Significant relationships referenced in this management's discussion and analysis of financial condition and results of operations include the following:

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

• References to "AHGP Partnership" mean the business and operations of Alliance Holdings GP, L.P., the parent company, as well as its consolidated subsidiaries, which include Alliance Resource Management GP, LLC and Alliance Resource Partners, L.P. and its consolidated subsidiaries.

• References to "AGP" mean Alliance GP, LLC, the general partner of Alliance Holdings GP, L.P., also referred to as our general partner.

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

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

• References to "MGP" mean Alliance Resource Management GP, LLC, the managing general partner of Alliance Resource Partners, L.P.

• References to "SGP" mean Alliance Resource GP, LLC, the special general partner of Alliance Resource Partners, L.P.

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

• References to "Alliance Coal" mean Alliance Coal, LLC, the holding company for the operations of Alliance Resource Operating Partners, L.P.

Summary

We have no operating activities apart from those conducted by the ARLP Partnership, and our cash flows currently consist primarily of distributions from ARLP for our ARLP partnership interests, including the incentive distribution rights that we own. We reflect our ownership interest in the ARLP Partnership on a consolidated basis, which means that our financial results are combined with the ARLP Partnership's financial results and the results of our other subsidiaries. The earnings of the ARLP Partnership allocated to its limited partners' interest not owned by us and allocated to SGP's general partner interest in ARLP are reflected as a noncontrolling interest in our consolidated statement of income and balance sheet. In addition to the ARLP Partnership, our historical consolidated results of operations include the results of operations of MGP, our wholly-owned subsidiary.

The AHGP Partnership's results of operations principally reflect the results of operations of the ARLP Partnership adjusted for noncontrolling partners' interest in the ARLP Partnership'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 the ARLP Partnership.

The ARLP Partnership is a diversified producer and marketer of coal primarily to major U.S. utilities and industrial users. The ARLP Partnership began mining operations in 1971 and, since then, has grown through acquisitions and internal development to become what it believes to be the fifth largest

coal producer in the eastern U.S. The ARLP Partnership operates eight mining complexes in Illinois, Indiana, Kentucky, Maryland and West Virginia. The ARLP Partnership is constructing two new mining complexes, one in Kentucky and one in West Virginia, and also operates a coal loading terminal on the Ohio River at Mt. Vernon, Indiana. As is customary in the coal industry, the ARLP Partnership has entered into long-term coal supply agreements with many of its customers.

We have four reportable segments: Illinois Basin, Central Appalachia, Northern Appalachia and Other and Corporate. The first three segments correspond to the three major coal producing regions in the eastern U.S. Coal quality, coal seam height, mining and transportation methods and regulatory issues are similar within each of these three segments.

• Illinois Basin segment is comprised of Webster County Coal, LLC's Dotiki mining complex, Gibson County Coal, LLC's Gibson North mining complex, Hopkins County Coal, LLC's Elk Creek mining complex, White County Coal, LLC's ("White County Coal") Pattiki mine and Warrior Coal, LLC's ("Warrior") mining complex, the Gibson County Coal (South), LLC ("Gibson South") property, certain properties of Alliance Resource Properties, LLC ("Alliance Resource Properties") and a mining complex currently under construction at River View Coal, LLC ("River View"). The ARLP Partnership is in the process of permitting the Gibson South property for future mine development.

• Central Appalachian segment is comprised of Pontiki Coal, LLC's and MC Mining, LLC's mining complexes.

• Northern Appalachian segment is comprised of Mettiki Coal, LLC's mining complex, Mettiki Coal (WV) LLC's Mountain View mining complex, two small third-party mining operations (one of which was idled in May 2009), a mining complex currently under construction at Tunnel Ridge, LLC ("Tunnel Ridge") and the Penn Ridge Coal, LLC ("Penn Ridge") property. The ARLP Partnership is in the process of permitting the Penn Ridge property for future mine development.

• Other and Corporate segment includes marketing and administrative expenses, the Mt. Vernon dock activities, coal brokerage activity, Mid-America Carbonates, LLC ("MAC"), Matrix Design Group, LLC ("Matrix Design") and certain properties of Alliance Resource Properties.

Results of Operations

Comparison of our operating results for the three months ended June 30, 2009 ("2009 Quarter") and June 30, 2008 ("2008 Quarter") and the six months ended June 30, 2009 ("2009 Period") and June 30, 2008 ("2008 Period") is affected by the following significant items:

• Gain on sale of non-core coal reserves of $5.2 million in the 2008 Quarter;

• Gain of $1.9 million on settlement of claims relating to the 2005 failure of the vertical belt system (the "Vertical Belt Incident") at the ARLP Partnership's Pattiki mine in the 2008 Quarter recorded as a reduction to operating expenses. The 2008 Quarter gain resulted from a settlement reached with the third-party installer of the vertical belt system and represents a partial recovery of expenses incurred in 2005; and

Three Months Ended June 30, 2009 Compared to Three Months Ended June 30, 2008

We reported Net Income of AHGP of $41.1 million for 2009 Quarter compared to $36.2 million for the 2008 Quarter. This increase of $4.9 million was principally due to improved contract pricing resulting in an average coal sales price of $46.04 per ton sold, as compared to $39.50 per ton sold for the 2008 Quarter. The ARLP Partnership had tons sold of 6.2 million and tons produced of 6.3 million for the 2009 Quarter compared to tons sold of 6.6 million and tons produced of 6.5 million in the 2008 Quarter. Increased operating expenses during the 2009 Quarter primarily reflect the increase in labor and labor-related expenses, as well as higher sales-related expenses, maintenance costs and other factors described below.

                                                        Three Months Ended June 30,
                                                   2009        2008        2009      2008
                                                    (in thousands)         (per ton sold)
 Tons sold                                           6,247       6,622        N/A       N/A
 Tons produced                                       6,324       6,467        N/A       N/A
 Coal sales                                      $ 287,620   $ 261,567   $  46.04   $ 39.50
 Operating expenses and outside coal purchases   $ 204,909   $ 195,915   $  32.80   $ 29.59

Coal sales. Coal sales for the 2009 Quarter increased 10.0% to $287.6 million from $261.6 million for the 2008 Quarter. The increase of $26.0 million in coal sales reflected the benefit of higher average coal sales prices (contributing $40.8 million in additional coal sales) partially offset by lower sales volumes (reducing coal sales by $14.8 million). Average coal sales prices increased $6.54 per ton sold to $46.04 per ton in the 2009 Quarter as compared to the 2008 Quarter, primarily as a result of improved contract pricing in the Illinois Basin and Central Appalachian regions.

Operating expenses. Operating expenses increased 6.9% to $204.5 million for the 2009 Quarter from $191.4 million for the 2008 Quarter. Higher operating expenses of $13.1 million resulted from increases and decreases associated with the specific factors listed below:

• Labor and benefit expenses per ton produced, excluding workers' compensation, increased to $11.55 per ton in the 2009 Quarter from $9.29 per ton in the 2008 Quarter. This increase of $2.26 per ton represents pay rate increases and higher benefit expenses, particularly increased health care costs and retirement expenses, and the impact of increased headcount as the ARLP Partnership continues to hire and train new employees for the River View and Tunnel Ridge mine development projects;

• Workers' compensation expenses per ton produced increased to $1.73 per ton in the 2009 Quarter from $0.82 per ton in the 2008 Quarter. The increase of $0.91 per ton produced primarily reflected a non-cash charge during the 2009 Quarter that resulted from discount rate changes, which increased the accrued liabilities for the present value of estimated future claim payments;

• Material and supplies per ton produced decreased 2.3% to $9.56 per ton in the 2009 Quarter from $9.79 per ton in the 2008 Quarter. The decrease of $0.23 per ton produced resulted from decreased costs for certain products and services particularly roof bolts, outside services, mine transportation, seals, and fuel used in the mining process and offset in part by higher power costs and reduced product recovery, among other factors;

• Operating expenses decreased due to a 287,000 ton reduction in produced tons sold reflecting lower export and spot market demand;

• Expenses incurred during the 2009 Quarter related to the ARLP Partnership's River View and Tunnel Ridge organic growth projects increased $2.8 million over the 2008 Quarter;

• Production taxes and royalties expenses (which were incurred as a percentage of coal sales and coal volumes) increased $1.5 million in the 2009 Quarter as compared to the 2008 Quarter primarily as a result of increased average coal sales prices, partially offset by reduced tons sold; and

• The 2008 Quarter operating expenses benefited from a $1.9 million gain on settlement of claims related to the Vertical Belt Incident at the ARLP Partnership's Pattiki mine.

General and administrative. General and administrative expenses for the 2009 Quarter decreased to $9.6 million compared to $12.6 million in the 2008 Quarter. The decrease of $3.0 million was primarily due to lower incentive compensation expense, partially offset by higher salary and benefit costs primarily related to increased staffing levels.

Other sales and operating revenues. Other sales and operating revenues are principally comprised of Mt. Vernon transloading revenues, products and services provided by MAC and Matrix Design, and other outside services. Other sales and operating revenues decreased to $3.4 million for the 2009 Quarter from $3.5 million for the 2008 Quarter. The decrease of $0.1 million was primarily attributable to decreased revenues from MAC product sales and other outside services, partially offset by increased transloading revenues.

Outside coal purchases. Outside coal purchases decreased to $0.4 million for the 2009 Quarter compared to $4.6 million in the 2008 Quarter. The decrease of $4.1 million was primarily attributable to a decrease in outside coal purchases in the Central Appalachian and Northern Appalachian regions due to reduced demand in the spot and export coal markets.

Depreciation, depletion and amortization. Depreciation, depletion and amortization expense increased to $28.3 million for the 2009 Quarter from $25.6 million for the 2008 Quarter. The increase of $2.7 million was primarily attributable to additional depreciation expense associated with continuing capital expenditures related to infrastructure improvements, efficiency projects and expansion of production capacity.

Interest expense. Interest expense, net of capitalized interest increased to $7.8 million for the 2009 Quarter from $3.2 million for the 2008 Quarter. The increase of $4.6 million was principally attributable to increased interest expense resulting from the 2008 financing activities, partially offset by reduced interest expense resulting from the ARLP Partnership's August 2008 principal repayment of $18.0 million on its original senior notes issued in 1999. The 2008 financing activities are discussed in more detail below under "-Debt Obligations."

Interest income. Interest income of $0.3 million for the 2009 Quarter was comparable to $0.2 million for the 2008 Quarter.

Transportation revenues and expenses. Transportation revenues and expenses each increased to $12.8 million for the 2009 Quarter compared to $11.0 million for the 2008 Quarter. The increase of $1.8 million was primarily attributable to increased coal sales volumes for which the ARLP Partnership arranged the transportation compared to the 2008 Quarter, partially offset by a decrease in average transportation rates reflecting lower fuel costs. The cost of transportation services are passed through to the ARLP Partnership's customers. Consequently, the ARLP Partnership does not realize any gain or loss on transportation revenues.

Income before income taxes. Income before income taxes increased 13.3% to $40.9 million for the 2009 Quarter compared to $36.1 million for the 2008 Quarter. The increase of $4.8 million reflects the impact of the changes in revenues and expenses described above.

Income tax expense (benefit). Income tax benefit increased to $0.2 million for the 2009 Quarter compared to $0.1 million for the 2008 Quarter. The income tax benefit for the 2009 and 2008 Quarters was primarily due to operating losses of Matrix Design, which is owned by the ARLP Partnership's subsidiary, Alliance Services, Inc. ("ASI").

Net income attributable to noncontrolling interests. The noncontrolling interests balance is comprised of non-affiliate and affiliate ownership interests in the net assets of the ARLP Partnership which we consolidate and a third-party ownership interest in MAC. The noncontrolling interest designated as Affiliate represents SGP's 0.01% general partner interest in ARLP and 0.01% general partner interest in the Intermediate Partnership. The noncontrolling interest designated as Non-Affiliates represents the limited partners' interest in ARLP controlled through the common unit ownership, excluding the 15,544,169 common units of ARLP held by us. The noncontrolling interest designated as MAC represents a 50% third-party interest in MAC. For more information about MAC, please read "Item 1. Financial Statements (Unaudited) - Note 6. Noncontrolling Interests" of this Quarterly Report on Form 10-Q. The net income attributable to noncontrolling interest was $15.4 million and $14.5 million for the 2009 Quarter and the 2008 Quarter, respectively. The increase in net income attributable to noncontrolling interest is due to an increase in the consolidated net income of the ARLP Partnership due to the changes in revenues and expenses described above.

Segment Adjusted EBITDA. Our 2009 Quarter Segment Adjusted EBITDA increased $8.9 million, or 11.5%, to $86.3 million from the 2008 Quarter Segment Adjusted EBITDA of $77.4 million. Segment Adjusted EBITDA, tons sold, coal sales, other sales and operating revenues and Segment Adjusted EBITDA Expense by segment are (in thousands):

                                                   Three Months Ended
                                                        June 30,
                                                  2009           2008           Increase/(Decrease)
Segment Adjusted EBITDA
Illinois Basin                                  $  77,012      $  47,306      $     29,706       62.8 %
Central Appalachia                                  6,151         16,927           (10,776 )    (63.7 )%
Northern Appalachia                                 1,625          7,613            (5,988 )    (78.7 )%
Other and Corporate                                 1,591          5,653            (4,062 )    (71.9 )%
Elimination                                           (82 )         (102 )              20      (19.6 )%

Total Segment Adjusted EBITDA (2)               $  86,297      $  77,397      $      8,900       11.5 %


Tons sold
Illinois Basin                                      5,062          4,959               103        2.1 %
Central Appalachia                                    615            866              (251 )    (29.0 )%
Northern Appalachia                                   570            797              (227 )    (28.5 )%
Other and Corporate                                    -              -                 -          -
Elimination                                            -              -                 -          -

Total tons sold                                     6,247          6,622              (375 )     (5.7 )%


Coal sales
Illinois Basin                                  $ 217,961      $ 168,656      $     49,305       29.2 %
Central Appalachia                                 40,999         52,736           (11,737 )    (22.3 )%
Northern Appalachia                                28,653         40,175           (11,522 )    (28.7 )%
Other and Corporate                                     7             -                  7         (1 )
Elimination                                            -              -                 -          -

Total coal sales                                $ 287,620      $ 261,567      $     26,053       10.0 %


Other sales and operating revenues
Illinois Basin                                  $     167      $     145      $         22       15.2 %
Central Appalachia                                     -              -                 -          -
Northern Appalachia                                   701          1,094              (393 )    (35.9 )%
Other and Corporate                                 8,012          5,070             2,942       58.0 %
Elimination                                        (5,496 )       (2,763 )          (2,733 )    (98.9 )%

Total other sales and operating revenues        $   3,384      $   3,546      $       (162 )     (4.6 )%


Segment Adjusted EBITDA Expense
Illinois Basin                                  $ 141,115      $ 121,495      $     19,620       16.1 %
Central Appalachia                                 34,849         38,599            (3,750 )     (9.7 )%
Northern Appalachia                                27,729         33,656            (5,927 )    (17.6 )%
Other and Corporate                                 6,428          4,575             1,853       40.5 %
Elimination                                        (5,414 )       (2,660 )          (2,754 )       (1 )

Total Segment Adjusted EBITDA Expense (3)       $ 204,707      $ 195,665      $      9,042        4.6 %

(1) Percentage increase or decrease was greater than or equal to 100%.

(2) Segment Adjusted EBITDA is defined as net income (prior to the allocation of noncontrolling interest) before net interest expense, income taxes, depreciation, depletion and amortization and general and administrative expenses. Consolidated EBITDA is used as a supplemental financial measure by management and by external users of our financial statements such as investors, commercial banks, research analysts and others, to assess:

• the financial performance of the ARLP Partnership's assets without regard to financing methods, capital structure or historical cost basis;

• the ARLP Partnership'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.

Segment Adjusted EBITDA is also used as a supplemental financial measure by our management for reasons similar to those stated in the above explanation of EBITDA. In addition, the exclusion of corporate general and administrative expenses from Segment Adjusted EBITDA allows management to focus solely on the evaluation of segment operating profitability as it relates to our revenues and operating expenses which are primarily controlled by our segments.

The following is a reconciliation of consolidated Segment Adjusted EBITDA to net income (in thousands):

                                                       Three Months Ended
                                                            June 30,
                                                      2009           2008

         Segment Adjusted EBITDA                    $  86,297      $  77,397

         General and administrative                    (9,573 )      (12,612 )
         Depreciation, depletion and amortization     (28,272 )      (25,600 )
         Interest expense, net                         (7,512 )       (3,041 )
         Income tax (expense) benefit                     201             70

         Net income                                 $  41,141      $  36,214

(3) Segment Adjusted EBITDA Expense includes operating expenses, outside coal purchases and other income. Transportation expenses are excluded as these expenses are passed through to the ARLP Partnership's customers, and consequently it does not realize any gain or loss on transportation revenues. Segment Adjusted EBITDA Expense is used as a supplemental financial measure by the ARLP Partnership's management to assess the operating performance of our segments. Segment Adjusted EBITDA Expense is a key component of EBITDA in addition to coal sales and other sales and operating revenues. The exclusion of corporate general and administrative expenses from Segment Adjusted EBITDA Expense allows management to focus solely on the evaluation of segment operating performance as it primarily relates to the ARLP Partnership's operating expenses. Outside coal purchases are included in Segment Adjusted EBITDA Expense because tons sold and coal sales include sales from outside coal purchases.

The following is a reconciliation of consolidated Segment Adjusted EBITDA Expense to Operating expense (in thousands):

                                                                 Three Months Ended
                                                                      June 30,
                                                                2009            2008

Segment Adjusted EBITDA Expense                               $ 204,707       $ 195,665

Outside coal purchases                                             (432 )        (4,552 )
Other income                                                        202             250

Operating expense (excluding depreciation, depletion and
amortization)                                                 $ 204,477       $ 191,363

Illinois Basin - Segment Adjusted EBITDA, as defined in reference (2) to the table above, increased 62.8% to $77.0 million in the 2009 Quarter from $47.3 million in the 2008 Quarter. The increase of $29.7 million was primarily attributable to improved contract pricing reflecting a higher average coal sales price of $43.06 per ton during the 2009 Quarter compared to $34.01 per ton for the 2008 Quarter and slightly higher coal sales volumes in the 2009 Quarter. Increased coal sales were partially offset by higher Segment Adjusted EBITDA Expense in the 2009 Quarter. Total Segment Adjusted EBITDA Expense, defined in reference (3) to the above table, for the 2009 Quarter increased 16.1% to $141.1 million from $121.5 million in the 2008 Quarter, primarily as a result of cost increases described above under consolidated operating expenses and costs associated with higher produced tons sold. In addition, the comparison is affected by the $1.9 million gain on settlement of claims related to the Pattiki Vertical Belt Incident in the 2008 Quarter. On a per ton sold basis, Segment Adjusted EBITDA Expense for the 2009 Quarter increased $3.38 to $27.88 per ton compared to the 2008 Quarter Segment Adjusted EBITDA Expense of $24.50 per ton.

Central Appalachia - Segment Adjusted EBITDA, as defined in reference (2) to the table above, decreased 63.7% to $6.1 million for the 2009 Quarter compared to $16.9 million in the 2008 Quarter. The decrease of $10.8 million was primarily the result of lower sales volumes due to weak coal demand in the spot market and higher expenses per ton during the 2009 Quarter, partially offset by improved contract pricing that resulted in an increase in the average coal sales price of $5.81 per ton to $66.70 per ton in the 2009 Quarter, compared to $60.89 per ton in the 2008 Quarter. Although Segment Adjusted EBITDA Expense for the 2009 Quarter decreased 9.7% to $34.8 million from $38.6 million in the 2008 Quarter primarily as a result of lower coal sales volumes, Segment Adjusted EBITDA Expense per ton sold during the 2009 Quarter increased $12.12 per ton sold to $56.69 as compared to $44.57 per ton sold in the 2008 Quarter (for a definition of Segment Adjusted EBITDA Expense, see reference (3) to the above table). The increase in Segment Adjusted EBITDA Expense per ton resulted in part from decreased coal production in response to lower spot market demand and lower productivity due to Pontiki's transition from the depleted Pond Creek coal seam into the thinner Van Lear coal seam during the 2009 Quarter. In addition, on a per ton basis, higher Segment Adjusted EBITDA Expenses resulted from increased materials and supplies primarily related to lower product recoveries and cost increases described above under consolidated operating expenses. Segment Adjusted EBITDA in the 2008 Quarter benefited from the $2.8 million gain recognized on settlement of claims from the third-party that provided security . . .