facsimile signatures affixed in the name and on behalf of the transfer agent and Registrar of the Partnership on certificates representing Common Units is expressly permitted by this Agreement.

[Remainder of Page Intentionally Left Blank]

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above.


GENERAL PARTNER:

ALLIANCE GP, LLC

By:
		Joseph W. Craft III
		President & Chief Executive Officer

LIMITED PARTNERS:

All Limited Partners now and hereafter admitted as Limited Partners of the Partnership, pursuant to powers of attorney now and hereafter executed in favor of, and granted and delivered to the General Partner or without execution hereof pursuant to Section 10.1(a) of this Agreement.

By:		ALLIANCE GP, LLC

General Partner, as attorney-in-fact for the Limited Partners pursuant to the Powers of Attorney granted pursuant to Section 2.6 of this Agreement.

By:
		Joseph W. Craft III
		President & Chief Executive Officer

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SCHEDULE 1

Initial Limited Partners

Alliance Management Holdings, LLC

AMH II, LLC

Alliance Resource GP, LLC

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APPENDIX B

Glossary

Ash: Impurities consisting of incombustible matter that are contained in coal. Since ash increases the weight of coal, it adds to the cost of transportation handling, and can affect the burning characteristics of coal. Coal with a higher percentage of ash will have a lower heating value.

British Thermal Unit, or Btu: A measure of the energy required to raise the temperature of one pound of water one degree Fahrenheit.

Clean Air Act: The Federal Clean Air Act.

Coal Seam: Coal deposits occur in layers typically separated by rock. Each layer is called a “seam.”

Coal Synfuel: Coal Synfuel is a “synthetic fuel from coal” that qualifies for tax credit treatment under Section 29 of the Internal Revenue Code. Current IRS policy requires synthetic fuel from coal to meet certain criteria, including, but not limited to, size consistency, form of binder holding the coal fines or crushed coal together, the physical output of the synfuel facility, and the change in the chemical composition of the coal feedstock into coal synfuel following processing.

Coke: A hard, dry carbon substance produced by heating coal to a very high temperature in the absence of air. Coke is used in the manufacture of iron and steel. Its production results in a number of useful by-products.

Compliance Coal: Coal which, when burned, emits less than 1.2 pounds of sulfur dioxide per million Btu. Compliance coal meets sulfur emission standards imposed by Phase I and II of the Clean Air Act.

Continuous Mining: A form of underground room and pillar mining, which involves the excavation of a series of “rooms” into the coal seam leaving “pillars” or columns of coal to help support the mine roof. A specialized cutting machine, the continuous miner, mechanizes the extraction procedure. Continuous miners tear the coal from the seam and load it onto conveyors or into shuttle cars in a continuous operation.

Dragline: A large machine used in the surface mining process to remove the overburden, or layers of earth and rock, covering a coal seam. The dragline has a large bucket suspended from the end of a huge boom. The bucket, which is suspended by cables, is able to scoop up great amounts of overburden as it is dragged across the excavation area. These machines, which “walk” by moving huge pontoon-like “feet,” are among the largest land-based machines in the world.

High-sulfur Coal: Coal with a sulfur content of greater than 2%.

Longwall Mining: A form of underground mining in which two sets of parallel entries, which can be up to 1,000 feet apart, are joined together at their far ends by a crosscut, called the longwall. The longwall machine consists of a rotating drum that moves back and forth across the longwall. The loosened coal falls onto a conveyor for removal from the mine.

Low-sulfur Coal: Coal with a sulfur content of less than 1%.

Medium-sulfur Coal: Coal with a sulfur content between 1% and 2%.

Nitrogen Oxide (NO₂): A gas formed in high temperature environments such as coal combustion. It is reported to contribute to ground level ozone and visibility degradation.

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Preparation Plant: Usually located on a mine site, although one plant may serve several mines. A preparation plant is a facility for sizing and washing coal to prepare it for use by a particular customer. The washing process removes ash from the coal and has the added benefit of removing some of the coal’s sulfur content.

Probable Reserves: Reserves for which quantity and grade and/or quality are computed from information similar to that used for proven reserves, but the sites for inspection, sampling, and measurement are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for proven reserves, is high enough to assume continuity between points of observation. Also known as “indicated” reserves.

Proven Reserves: Reserves for which (a) quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes; grade and/or quality are computed from the results of detailed sampling and (b) the sites for inspection, sampling and measurement are spaced so closely and the geologic character is so well defined that size, shape, depth and mineral content of reserves are well-established. Also known as “measured” reserves.

Reclamation: The restoration of land and environmental values to a mining site after the coal is extracted. Reclamation operations are usually underway where the coal has already been taken from a mine even as mining operations are taking place elsewhere at the site. The process commonly includes “recontouring” or reshaping the land to its approximate original appearance, restoring topsoil and planting native grass and ground covers. Reclamation is closely regulated by both state and federal law.

Reserves: That part of a mineral deposit which could be economically and legally extracted or produced at the time of the reserve determination.

Room and Pillar Mining: A system of coal mining commonly used in the United States in which rooms are driven off the entries with pillars of coal left standing between them for temporary or permanent roof support.

Scrubber (flue gas desulfurization unit): Any of several forms of chemical/physical devices which operate to neutralize sulfur compounds formed during coal combustion. These devices combine the sulfur in gaseous emissions with other chemicals to form inert compounds, such as gypsum, which must then be removed for disposal.

Spot Market: Sales of coal pursuant to an agreement for shipments over a period of one year or less. Spot market sales are generally obtained via a competitive bidding process.

Steam Coal: Coal used by power plants and industrial boilers to produce steam for the generation or heating processes. It generally is lower in Btu heat content and higher in volatile matter than metallurgical coal.

Sulfur: One of the elements present in varying quantities in coal. Sulfur dioxide (SO₂) is produced as a gaseous byproduct of coal combustion.

Tons: A “short” or net ton is equal to 2,000 pounds. A “long” or British ton is 2,240 pounds. A “metric” ton is approximately 2,205 pounds. The short ton is the unit of measure referred to in this document.

Units: The term “units” refers to both common units and subordinated units, but not the general partner interest.

Volatile Matter: Combustible matter which is vaporized in the combustion process. Power plant boilers are designed to burn coal containing specific amounts of volatile matter.

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