XNYS:ANR Alpha Natural Resources Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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Table of Contents

 

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended March 31, 2012

 

OR

 

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

 

For the transition period from           to           

 

Commission File No. 001-32331

 

 

ALPHA NATURAL RESOURCES, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

42-1638663

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification Number)

 

One Alpha Place, P.O. Box 2345, Abingdon, Virginia

 

24212

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code:

(276) 619-4410

 

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

 

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

 

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

 

x Large accelerated filer

 

o Accelerated filer

 

 

 

o Non-accelerated filer

 

o Smaller reporting company

 

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

 

Number of shares of the registrant’s Common Stock, $0.01 par value, outstanding as of April 30, 2012 — 220,277,750

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

PART I — FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

 

 

Condensed Consolidated Statements of Operations (Unaudited)

2

 

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

3

 

Condensed Consolidated Balance Sheets (Unaudited)

4

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

5

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

6

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

35

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

47

Item 4.

Controls and Procedures

48

 

 

 

PART II — OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

49

Item 1A.

Risk Factors

49

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

51

Item 4.

Mine Safety Disclosures

52

Item 6.

Exhibits

52

 



Table of Contents

 

Item 1. Financial Statements

 

ALPHA NATURAL RESOURCES INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (Unaudited)

(Amounts in thousands, except share and per share data)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2012

 

2011

 

Revenues:

 

 

 

 

 

Coal revenues

 

$

1,639,558

 

$

986,978

 

Freight and handling revenues

 

209,350

 

116,055

 

Other revenues

 

85,740

 

27,705

 

Total revenues

 

1,934,648

 

1,130,738

 

Costs and expenses:

 

 

 

 

 

Cost of coal sales (exclusive of items shown separately below)

 

1,419,420

 

734,985

 

Freight and handling costs

 

209,350

 

116,055

 

Other expenses

 

19,396

 

18,579

 

Depreciation, depletion and amortization

 

285,895

 

88,638

 

Amortization of acquired intangibles, net

 

(35,267

)

25,983

 

Selling, general and administrative expenses (exclusive of depreciation, depletion and amortization shown separately above)

 

65,061

 

67,284

 

Total costs and expenses

 

1,963,855

 

1,051,524

 

Income (loss) from operations

 

(29,207

)

79,214

 

Other income (expense):

 

 

 

 

 

Interest expense

 

(45,434

)

(15,610

)

Interest income

 

1,097

 

1,045

 

Miscellaneous expense, net

 

642

 

(834

)

Total other expense, net

 

(43,695

)

(15,399

)

Income (loss) before income taxes

 

(72,902

)

63,815

 

Income tax (expense) benefit

 

43,785

 

(13,967

)

Net income (loss)

 

$

(29,117

)

$

49,848

 

 

 

 

 

 

 

Basic earnings (loss) per common share

 

$

(0.13

)

$

0.42

 

Diluted earnings (loss) per common share

 

$

(0.13

)

$

0.41

 

 

 

 

 

 

 

Weighted average shares - basic

 

219,785,981

 

120,014,520

 

Weighted average shares - diluted

 

219,785,981

 

122,035,780

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

2



Table of Contents

 

ALPHA NATURAL RESOURCES INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

(Amounts in thousands)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2012

 

2011

 

Net income (loss)

 

$

(29,117

)

$

49,848

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

Amortization of employee benefit costs, net of income tax of $1,071 and $114 for the three months ended March 31, 2012 and 2011, respectively

 

1,789

 

(175

)

Change in fair value of cash flow hedges, net of income tax of $9,672 and $10,599 for the three months ended March 31, 2012 and 2011, respectively

 

16,150

 

16,288

 

Unrealized gains (losses) on available-for-sale marketable securities:

 

 

 

 

 

Unrealized holding gains (losses) arising during the period, net of tax of $47 and $45 for the three months ended March 31, 2012 and 2011, respectively

 

(77

)

(74

)

Less: reclassification adjustment for (gains) losses included in net income (loss), net of tax of $1 and $1 for the three months ended March 31, 2012 and 2011, respectively

 

(3

)

3

 

Total other comprehensive income, net of tax

 

$

17,859

 

$

16,042

 

Total comprehensive income (loss)

 

$

(11,258

)

$

65,890

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

3



Table of Contents

 

ALPHA NATURAL RESOURCES INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Amounts in thousands, except share and per share data)

 

 

 

March 31,

 

December 31,

 

 

 

2012

 

2011

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

487,507

 

$

585,882

 

Trade accounts receivable, net

 

440,465

 

641,975

 

Inventories, net

 

551,934

 

492,022

 

Prepaid expenses and other current assets

 

740,142

 

766,959

 

Total current assets

 

2,220,048

 

2,486,838

 

Property, equipment and mine development costs (net of accumulated depreciation and amortization of $1,589,829 and $1,397,903, respectively)

 

2,723,102

 

2,812,208

 

Owned and leased mineral rights and land (net of accumulated depletion of $665,997 and $590,575, respectively)

 

8,202,395

 

8,283,929

 

Goodwill, net

 

2,260,248

 

2,260,248

 

Other acquired intangibles (net of accumulated amortization of $587,798 and $552,156, respectively)

 

314,346

 

349,988

 

Other non-current assets

 

421,027

 

320,493

 

Total assets

 

$

16,141,166

 

$

16,513,704

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current portion of long-term debt

 

$

53,529

 

$

46,029

 

Trade accounts payable

 

366,172

 

504,059

 

Accrued expenses and other current liabilities

 

1,092,413

 

1,218,366

 

Total current liabilities

 

1,512,114

 

1,768,454

 

Long-term debt

 

2,912,683

 

2,922,052

 

Pension and postretirement medical benefit obligations

 

1,219,765

 

1,214,724

 

Asset retirement obligations

 

787,333

 

731,643

 

Deferred income taxes

 

1,455,630

 

1,528,707

 

Other non-current liabilities

 

841,831

 

923,815

 

Total liabilities

 

8,729,356

 

9,089,395

 

 

 

 

 

 

 

Commitments and Contingencies (Note 14)

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

Preferred stock - par value $0.01, 10.0 million shares authorized, none issued

 

 

 

Common stock - par value $0.01, 400.0 million shares authorized, 231.8 million issued and 220.3 million outstanding at March 31, 2012 and 231.0 million issued and 219.8 million outstanding at December 31, 2011

 

2,318

 

2,310

 

Additional paid-in capital

 

8,078,590

 

8,073,514

 

Accumulated other comprehensive income (loss)

 

(183,971

)

(201,830

)

Treasury stock, at cost: 11.5 million and 11.2 million shares at March 31, 2012 and December 31, 2011, respectively

 

(269,121

)

(262,795

)

Accumulated deficit

 

(216,006

)

(186,890

)

Total stockholders’ equity

 

7,411,810

 

7,424,309

 

Total liabilities and stockholders’ equity

 

$

16,141,166

 

$

16,513,704

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

4



Table of Contents

 

ALPHA NATURAL RESOURCES INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

(Amounts in thousands)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2012

 

2011

 

Operating activities:

 

 

 

 

 

Net income (loss)

 

$

(29,117

)

$

49,848

 

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

Depreciation, depletion, accretion and amortization

 

311,829

 

97,847

 

Amortization of acquired intangibles, net

 

(35,267

)

25,983

 

Mark-to-market adjustments for derivatives

 

(36,025

)

(140

)

Stock-based compensation

 

7,014

 

10,948

 

Employee benefit plans, net

 

20,463

 

12,852

 

Deferred income taxes

 

(44,394

)

4,652

 

Other, net

 

(6,956

)

(6,360

)

Changes in operating assets and liabilities:

 

 

 

 

 

Trade accounts receivable, net

 

201,510

 

(74,903

)

Inventories, net

 

(59,912

)

(19,372

)

Prepaid expenses and other current assets

 

63,188

 

(17,458

)

Other non-current assets

 

10,914

 

(3,589

)

Trade accounts payable

 

(128,865

)

109,116

 

Accrued expenses and other current liabilities

 

(86,296

)

(13,519

)

Pension and postretirement medical benefit obligations

 

(10,980

)

(12,110

)

Asset retirement obligations

 

(10,141

)

(961

)

Other non-current liabilities

 

(336

)

5,584

 

Net cash provided by operating activities

 

166,629

 

168,418

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

Capital expenditures

 

(125,774

)

(57,101

)

Purchase of equity-method investments

 

(6,100

)

(2,000

)

Purchases of marketable securities

 

(194,965

)

(160,372

)

Sales of marketable securities

 

72,290

 

60,434

 

Other, net

 

3,262

 

(4,477

)

Net cash used in investing activities

 

(251,287

)

(163,516

)

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

Principal repayments of long-term debt

 

(7,500

)

(2,960

)

Principal repayments of capital lease obligations

 

(25

)

 

Debt issuance costs

 

 

(11,710

)

Excess tax benefit from stock-based awards

 

 

5,245

 

Common stock repurchases

 

(6,327

)

(11,203

)

Proceeds from exercise of stock options

 

135

 

1,814

 

Net cash used in financing activities

 

(13,717

)

(18,814

)

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(98,375

)

(13,912

)

Cash and cash equivalents at beginning of period

 

585,882

 

554,772

 

Cash and cash equivalents at end of period

 

$

487,507

 

$

540,860

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Cash paid for interest

 

$

17,388

 

$

17,679

 

Cash paid for income taxes

 

$

563

 

$

3,265

 

Cash received for income tax refunds

 

$

11,821

 

$

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

5



Table of Contents

 

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands except share and per share data)

 

(1)                   Business and Basis of Presentation

 

Business

 

Alpha Natural Resources, Inc. and its consolidated subsidiaries (the “Company” or “Alpha”) are primarily engaged in the business of extracting, processing and marketing steam and metallurgical coal from surface and deep mines, and mainly sell to electric utilities, steel and coke producers, and industrial customers. The Company, through its subsidiaries, is also involved in marketing coal produced by others to supplement its own production and, through blending, provides its customers with coal qualities differing from those available from its own production.

 

Basis of Presentation

 

The accompanying interim condensed consolidated financial statements of the Company are unaudited and prepared in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC”) for Form 10-Q.  Such rules and regulations allow the omission of certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America as long as the financial statements are not misleading.  In the opinion of management, these interim condensed consolidated financial statements reflect all normal and recurring adjustments necessary for a fair presentation of the results for the periods presented.  Results of operations for the three months ended March 31, 2012 are not necessarily indicative of the results to be expected for the year ending December 31, 2012. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company included in its Annual Report on Form 10-K for the year ended December 31, 2011, filed February 29, 2012.

 

The Company’s condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of the Company’s condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include inventories; mineral reserves; allowance for non-recoupable advanced mining royalties; asset impairments; environmental and reclamation obligations; acquisition accounting; pensions, postemployment, postretirement medical and other employee benefit obligations; useful lives for depreciation, depletion, and amortization; reserves for workers’ compensation and black lung claims; current and deferred income taxes; reserves for contingencies and litigation and fair value of financial instruments. Estimates are based on facts and circumstances believed to be reasonable at the time; however, actual results could differ from those estimates.

 

(2)                   Acquisition

 

On June 1, 2011, the Company completed its acquisition (the “Massey Acquisition”) of 100% of the outstanding common stock of Massey Energy Company (“Massey”), a coal producer with operations located primarily in Virginia, West Virginia, and Kentucky.

 

The total purchase price has been preliminarily allocated to the net tangible and intangible assets of Massey as follows:

 

6



Table of Contents

 

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands except share and per share data)

 

 

 

Provisional as of
December 31, 2011

 

Adjustments

 

Provisional as of
March 31, 2012

 

 

 

 

 

 

 

 

 

Inventories

 

$

414,310

 

$

 

$

414,310

 

Other current assets

 

998,034

 

(1,551

)

996,483

 

Property, equipment and mine development costs

 

1,705,531

 

(9,461

)

1,696,070

 

Owned and leased mineral rights and land

 

6,445,688

 

 

6,445,688

 

Goodwill

 

2,613,442

 

17,981

 

2,631,423

 

Other intangible assets

 

365,379

 

(3,218

)

362,161

 

Other non-current assets

 

90,788

 

1

 

90,789

 

Total assets

 

12,633,172

 

3,752

 

12,636,924

 

 

 

 

 

 

 

 

 

Total current liabilities

 

1,128,922

 

2,404

 

1,131,326

 

Long-term debt, including current portion

 

1,397,405

 

 

1,397,405

 

Pension and post-retirement medical benefits, including current portion

 

294,657

 

 

294,657

 

Asset retirement obligation, including current portion

 

610,506

 

6,709

 

617,215

 

Deferred income taxes, including current portion

 

1,303,415

 

(2,361

)

1,301,054

 

Below-market contract obligations

 

707,969

 

(3,000

)

704,969

 

Other liabilities, including current portion of black lung and workers’ compensation

 

365,866

 

 

365,866

 

Total liabilities

 

5,808,740

 

3,752

 

5,812,492

 

 

 

 

 

 

 

 

 

Equity component of convertible notes

 

110,375

 

 

110,375

 

 

 

 

 

 

 

 

 

Net tangible and intangible assets acquired

 

$

6,714,057

 

$

 

$

6,714,057

 

 

The above purchase price allocation includes provisional amounts for certain assets and liabilities. The purchase price allocation will continue to be refined primarily in the areas of income taxes, other contingencies, and goodwill. During the measurement period, which will end no later than May 31, 2012, the Company expects to finalize the 2011 tax return for Massey and otherwise complete the final purchase price allocation.

 

The Company’s provisional estimate of goodwill has been allocated to Eastern Coal Operations. The provisional goodwill recognized is generally attributable to intangible assets that do not qualify for separate recognition such as the Massey workforce, synergies expected to be realized through administrative, sales and operating cost savings and capital expenditure efficiencies and annual revenue synergies expected to be achieved from the integration of the Massey assets into the Company’s existing operations.

 

During the three months ended March 31, 2012, the Company recorded certain immaterial corrections and adjustments to the provisional opening balance sheet as shown in the above table. Adjustments were made primarily to reflect corrections to asset retirement obligations, updated estimates of franchise tax liabilities, updated estimates of certain property, updated estimates of below-market contract liabilities, other miscellaneous adjustments and the deferred tax impact of all adjustments made.

 

The Company adjusted depreciation, depletion and amortization, amortization of acquired intangibles, net, cost of coal sales, other expenses, other revenues and goodwill impairment and restated its consolidated balance sheet as of December 31, 2011 and its consolidated results of operations for the three months ended June 30, 2011, September 30, 2011 and December 31, 2011 for the changes to the provisional opening balance sheet of Massey and for certain other immaterial corrections. As a result, the Company recorded additional goodwill impairment of $8,290, increased its net loss before income taxes by $868, and increased its net loss by $3,889 for the year ended December 31, 2011. The following table provides information about Goodwill for the year ended December 31, 2011:

 

Balance
December 31, 2010

 

Acquisitions

 

Impairments

 

Balance
December 31, 2011

 

$

382,440

 

$

2,631,423

 

$

(753,615

)

$

2,260,248

 

 

7



Table of Contents

 

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands except share and per share data)

 

The following unaudited pro forma information has been prepared for illustrative purposes only and assumes the acquisition occurred on January 1, 2011. The unaudited pro forma results have been prepared based on estimates and assumptions which the Company believes are reasonable, however, they are not necessarily indicative of the consolidated results of operations had the acquisition occurred on January 1, 2011, or of future results of operations.

 

 

 

Three Months Ended
March 31, 2011

 

Total revenues:

 

 

 

As reported

 

$

1,130,738

 

Pro forma

 

$

2,062,134

 

 

 

 

 

Net income:

 

 

 

As reported

 

$

49,848

 

Pro forma

 

$

16,188

 

 

 

 

 

Earnings per common share-basic:

 

 

 

As reported

 

$

0.42

 

Pro forma

 

$

0.07

 

 

 

 

 

Earnings per common share-diluted:

 

 

 

As reported

 

$

0.41

 

Pro forma

 

$

0.07

 

 

(3)                   New Accounting Pronouncements

 

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”), which amended accounting guidance related to fair value measurements and disclosures with the purpose of converging the fair value measurement and disclosure guidance issued by the FASB and the International Accounting Standards Board (“IASB”). The guidance is effective for reporting periods beginning after December 15, 2011. The guidance includes amendments that clarify the intent of the application of existing fair value measurement requirements along with amendments that change a particular principle or requirement for fair value measurements and disclosures. The Company adopted the new guidance on January 1, 2012. The adoption did not have a material impact on the Company’s Condensed Consolidated Financial Statements or related disclosures.

 

In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income (“ASU 2011-05”), which amended accounting guidance related to presentation of comprehensive income. The standards update is intended to help financial statement users better understand the causes of an entity’s change in financial position and results of operation. The amendment eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendment requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The guidance also requires that reclassification adjustments for items that are reclassified from other comprehensive income to net income be presented on the face of the financial statement where the components of net income and other comprehensive income are presented. In December 2011, the FASB issued ASU 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 (“ASU 2011-12”), which defers only those changes in ASU 2011-5 that relate to the presentation of reclassification adjustments out of accumulated other comprehensive income. ASU 2011-05 and ASU 2011-12 are effective for reporting periods beginning after December 15, 2011. The Company adopted the new guidance on January 1, 2012.

 

In September 2011, the FASB issued ASU 2011-08, Testing for Goodwill Impairment (“ASU 2011-08”). ASU 2011-08 is intended to simplify how entities test for goodwill impairment by adding a qualitative review step to assess whether the required quantitative impairment analysis is necessary.  ASU 2011-08 permits an entity to first assess qualitative factors to determine whether it is more likely than not that the

 

8



Table of Contents

 

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands except share and per share data)

 

fair value of a reporting unit is less than its carrying amount. If it is concluded that this is not the case, it is not necessary to perform the two-step impairment test as described in ASC Topic 350, Intangibles-Goodwill and Other. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company will adopt the provisions of the new guidance in 2012 during its annual goodwill impairment analysis.

 

(4)                   Earnings Per Share

 

The number of shares used to calculate basic earnings per common share is based on the weighted average number of the Company’s outstanding common shares during the respective periods. The number of shares used to calculate diluted earnings per common share is based on the number of common shares used to calculate basic earnings per share plus the dilutive effect of stock options and other stock-based instruments held by the Company’s employees and directors during each period, the Company’s outstanding 2.375% convertible senior notes due 2015 (the “2.375% Convertible Notes”), and the Company’s outstanding 3.25% convertible senior notes due 2015 (the “3.25% Convertible Notes”). As of March 31, 2012, the 2.375% Convertible Notes and the 3.25% Convertible Notes were not convertible.

 

The following table provides a reconciliation of the weighted average shares outstanding used in the basic and diluted earnings per share computations for the periods presented:

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Weighted average shares - basic

 

219,785,981

 

120,014,520

 

Dilutive impact of stock options and restricted stock plans

 

 

1,815,615

 

Dilutive impact of Convertible Notes - 2.375%

 

 

205,645

 

Weighted average shares - diluted

 

219,785,981

 

122,035,780

 

 

(5)                   Inventories, net

 

Inventories, net consisted of the following:

 

 

 

March 31,

 

December 31,

 

 

 

2012

 

2011

 

Raw coal

 

$

48,069

 

$

52,215

 

Saleable coal

 

393,705

 

340,672

 

Materials, supplies and other, net

 

110,160

 

99,135

 

Total inventories, net

 

$

551,934

 

$

492,022

 

 

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ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands except share and per share data)

 

(6)                   Marketable Securities

 

Short-term marketable securities, included in prepaid expenses and other current assets, consisted of the following:

 

 

 

March 31, 2012

 

 

 

 

 

Unrealized

 

 

 

 

 

Cost

 

Gain

 

Loss

 

Fair value

 

Short-term marketable securities:

 

 

 

 

 

 

 

 

 

U.S. treasury and agency securities (a)

 

$

33,398

 

$

79

 

$

 

$

33,477

 

Corporate debt securities (a)

 

67,934

 

3

 

(18

)

67,919

 

Total short-term marketable securities

 

$

101,332

 

$

82

 

$

(18

)

$

101,396

 

 

 

 

December 31, 2011

 

 

 

 

 

Unrealized

 

 

 

 

 

Cost

 

Gain

 

Loss

 

Fair value

 

Short-term marketable securities:

 

 

 

 

 

 

 

 

 

U.S. treasury and agency securities (a)

 

$

18,415

 

$

61

 

$

 

$

18,476

 

Corporate debt securities (a)

 

61,861

 

7

 

(2

)

61,866

 

Total short-term marketable securities

 

$

80,276

 

$

68

 

$

(2

)

$

80,342

 

 


(a)                Unrealized gains and losses are recorded as a component of stockholders’ equity.

 

Long-term marketable securities, with maturity dates between one and three years, included in other non-current assets, consisted of the following:

 

 

 

March 31, 2012

 

 

 

 

 

Unrealized

 

 

 

 

 

Cost

 

Gain

 

Loss

 

Fair value

 

Long-term marketable securities:

 

 

 

 

 

 

 

 

 

U.S. treasury and agency securities (a)

 

$

44,210

 

$

9

 

$

(39

)

$

44,180

 

Corporate debt securities (a)

 

67,721

 

16

 

(74

)

67,663

 

Mutual funds held in rabbi trust (b)

 

5,753

 

1,015

 

(678

)

6,090

 

Total long-term marketable securities

 

$

117,684

 

$

1,040

 

$

(791

)

$

117,933

 

 

 

 

December 31, 2011

 

 

 

 

 

Unrealized

 

 

 

 

 

Cost

 

Gain

 

Loss

 

Fair value

 

Long-term marketable securities:

 

 

 

 

 

 

 

 

 

U.S. treasury and agency securities (a)

 

$

20,451

 

$

49

 

$

(11

)

$

20,489

 

Mutual funds held in rabbi trust (b)

 

4,222

 

578

 

(671

)

4,129

 

Total long-term marketable securities

 

$

24,673

 

$

627

 

$

(682

)

$

24,618

 

 


(a)                    Unrealized gains and losses are recorded as a component of stockholders’ equity.

(b)                   Unrealized gains and losses are recorded in current period earnings.

 

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ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands except share and per share data)

 

(7)                   Long-Term Debt

 

Long-term debt consisted of the following:

 

 

 

March 31,

 

December 31,

 

 

 

2012

 

2011

 

6.00% senior notes due 2019

 

$

800,000

 

$

800,000

 

6.25% senior notes due 2021

 

700,000

 

700,000

 

Term loan due 2016

 

577,500

 

585,000

 

3.25% convertible senior notes due 2015

 

658,673

 

658,673

 

2.375% convertible senior notes due 2015

 

287,500

 

287,500

 

Other

 

23,576

 

23,554

 

Debt discount, net

 

(81,037

)

(86,646

)

Total long-term debt

 

2,966,212

 

2,968,081

 

Less current portion

 

53,529

 

46,029

 

Long-term debt, net of current portion

 

$

2,912,683

 

$

2,922,052

 

 

(8)                   Asset Retirement Obligations

 

As of March 31, 2012 and December 31, 2011, the Company had recorded asset retirement obligation accruals for mine reclamation and closure costs totaling $930,579 and $922,636, respectively. Changes in the asset retirement obligations were as follows:

 

Total asset retirement obligations at December 31, 2011

 

$

922,636

 

Accretion for the period

 

15,973

 

Sites added during the period

 

2,155

 

Revisions in estimated cash flows

 

(44

)

Expenditures for the period

 

(10,141

)

Total asset retirement obligations at March 31, 2012

 

$

930,579

 

Less current portion

 

143,246

 

Long-term portion

 

$

787,333

 

 

(9)                   Fair Value of Financial Instruments and Fair Value Measurements

 

The estimated fair values of financial instruments are determined based on relevant market information. These estimates involve uncertainty and cannot be determined with precision. The following methods and assumptions are used to estimate the fair value of each class of financial instruments.

 

The carrying amounts for cash and cash equivalents, trade accounts receivable, net, prepaid expenses and other current assets, trade accounts payable, and accrued expenses and other current liabilities approximate fair value due to the short maturity of these instruments.

 

Long-term Debt: The fair values of the 6.00% senior notes due 2019 and the 6.25% senior notes due 2021 (collectively, the “Senior Notes”), 2.375% Convertible Notes, and 3.25% Convertible Notes, were estimated using observable market prices as these securities are traded and are considered Level 1 in the fair value hierarchy. The fair values of the term loan were estimated based on market rates of interest offered to the Company for debt of similar maturities and are considered Level 2 in the fair value hierarchy.

 

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ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands except share and per share data)

 

The estimated fair values of long-term debt were as follows:

 

 

 

March 31, 2012

 

December 31, 2011

 

 

 

Carrying

 

 

 

Carrying

 

 

 

 

 

Amount

 

Fair Value

 

Amount

 

Fair Value

 

6.00% senior notes due 2019

 

$

800,000

 

$

732,000

 

$

800,000

 

$

780,000

 

6.25% senior notes due 2021

 

700,000

 

633,920

 

700,000

 

682,500

 

Term loan due 2016(1)

 

576,868

 

577,736

 

584,330

 

584,989

 

3.25% convertible senior notes due 2015(2)

 

627,116

 

591,914

 

624,946

 

596,955

 

2.375% convertible senior notes due 2015(3)

 

238,652

 

268,345

 

235,251

 

276,596

 

Total long-term debt

 

$

2,942,636

 

$

2,803,915

 

$

2,944,527

 

$

2,921,040

 

 


(1)  Net of debt discount of $632 and $670 as of March 31, 2012 and December 31, 2011, respectively.

(2)  Net of debt discount of $31,557 and $33,727 as of March 31, 2012 and December 31, 2011, respectively.

(3)  Net of debt discount of $48,848 and $52,249 as of March 31, 2012 and December 31, 2011, respectively.

 

The following tables set forth by level, within the fair value hierarchy, the Company’s financial and non-financial assets and liabilities that were accounted for at fair value on a recurring and non-recurring basis as of March 31, 2012 and December 31, 2011, respectively.  Financial and non-financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the determination of fair value for assets and liabilities and their placement within the fair value hierarchy levels.

 

 

 

March 31, 2012

 

 

 

 

 

Quoted Prices

 

Significant Other

 

Significant

 

 

 

 

 

in Active

 

Observable

 

Unobservable

 

 

 

Total Fair

 

Markets

 

Inputs

 

Inputs

 

 

 

Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Financial assets (liabilities):

 

 

 

 

 

 

 

 

 

U.S. treasury and agency securities

 

$

77,657

 

$

77,657

 

$

 

$

 

Mutual funds held in rabbi trust

 

$

6,089

 

$

6,089

 

$

 

$

 

Corporate debt securities

 

$

135,582

 

$

 

$

135,582

 

$

 

Forward coal sales

 

$

76,504

 

$

 

$

76,504

 

$

 

Forward coal purchases

 

$

(28,740

)

$

 

$

(28,740

)

$

 

Commodity swaps

 

$

30,063

 

$

 

$

30,063

 

$

 

Commodity options

 

$

225

 

$

 

$

225

 

$

 

Interest rate swaps

 

$

(7,445

)

$

 

$

(7,445

)

$

 

 

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ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands except share and per share data)

 

 

 

December 31, 2011

 

 

 

 

 

Quoted Prices

 

Significant Other

 

Significant

 

 

 

 

 

in Active

 

Observable

 

Unobservable

 

 

 

Total Fair

 

Markets

 

Inputs

 

Inputs

 

 

 

Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Financial assets (liabilities):

 

 

 

 

 

 

 

 

 

U.S. treasury and agency securities

 

$

38,965

 

$

38,965

 

$

 

$

 

Mutual funds held in rabbi trust

 

$

4,129

 

$

4,129

 

$

 

$

 

Corporate debt securities

 

$

61,866

 

$

 

$

61,866

 

$

 

Forward coal sales

 

$

27,254

 

$

 

$

27,254

 

$

 

Forward coal purchases

 

$

(15,456

)

$

 

$

(15,456

)

$

 

Commodity swaps

 

$

3,222

 

$

 

$

3,222

 

$

 

Commodity options

 

$

95

 

$

 

$

95

 

$

 

Interest rate swaps

 

$

(10,097

)

$

 

$

(10,097

)

$

 

 

The following methods and assumptions were used to estimate the fair values of the assets and liabilities in the tables above.

 

Level 1 Fair Value Measurements

 

U.S. Treasury and Agency Securities and Mutual Funds Held in Rabbi Trust — The fair value of marketable securities is based on observable market data.

 

Level 2 Fair Value Measurements

 

Corporate Debt Securities — The fair values of the Company’s corporate debt securities are obtained from a third-party pricing service provider.  The fair values provided by the pricing service provider are estimated using pricing models, where the inputs to those models are based on observable market inputs including credit spreads and broker-dealer quotes, among other inputs. The Company classifies the prices obtained from the pricing services within Level 2 of the fair value hierarchy because the underlying inputs are directly observable from active markets.  However, the pricing models used do entail a certain amount of subjectivity and therefore differing judgments in how the underlying inputs are modeled could result in different estimates of fair value.

 

Forward Coal Purchases and Sales — The fair values of the forward coal purchase and sale contracts were estimated using discounted cash flow calculations based upon actual contract prices and forward commodity price curves. The curves were obtained from independent pricing services reflecting broker market quotes. The fair values are adjusted for counter-party risk, when applicable.

 

Commodity Swaps — The fair values of commodity swaps are estimated using valuation models which include assumptions about commodity prices based on those observed in the underlying markets. The fair values are adjusted for counter-party risk, when applicable.

 

Commodity Options — The fair values of the commodity options were estimated using an option pricing model that incorporates historical volatility of the underlying commodity, the strike price, notional amount, current market price and risk free interest rate. The fair values are adjusted for counter-party risk, when applicable.

 

Interest Rate Swaps — The fair values of the interest rate swaps were estimated using discounted cash flow calculations based upon forward interest-rate yield curves. The curves were obtained from independent pricing services reflecting broker market quotes. The fair values are adjusted for counter-party risk, when applicable.

 

(10)     Derivative Financial Instruments

 

Forward Contracts

 

The Company manages price risk for coal sales and purchases through the use of coal supply agreements. The Company evaluates each of its coal sales and coal purchase forward contracts to determine whether they meet the definition of a derivative and if so, whether they qualify

 

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ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands except share and per share data)

 

for the normal purchase normal sale (“NPNS”) exception. The majority of the Company’s forward contracts do not qualify as derivatives. For those contracts that do meet the definition of a derivative, certain contracts also qualify for the NPNS exception based on management’s intent and ability to physically deliver or take physical delivery of the coal. Contracts that meet the definition of a derivative and do not qualify for the NPNS exception are accounted for at fair value and, accordingly, the Company includes the unrealized gains and losses in current period earnings or losses.

 

Swap Agreements

 

Commodity Swaps

 

The Company uses diesel fuel and explosives in its production process and incurs significant expenses for the purchase of these commodities. Diesel fuel and explosives expenses represented approximately 8% of cost of coal sales for the three months ended March 31, 2012. The Company is subject to the risk of price volatility for these commodities and as a part of its risk management strategy, the Company enters into swap agreements with financial institutions to mitigate the risk of price volatility for both diesel fuel and explosives. The terms of the swap agreements allow the Company to pay a fixed price and receive a floating price, which provides a fixed price per unit for the volume of purchases being hedged. As of March 31, 2012, the Company had swap agreements outstanding to hedge the variable cash flows related to 66% and 38% of anticipated diesel fuel usage for the remaining nine months of 2012 and calendar year 2013, respectively. The average fixed price per swap for diesel fuel hedges is $2.88 per gallon and $3.02 per gallon for the remaining nine months of 2012 and calendar year 2013, respectively. As of March 31, 2012, the Company had swap agreements outstanding to hedge the variable cash flows related to approximately 36% of anticipated explosives usage in the Powder River Basin for the remaining nine months of 2012. All cash flows associated with derivative instruments are classified as operating cash flows in the Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011.

 

The Company sells coalbed methane. The revenues derived from the sale of coalbed methane are subject to volatility based on the changes in natural gas prices. In order to reduce that risk, the Company enters into “pay variable, receive fixed” natural gas swaps for a portion of its anticipated gas production in order to fix the selling price for a portion of its production. The natural gas swaps have been designated as qualifying cash flow hedges. As of March 31, 2012, the Company had swap agreements outstanding to hedge the variable cash flows related to approximately 79% and 76% of anticipated natural gas production for the remaining nine months of 2012 and for calendar year 2013, respectively.

 

Interest Rate Swap

 

The Company has variable rate debt outstanding and is subject to interest rate risk based on volatility in underlying interest rates. The interest rate swap is not designated as a qualifying cash flow hedge and, therefore, changes in fair value are recorded in current period earnings and losses.

 

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ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands except share and per share data)

 

The following tables present the fair values and location of the Company’s derivative instruments within the Condensed Consolidated Balance Sheets:

 

 

 

Asset Derivatives

 

Derivatives designated as 

 

March 31,

 

December 31,

 

cash flow hedging instruments

 

2012

 

2011

 

Commodity swaps (1)

 

$

31,737

 

$

16,532

 

Commodity options (1)

 

242

 

112

 

 

 

$

31,979

 

$

16,644

 

 

Derivatives not designated as 

 

March 31,

 

December 31,

 

cash flow hedging instruments

 

2012

 

2011

 

Forward coal sales (2)

 

$

76,504

 

$

27,254

 

Commodity swaps (3)

 

2

 

 

Total

 

$

76,506

 

$

27,254

 

 

 

 

 

 

 

Total asset derivatives

 

$

108,485

 

$

43,898

 

 


(1) As of March 31, 2012, $22,742 is recorded in prepaid expenses and other current assets and $9,237 is recorded in other non-current assets in the Condensed Consolidated Balance Sheets.  As of December 31, 2011, $14,436 is recorded in prepaid expenses and other current assets and $2,208 is recorded in other non-current assets in the Condensed Consolidated Balance Sheets.

(2) As of March 31, 2012, $69,321 is recorded in prepaid expenses and other current assets and $7,183 is recorded in other non-current assets in the Condensed Consolidated Balance Sheets. As of December 31, 2011, $20,891 is recorded in prepaid expenses and other current assets and $6,363 is recorded in other non-current assets in the Condensed Consolidated Balance Sheets.

(3) As of March 31, 2012, $2 is recorded in prepaid expenses and other current assets in the Condensed Consolidated Balance Sheets.

 

 

 

Liability Derivatives

 

Derivatives designated as 

 

March 31,

 

December 31,

 

cash flow hedging instruments

 

2012

 

2011

 

Commodity swaps (1)

 

$

1,651

 

$

12,874

 

 

Derivatives not designated as

 

March 31,

 

December 31,

 

cash flow hedging instruments

 

2012

 

2011

 

Forward coal purchases (2)

 

28,740

 

15,456

 

Commodity swaps (3)

 

25

 

436

 

Commodity options-coal (4)

 

17

 

17

 

Interest rate swaps (5)

 

7,445

 

10,097

 

Total

 

$

36,227

 

$

26,006

 

 

 

 

 

 

 

Total liability derivatives

 

$

37,878

 

$

38,880

 

 


(1)  As of March 31, 2012, $840 is recorded in accrued expenses and other current liabilities and $811 is recorded in other non-current liabilities in the Condensed Consolidated Balance Sheets. As of December 31, 2011, $6,222 is recorded in accrued expenses and other current liabilities and $6,652 is recorded in other non-current liabilities in the Condensed Consolidated Balance Sheets.

(2)  As of March 31, 2012, $28,740 is recorded in accrued expenses in the Condensed Consolidated Balance Sheets. As of December 31, 2011, $15,456 is recorded in accrued expenses in the Condensed Consolidated Balance Sheets.

 

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ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands except share and per share data)

 

(3)  As of March 31, 2012, $25 is recorded in accrued expenses in the Condensed Consolidated Balance Sheets. As of December 31, 2011, $436 is recorded in accrued expenses and other current liabilities in the Condensed Consolidated Balance Sheets.

(4)  As of March 31, 2012, $3 is recorded in accrued expenses and other current liabilities and $14 is recorded in other non-current liabilities in the Condensed Consolidated Balance Sheets. As of December 31, 2011, $3 is recorded in accrued expenses and other current liabilities and $14 in other non-current liabilities in the Condensed Consolidated Balance Sheets.

(5)  As of March 21, 2012, $7,445 is recorded in accrued expenses and other current liabilities in the Condensed Consolidated Balance Sheets. As of December 31, 2011, $10,097 is recorded in accrued expenses and other current liabilities in the Condensed Consolidated Balance Sheets.

 

The following tables present the gains and losses from derivative instruments for the three months ended March 31, 2012 and 2011 and their location within the Condensed Consolidated Financial Statements:

 

 

 

Gain (loss) reclassified

 

Gain (loss) recorded

 

 

 

from accumulated other

 

in accumulated other

 

Derivatives designated as 

 

comprehensive income (loss) to earnings

 

comprehensive income (loss)

 

cash flow hedging instruments

 

2012

 

2011

 

2012

 

2011

 

Commodity swaps (1) (2) (3)

 

$

4,500

 

$

3,448

 

$

20,650

 

$

19,736

 

 


(1)  Amounts are recorded as a component of cost of coal sales in the Condensed Consolidated Statements of Operations.

(2)  Net of tax.

(3)  Ineffectiveness during the period was immaterial.

 

 

 

Gain (loss)

 

Derivatives not designated as 

 

recorded in earnings

 

cash flow hedging instruments

 

2012

 

2011

 

Forward coal sales (1)

 

$

49,259

 

$

2,363

 

Forward coal purchases (1)

 

(13,284

)

(1,883

)

Commodity swaps (2)

 

372

 

85

 

Commodity options-coal (1)

 

 

(65

)

Interest rate swap (3)

 

(322

)

(444

)

Freight swap (2)

 

 

84

 

 

 

$

36,025

 

$

140

 

 


(1)  Amounts are recorded as a component of other revenues in the Condensed Consolidated Statements of Operations.

(2)  Amounts are recorded as a component of other expenses in the Condensed Consolidated Statements of Operations.

(3)  Amounts are recorded as a component of interest expense in the Condensed Consolidated Statements of Operations.

 

Unrealized losses recorded in accumulated other comprehensive income (loss) are reclassified to income or loss as the financial swaps settle and the Company purchases the underlying items that are being hedged. During the next twelve months, the Company expects to reclassify approximately $20,742, net of tax, to earnings. The following table summarizes the changes to accumulated other comprehensive income (loss) related to hedging activities during the three months ended March 31, 2012 and 2011:

 

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ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands except share and per share data)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2012

 

2011

 

Balance at beginning of period

 

$

1,333

 

$

8,443

 

Net change associated with current year hedging transactions

 

20,650

 

19,736

 

Net amounts reclassified to earnings

 

(4,500

)

(3,448

)

Balance at end of period

 

$

17,483

 

$

24,731

 

 

(11)     Income Taxes

 

Income tax expense (benefit) for the three months ended March 31, 2012 and 2011 was ($43,785) and $13,967, respectively. A reconciliation of the statutory federal income tax expense (benefit) at 35% to the actual federal income tax expense (benefit) is as follows:

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2012

 

2011

 

Federal statutory income tax expense (benefit)

 

$

(25,516

)

$

22,335

 

Increases (reductions) in taxes due to:

 

 

 

 

 

Percentage depletion allowance

 

(18,718

)

(9,282

)

State taxes, net of federal tax impact

 

(2,697

)

1,090

 

Deduction for domestic production activities

 

 

(610

)

Change in valuation allowance

 

1,454

 

 

Other, net

 

1,692

 

434

 

Income tax expense (benefit)

 

$

(43,785

)

$

13,967

 

 

(12)     Employee Benefit Plans

 

The Company sponsors or participates in several benefit plans for its employees, including postemployment health care and life insurance, defined benefit and defined contribution pension plans, and provides workers’ compensation and black lung benefits.

 

The components of net periodic cost are included in the tables below.

 

Components of Net Periodic Pension Costs

 

The components of net periodic benefit costs (credits) are as follows:

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2012

 

2011

 

Interest cost

 

$

7,863

 

$

3,151

 

Expected return on plan assets

 

(10,034

)

(4,085

)

Amortization of net actuarial (gain) loss

 

179

 

(260

)

Net periodic benefit credit

 

$

(1,992

)

$

(1,194

)

 

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NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands except share and per share data)

 

Components of Net Periodic Costs of Other Postretirement Benefit Plans

 

The components of net periodic benefit costs are as follows:

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2012

 

2011

 

Service cost

 

$

4,600

 

$

4,288

 

Interest cost

 

11,900

 

8,793

 

Amortization of prior service cost (credit)

 

100

 

(238

)

Amortization of net actuarial loss

 

2,250

 

 

Net periodic benefit cost

 

$

18,850

 

$

12,843

 

 

Components of Net Periodic Costs of Black Lung

 

The components of net periodic benefit costs are as follows:

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2012

 

2011

 

Service cost

 

$

1,507

 

$

407

 

Interest cost

 

1,793

 

591

 

Expected return on plan assets

 

(13

)

(6

)

Amortization of net actuarial loss

 

318

 

209

 

Net periodic benefit cost

 

$

3,605

 

$

1,201

 

 

(13)     Stock-Based Compensation Awards

 

The Company provides incentives to certain eligible persons who contribute significantly to the strategic and long-term performance objectives and growth of the Company under the 2010 Long Term Incentive Plan (the “2010 LTIP”) and the Alpha Appalachia 2006 Stock and Incentive Compensation Plan (the “2006 SICP”), (collectively the “Stock Plans”). The Stock Plans provide for a variety of awards, including options, stock appreciation rights, restricted stock, restricted share units (both time-based and performance-based), and any other type of award deemed by the Compensation Committee in its discretion to be consistent with the purposes of the Stock Plans. The 2010 LTIP is currently authorized for the issuance of awards for up to 3,250,000 shares of common stock, and as of March 31, 2012, 25,801 shares of common stock were available for grant under the plan. The 2006 SICP is currently authorized for the issuance of awards for up to 6,110,500 shares of common stock, and as of March 31, 2012, the Company had 3,212,234 shares of common stock available for grant under the plan.

 

During the three months ended March 31, 2012, the Company awarded certain of its executives and key employees 823,895 time-based restricted share units and 1,026,368 performance-based restricted share units. The time-based share units vest, subject to continued employment, ratably over three-years or cliff vest after three years (with accelerated vesting upon a change of control and certain retirement scenarios). The performance-based share units cliff vest after three years, subject to continued employment and the satisfaction of the performance criteria (with accelerated vesting upon a change of control and certain retirement scenarios). The 1,026,368 performance-based restricted share units awarded during the three months ended March 31, 2012 have the potential to be distributed from 0% to 200% of the awarded amount, depending on the actual results versus the pre-established performance criteria over the three-year period.

 

At March 31, 2012, the Company had three types of stock-based awards outstanding: restricted stock, restricted share units (both time-based and performance-based), and stock options. Stock-based compensation expense totaled $7,014 and $10,948, for the three months ended March 31, 2012 and 2011, respectively. For the three months ended March 31, 2012 and 2011, approximately 70% and 69%, respectively, of

 

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NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands except share and per share data)

 

stock-based compensation expense is reported as selling, general and administrative expenses. Approximately 30% and 31%, of stock-based compensation expense was recorded as cost of coal sales for the three months ended March 31, 2012 and 2011, respectively.

 

The Company is authorized to repurchase common shares from employees (upon the election by the employee) to satisfy the employees’ minimum statutory tax withholdings upon the vesting of restricted stock and restricted share units (both time-based and performance-based).  Shares that are repurchased to satisfy the employees’ minimum statutory tax withholdings are recorded in treasury stock at cost, and these shares are not added back into the pool of shares available for grant of the respective plans the shares were granted from. During the three months ended March 31, 2012 and 2011, the Company repurchased 310,909 and 191,849, respectively, of common shares from employees at an average price paid per share of $20.35 and $58.39, respectively.

 

(14) Commitments and Contingencies

 

(a) General

 

Estimated losses from loss contingencies are accrued by a charge to income when information available indicates that it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. If a loss contingency is not probable or reasonably estimable, disclosure of the loss contingency is made in the consolidated financial statements when it is at least reasonably possible that a loss may be incurred and that the loss could be material.

 

(b) Commitments and Contingencies

 

Commitments

 

The Company leases coal mining and other equipment under long-term operating leases with varying terms. In addition, the Company leases mineral interests and surface rights from land owners under various terms and royalty rates.

 

The Company has obligations for federal coal leases, which contain an estimated 354.2 million tons of proven and probable coal reserves in the Powder River Basin. The original lease bids totaled $323,955, payable in annual installments. The annual installments due in 2012 total $64,791. The annual installments due in 2013 through 2015 of $28,683 are due each September until the obligation is satisfied.

 

Contingencies

 

Extensive regulation of the impacts of mining on the environment and of maintaining workplace safety, and related litigation, has had or may have a significant effect on the Company’s costs of production and results of operations. Further regulations, legislation or litigation in these areas may also cause the Company’s sales or profitability to decline by increasing costs or by hindering the Company’s ability to continue mining at existing operations or to permit new operations.

 

(c) Guarantees and Financial Instruments with Off-Balance Sheet Risk

 

In the normal course of business, the Company is a party to certain guarantees and financial instruments with off-balance sheet risk, such as bank letters of credit, performance or surety bonds, and other guarantees and indemnities related to the obligations of affiliated entities which are not reflected in the Company’s Condensed Consolidated Balance Sheets. Management does not expect any material losses to result from these guarantees or other off-balance sheet financial instruments.

 

Letters of Credit

 

The amount of outstanding bank letters of credit issued under the Company’s accounts receivable securitization program as of March 31, 2012 was $159,987. As of March 31, 2012, the Company had $300 of additional letters of credit outstanding under its senior secured revolving facility.

 

(d) Legal Proceedings

 

The Company’s legal proceedings range from cases brought by a single plaintiff to class actions. These legal proceedings, as well as governmental examinations, involve various business units and a variety of claims including, but not limited to, contract disputes, personal

 

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NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands except share and per share data)

 

injury claims, property damage claims (including those resulting from blasting, trucking and flooding), environmental and safety issues, and employment matters. While some matters pending against the Company or its subsidiaries specify the damages claimed by the plaintiffs, many seek an unquantified amount of damages or are at very early stages of the legal process. Even when the amount of damages claimed against the Company or its subsidiaries is stated, the claimed amount may be exaggerated or unsupported.  The outcome of any litigation depends on a variety of factors, many of which are outside the Company’s control. As a result, the Company believes that an estimate of possible loss in excess of amounts accrued, if any, to which the Company is exposed in future periods relating to the legal proceedings disclosed below, would either be premature or impossible to determine or so imprecise, uncertain or wide as to be potentially misleading. The Company intends to defend these legal proceedings vigorously, litigating or settling cases where in management’s judgment it would be in the best interest of shareholders to do so.

 

The Company evaluates, on a quarterly basis, developments in legal proceedings and governmental examinations that could cause an increase or decrease in the amount of the reserves previously recorded. Excluding fees paid to external legal counsel, the Company recognized (income) expense, net of expected insurance recoveries, associated with litigation-related reserves of $1,200 and $3 during the three months ended March 31, 2012 and 2011, respectively.

 

Federal Securities Class Action

 

On April 29, 2010 and May 28, 2010, two purported class actions that were subsequently consolidated into one case were brought against, among others, Massey, now the Company’s subsidiary Alpha Appalachia Holdings, Inc. (“Massey” or “Alpha Appalachia”), in the United States District Court for the Southern District of West Virginia in connection with alleged violations of the federal securities laws.  The lead plaintiffs allege, purportedly on behalf of a class of former Massey stockholders, that (i) Massey and certain former Massey directors and officers violated Section 10(b) of the Securities and Exchange Act of 1934, as amended, (the “Exchange Act”), and Rule 10b-5 thereunder by intentionally misleading the market about the safety of Massey’s operations and that (ii) Massey’s former officers violated Section 20(a) of the Exchange Act by virtue of their control over persons alleged to have committed violations of Section 10(b) of the Exchange Act.  The lead plaintiffs seek a determination that this action is a proper class action; certification as class representatives; an award of compensatory damages in an amount to be proven at trial, including interest thereon; and an award of reasonable costs and expenses, including counsel fees and expert fees.

 

On February 16, 2011, the lead plaintiffs moved to partially lift the statutory discovery stay imposed under the Private Securities Litigation Reform Act of 1995 (“PSLRA”).  On March 3, 2011, the United States moved to intervene and to stay discovery until the completion of criminal proceedings allegedly arising from the same facts that allegedly give rise to this action.  On April 15, 2011, the United States and the lead plaintiffs informed the court that they had reached an agreement regarding the United States’ motions and jointly requested that if the court decided to lift the statutory discovery stay, the court limit the discovery to be provided by Massey in certain respects.

 

On April 25, 2011, the defendants moved to dismiss the operative complaint.  On June 9, 2011, plaintiffs filed a memorandum in opposition to the defendants’ motion to dismiss.  On March 27, 2012, the court denied the defendants’ motion to dismiss.

 

On September 28, 2011, the court granted plaintiffs’ motion to partially lift the PSLRA discovery stay, granted the United States’ motion to intervene and imposed the conditions on discovery requested by the United States and plaintiffs.  On March 30, 2012, the court entered an order setting a July 13, 2012 deadline for the parties to serve their initial discovery disclosures.

 

Upper Big Branch (“UBB”) Explosion and Related Investigations

 

On April 5, 2010, before the acquisition of Massey by the Company, an explosion occurred at the UBB mine, resulting in the deaths of 29 miners. The Federal Mine Safety and Health Administration (“MSHA”), the Office of Miner’s Health, Safety, and Training of the State of West Virginia (“State”), and the Governor’s Independent Investigation Panel (“GIIP”) initiated investigations into the cause of the UBB explosion and related issues.  Additionally, the U.S. Attorney for the Southern District of West Virginia (the “Office”) commenced a grand jury investigation.  The GIIP published its final report on May 19, 2011; MSHA released its final report on December 6, 2011; and the State released its final report on February 23, 2012.

 

On December 6, 2011, the Company, the Office and the United States Department of Justice entered into a Non-Prosecution Agreement (the “Agreement”) resolving the criminal investigation against Massey and its affiliates relating to the UBB explosion and other health and safety related issues at Massey, and the Company also reached a comprehensive settlement with MSHA resolving outstanding civil citations,

 

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NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands except share and per share data)

 

violations, and orders related to MSHA’s investigation arising from the UBB explosion and other non-UBB related matters involving legacy Massey entities prior to the Massey Acquisition. The Agreement does not resolve individual responsibilities related to the UBB explosion.

 

Under the terms of the Agreement and settlement, the Company agreed to pay outstanding MSHA fines, and has agreed to invest in additional measures designed to improve miner health and safety, provide restitution to the families of the fallen miners and two individuals injured in the UBB explosion, and create a charitable organization to research mine safety. The Company has further agreed to cooperate fully with all governmental agencies in all continuing investigations and prosecutions against any individuals that arise out of the UBB explosion and related conduct described in the Agreement until such investigations and prosecutions are concluded.

 

The Company cannot predict the outcome of these investigations, including whether or not any individual will become subject to possible criminal and civil penalties or enforcement actions.  In order to accommodate these investigations, the UBB mine has been idled since the explosion. As of April 20, 2012, the Company has been authorized by regulatory authorities to close the UBB mine permanently.

 

Wrongful Death and Personal Injury

 

As of May 9, 2012, twenty of the twenty-nine families of the deceased miners had filed wrongful death suits against Massey and certain of its subsidiaries in Boone County Circuit Court and Wyoming County Circuit Court. In addition, as of May 9, 2012, two seriously injured employees had filed personal injury claims against Massey and certain of its subsidiaries in Boone County Circuit Court seeking damages for physical injuries and/or alleged psychiatric injuries, and thirty-nine employees had filed lawsuits against Massey and certain of its subsidiaries in Boone County Circuit Court and Wyoming County Circuit Court alleging emotional distress or personal injuries due to their proximity to the explosion. On April 19, 2012, the Company filed a motion to transfer the Wyoming County lawsuits to Boone County.

 

On October 19, 2011, the Boone County Circuit Court ordered that the cases pending before it be mediated by a panel of three mediators.  These mediations are, per order of the court, strictly confidential.  The Company had reached agreements in principle to settle with all twenty-nine families of the deceased miners as well as the two employees who were seriously injured.  However, families of two of the deceased miners have recently withdrawn their prior agreements to settle, and settlement negotiations in those cases are ongoing.  Of the twenty-seven settlements that have been reached with the families of the deceased miners, all have received court approval. The settlements relating to the two serious injuries did not require court approval.

 

On May 4, 2012, the Boone County Circuit Court ordered that the remaining personal injury and emotional distress claims continue to be mediated through July 6, 2012. Until that date, a stay was in place for all remaining cases until further order from the court.

 

On April 5, 2012, one of the families of the deceased miners filed a class action suit in Boone County Circuit Court, purportedly on behalf of the families that settled their claims prior to the mediation, alleging fraudulent inducement into a contract, naming as defendants Massey, the Company and certain of its subsidiaries,the Company’s CEO and the Company’s Board of Directors.

 

Uniform Fraudulent Transfers Act Action

 

On June 1, 2011, certain of the plaintiffs who had filed wrongful death cases filed a complaint against Massey, Massey Coal Services, Inc., Performance Coal Company, and certain individuals in the Circuit Court of Boone County, West Virginia, alleging that the Massey Acquisition represented a fraudulent transfer intended to prevent plaintiffs from recovering damages in their wrongful death actions.  Plaintiffs request that the court order defendants to post a bond of at least $500,000.

 

On June 22, 2011, certain of the former Massey directors filed a motion for a more definite statement, requesting that the court order plaintiffs to clarify their allegations and how their allegations constitute a violation of the Uniform Fraudulent Transfer Act.  On July 27, 2011, plaintiffs opposed the motion for a more definite statement.  On August 24, 2011, the former directors filed a reply brief in further support of their motion.  The court heard oral arguments on defendants’ motion on September 22, 2011.  At the hearing, the court ordered that this case be mediated with the wrongful death cases, as discussed above. Each plaintiff in this action has agreed to settle their wrongful death cases, as discussed above, and as part of those settlements, has also agreed to dismiss this action.

 

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NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands except share and per share data)

 

Derivative and Related Class Action Litigation

 

A number of purported former Massey stockholders have brought lawsuits derivatively, purportedly on behalf of Massey, in West Virginia and Delaware state courts, in connection with the April 5, 2010 explosion at the UBB mine and related claims. Certain of these former stockholders have also initiated contempt proceedings in West Virginia state court in connection with alleged violations of the settlement of a previous derivative lawsuit. In addition, these and other purported former Massey stockholders have asserted class action claims allegedly arising out of the Massey Acquisition in Delaware and West Virginia state courts and Virginia federal court. These cases are summarized below.

 

Delaware Chancery Court

 

In a case filed on April 23, 2010 in Delaware Chancery Court, In re Massey Energy Company Derivative and Class Action Litigation (“In re Massey”), a number of purported former Massey stockholders (the “Delaware Plaintiffs”) allege, purportedly on behalf of Massey, that certain former Massey directors and officers breached their fiduciary duties by failing to monitor and oversee Massey’s employees, allegedly resulting in fines against Massey and the explosion at UBB, and by wasting corporate assets by paying allegedly excessive and inflated amounts to former Massey Chairman and Chief Executive Officer Don L. Blankenship as part of his retirement package.  The Delaware Plaintiffs also allege, on behalf of a purported class of former Massey stockholders, that certain former Massey directors breached their fiduciary duties by agreeing to the Massey Acquisition.  The Delaware Plaintiffs allege that defendants breached their fiduciary duties by failing to secure the best price possible, by failing to secure any downside protection for the acquisition consideration, and by purportedly eliminating the possibility of a superior proposal by agreeing to a “no shop” provision and a termination fee.  In addition, the Delaware Plaintiffs allege that defendants agreed to the Massey Acquisition to eliminate the liability that defendants faced on the Delaware Plaintiffs’ derivative claims.  Finally, the Delaware Plaintiffs allege that defendants failed to fully disclose all material information necessary for Massey stockholders to cast an informed vote on the Massey Acquisition.

 

The Delaware Plaintiffs also name the Company and Mountain Merger Sub, Inc. (“Merger Sub”), the Company’s wholly-owned subsidiary created for purposes of effecting the Massey Acquisition, which, at the effective time of the Massey Acquisition, was merged with and into Massey, as defendants. The Delaware Plaintiffs allege that the Company and Merger Sub aided and abetted the former Massey directors’ alleged breaches of fiduciary duty and agreed to orchestrate the Massey Acquisition for the purpose of eliminating the former Massey directors’ potential liability on the derivative claims.

 

The Delaware Plaintiffs seek an award against each defendant for restitution and/or compensatory damages, plus pre-judgment interest; an order establishing a litigation trust to preserve the derivative claims asserted in the complaint; and an award of costs, disbursements and reasonable allowances for fees incurred in this action. The Delaware Plaintiffs also sought to enjoin consummation of the Massey Acquisition.  The court denied their motion for a preliminary injunction on May 31, 2011.

 

Two additional putative class actions were brought against Massey, certain former Massey directors and officers, the Company and Merger Sub in the Delaware Court of Chancery following the announcement of the Massey Acquisition. Silverman v. Phillips, et al., filed on February 7, 2011 (“Silverman”), and Goe v. Massey Energy Company, et al., filed on February 14, 2011 (“Goe”), assert allegations that are nearly identical to those made by the Delaware Plaintiffs in In re Massey.  Silverman and Goe were consolidated for all purposes with In re Massey on February 9, 2011 and February 24, 2011, respectively.

 

On June 10, 2011, Massey moved to dismiss the Delaware Plaintiffs’ derivative claims on the ground that the Delaware Plaintiffs, as former Massey stockholders, lacked the legal right to pursue those claims, and the Company and Alpha Appalachia Merger Sub moved to dismiss the purported class action claim against them for failure to state a claim upon which relief may be granted.  On June 10 and 13, 2011, certain former Massey director and officer defendants moved to dismiss the derivative claims and filed answers to the remaining direct claims.

 

On September 14, 2011, the parties submitted a Stipulation Staying Proceedings, which stayed the matter until March 1, 2012, without prejudice to the parties’ right to seek an extension or a termination of the stay by application to the court.  The court approved the stipulation and entered the stay that same day.  On January 31, 2012, the Company and Alpha Appalachia requested that the Delaware Plaintiffs consent to a six month extension of the stay order (the “Stay Order”); the Delaware Plaintiffs refused to do so.  On February 21, 2012, the Company and Alpha Appalachia filed a motion to extend the Stay Order for an additional five months through August 1, 2012. The motion remains pending.

 

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NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands except share and per share data)

 

West Virginia State Court

 

In a case filed on April 15, 2010 in West Virginia state court, three purported former Massey stockholders (the “West Virginia Plaintiffs”) allege, purportedly on behalf of Massey, that certain former Massey directors and officers breached their fiduciary duties by failing to monitor and oversee Massey’s employees, allegedly resulting in fines against Massey and the explosion at UBB. The West Virginia Plaintiffs seek an award against each defendant and in favor of Massey for the amount of damages sustained by Massey as a result of defendants’ alleged breaches of fiduciary duty and an award to the West Virginia Plaintiffs of the costs and disbursements of the action, including reasonable attorneys’ fees, accountants’ and experts’ fees, costs, and expenses.

 

On May 2, 2011, the West Virginia Plaintiffs moved for leave to amend their complaint to add Alpha and Merger Sub as additional defendants and to add claims allegedly arising out of the then-proposed Massey Acquisition. In their proposed amended complaint, the West Virginia Plaintiffs allege that certain former Massey directors breached their fiduciary duties by failing to obtain the highest price reasonably available for Massey and by failing to disclose material information to Massey’s then-stockholders in connection with the stockholder vote on the Massey Acquisition. The West Virginia Plaintiffs also allege that Massey, Merger Sub and the Company aided and abetted the former Massey directors’ breaches of fiduciary duty. The West Virginia Plaintiffs further allege that certain former Massey directors wasted corporate assets by failing to maintain sufficient internal controls over Massey’s safety and environmental reporting; failing to properly consider the interests of Massey and its stockholders, including the value of the derivative claims asserted by the West Virginia Plaintiffs in the Massey Acquisition; failing to conduct proper supervision; paying undeserved incentive compensation to certain Massey executive directors, particularly former Massey Chairman and CEO Don L. Blankenship during Massey’s alleged years of noncompliance with safety regulations and more recently as part of Blankenship’s retirement package; incurring millions of dollars in fines due to safety and environmental violations; and incurring potentially hundreds of millions of dollars of legal liability and/or legal costs to defend defendants’ allegedly unlawful actions. Finally, the West Virginia Plaintiffs’ proposed amended complaint alleges that certain former Massey directors were unjustly enriched by their compensation as directors.

 

On May 25, 2011, the West Virginia Plaintiffs filed a petition with the West Virginia Supreme Court for a preliminary injunction against the consummation of the Massey Acquisition, which was denied on May 31, 2011.

 

On June 24, 2011, the defendants moved to dismiss the West Virginia Plaintiffs’ original complaint on the grounds that plaintiffs, as former Massey stockholders, lacked the legal right to pursue those claims, or, alternatively, to stay this case in favor of In re Massey, described above.  Defendants also filed an opposition to the West Virginia Plaintiffs’ motion to amend.  On August 19, 2011, the West Virginia Plaintiffs filed a combined memorandum in opposition to defendants’ motion to dismiss or stay and in further support of their motion to amend.  On August 22, 2011, defendants filed a memorandum in further support of their motion to dismiss or stay and in further opposition to plaintiffs’ motion to amend.  On August 23, 2011, the court held a hearing on defendants’ motion to dismiss and plaintiffs’ motion to amend.  Without deciding the motions, the court requested the parties to submit competing proposed orders containing findings of fact and conclusions of law and proposed scheduling orders for the court’s consideration, which the parties did on September 9, 2011.  The motions remain pending.

 

U.S. District Court — Eastern District of Virginia

 

In the United States District Court for the Eastern District of Virginia, purported former Massey stockholder Benjamin Mostaed (“Mostaed”) alleges in a suit filed on February 2, 2011, and amended thereafter, purportedly on behalf of a class of former Massey stockholders, that Massey, Alpha and certain former Massey directors violated Sections 14(a) of the Exchange Act and Rule 14a-9 thereunder by filing a false and misleading preliminary proxy statement in connection with the then-proposed Massey Acquisition; that Massey and certain former Massey directors violated Section 20(a) of the Exchange Act by virtue of their control over persons alleged to have committed violations of Section 14(a) of the Exchange Act; that certain former Massey directors violated their fiduciary duties by causing Massey to enter into the Merger Agreement with Alpha pursuant to an unfair process that resulted in an unfair offer with preclusive deal protection devices that allegedly inhibited superior proposals; and that Massey and Alpha aided and abetted the former Massey directors’ alleged breaches of fiduciary duty.  Mostaed sought an injunction preventing the consummation of the Massey Acquisition; rescission of the Merger Agreement; and an award of the costs and disbursements of the action, including reasonable attorneys’ and experts’ fees.

 

On February 4, 2011, William D. Perkins (“Perkins”), another purported former Massey stockholder, filed a suit in the Eastern District of Virginia similar to Mostaed’s.  On February 17, 2011, Mostaed requested that the court consolidate the two pending actions, along with any subsequently filed actions challenging the proposed transaction.  Defendants did not oppose the motion.  On June 3, 2011, the court granted the motion.

 

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NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands except share and per share data)

 

On June 24, 2011, Mostaed informed the court that, aside from a motion for an award of attorneys’ fees, he did not intend to prosecute the action further and would voluntarily dismiss his claims.

 

On July 13, 2011, Mostaed and Perkins moved for an award of attorneys’ fees, reimbursement of expenses and incentive awards, contending that voluntary remedial measures implemented by defendants and sought by Mostaed (i.e., additional disclosure) had mooted Mostaed’s claims. On July 26, 2011, defendants filed their opposition and on August 4, 2011, Mostaed and Perkins filed their reply brief.  The court subsequently denied plaintiffs’ request for oral argument.  The motion remains pending.

 

Contempt Proceedings

 

On April 16, 2010, Manville Personal Injury Settlement Trust (“Manville”), one of the West Virginia Plaintiffs, filed a petition in the Circuit Court of Kanawha County, West Virginia, requesting that the court initiate civil contempt proceedings against certain of the then-current members of Massey’s board of directors with respect to alleged violations of a settlement agreement.  In July 2007, Manville filed a complaint, purportedly on behalf of Massey, alleging that certain of Massey’s then directors and officers breached their fiduciary duties.  On May 20, 2008, the parties executed a stipulation of settlement, which the court subsequently approved.  The settlement provided for a release of all claims that were or could have been asserted on behalf of Massey in exchange for, among other things, certain corporate governance reforms and an agreement that the Massey board of directors would make a Corporate Social Responsibility Report to its stockholders on an annual basis that would include, among other things, a report on Massey’s environmental and worker safety compliance.  Manville alleges that Massey’s 2009 Corporate Social Responsibility Report did not contain a sufficient report on worker safety compliance.  On April 22, 2010, the court issued an order for a rule to show cause, initiating the contempt proceedings.

 

On May 31, 2011, Manville, now joined by the other two West Virginia Plaintiffs, filed a new petition for civil contempt, requesting that the court initiate civil contempt proceedings against certain of the then-current members of Massey’s board of directors and certain then-current Massey officers in connection with certain additional alleged violations of the settlement.

 

On June 22, 2011, the individual defendants that have been served with the new petition filed a motion to dismiss that petition, as well as the original April 16 petition, and also moved to vacate the 2008 order, in which the court approved the settlement, as against them.  On June 28, 2011, nominal defendant Alpha Appalachia joined in the individual defendants’ motions to dismiss and vacate.  On July 21, 2011, the court held a hearing on the defendants’ motions to dismiss and vacate.

 

On September 29, 2011, the court granted the individual defendants’ motions to dismiss and vacate and ordered that the contempt proceedings be terminated in their entirety.  The plaintiffs have filed an appeal, which remains pending.

 

Well Water Suit

 

Since September 2004, approximately 738 plaintiffs have filed approximately 400 suits against the Company’s subsidiaries Alpha Appalachia and Rawl Sales & Processing Co. in the Circuit Court of Mingo County, West Virginia (“Mingo Court”), for alleged property damage and personal injuries arising out of slurry injection and impoundment practices during the period of 1978 through 1987 allegedly contaminating plaintiffs’ water wells. Plaintiffs sought injunctive relief and compensatory damages in excess of $170,000 and unquantified punitive damages, including medical monitoring for the next 30 years.

 

A mediation session held on July 25-27, 2011 resulted in settlement of all plaintiffs’ claims. Court approval of the settlement was granted on April 20, 2012. The Company believes that the terms of the settlement will not result in any material impact on its results of operations.

 

Mine Water Discharge Suits

 

The West Virginia Department of Environmental Protection has brought civil enforcement actions against two of the Company’s subsidiaries, Paynter Branch Mining, Inc. and Pioneer Fuel Corporation, in various West Virginia state courts seeking civil penalties based on alleged discharge of selenium, and in one case, additional materials, in excess of permitted levels. These suits remain ongoing. The Company does not believe the amounts of any civil penalties or fines resulting from the Paynter Branch Mining, Inc. and Pioneer Fuel Corporation cases will be material to its results of operations.

 

The estimated future costs to treat for selenium discharges on specific permits involved include costs to build and to maintain water treatment systems. For permits that are active, capital costs (expected to be approximately $23,000) will be capitalized as property and

 

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NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands except share and per share data)

 

equipment and depreciated over the expected lives and annual water treatment costs (expected to be approximately $2,300 annually) will be expensed as incurred. For post-closing periods on active permits as well as non-active permits, estimated future treatment costs have been included in asset retirement obligations.

 

On March 20, 2012, three environmental groups filed a citizen’s suit against two of the Company’s subsidiaries, Alex Energy, Inc. and Elk Run Coal Company, Inc., in federal court in the Southern District of West Virginia alleging violations of the terms of the subsidiaries’ water discharge permits. The plaintiffs seek a civil penalty as well as injunctive relief.

 

On April 16, 2012, three environmental groups filed a citizen’s suit in federal court in the Southern District of West Virginia against one of the Company’s subsidiaries, Boone East Development Company (“Boone East”), which owns land previously mined and reclaimed by other companies, alleging that Boone East is discharging pollutants without a permit.

 

Nicewonder Litigation

 

In December 2004, prior to the Company’s acquisition of Nicewonder in October 2005, the Affiliated Construction Trades Foundation (“ACTF”), a division of the West Virginia State Building and Construction Trades Council, brought an action against the West Virginia Department of Transportation, Division of Highways (“WVDOH”) and Nicewonder Contracting, Inc. (“NCI”), which became the Company’s wholly-owned indirect subsidiary as a result of the Nicewonder acquisition, in the United States District Court in the Southern District of West Virginia. The plaintiff sought a declaration that the contract between NCI and the State of West Virginia related to NCI’s road construction project was illegal as a violation of applicable West Virginia and federal competitive bidding and prevailing wage laws and sought to enjoin performance of the contract, but did not seek monetary damages.

 

On September 30, 2009, the District Court issued an order that dismissed or denied for lack of standing all of the plaintiff’s claims under federal law and remanded the remaining state claims to the Circuit Court of Kanawha County, West Virginia for resolution.  On May 7, 2010, the Circuit Court of Kanawha County entered summary judgment in favor of NCI.  On June 22, 2011, the West Virginia Supreme Court of Appeals reversed the Circuit Court order granting summary judgment in favor of NCI, and remanded the case back to the Circuit Court for further proceedings. Following remand, ACTF filed a motion for summary judgment, which the Circuit Court denied on November 9, 2011.  ACTF has challenged the order denying its summary judgment motion to the West Virginia Supreme Court of Appeals. Oral arguments were heard by the West Virginia Supreme Court of Appeals on this matter on April 25, 2012. A decision on this matter is anticipated later this year.

 

Fluor Litigation

 

Alpha Appalachia and certain of its subsidiaries are also parties to a number of lawsuits and other legal proceedings related to certain non-coal businesses (the “Prior Business”) previously conducted by its former affiliate Fluor Corporation.  These lawsuits include the Alexander-Pederson-Helig cases in which two of Alpha Appalachia’s subsidiaries, Appalachia Holding Company (“Appalachia Holding”) and DRIH Corporation (“DRIH”), were named defendants along with Fluor. In July 2011, those cases resulted in a jury award in the City of St. Louis Circuit Court in favor of the plaintiffs for $38,500 in compensatory and economic damages and $320,000 in punitive damages.  The total aggregate judgment against Alpha Appalachia’s subsidiaries is $118,500.

 

Under the terms of the Distribution Agreement entered into by Alpha Appalachia (then called Massey) and Fluor as of November 30, 2000 in connection with the spin-off of Fluor by Massey, Fluor agreed to indemnify Massey with respect to all such legal proceedings and assumed defense of the proceedings. Consistent with that agreement, in September 2011, Fluor submitted to the Court a number of surety bonds covering the full amount of the judgments against Fluor and Alpha Appalachia’s subsidiaries in the Alexander-Pederson-Helig cases.  On January 24, 2012, Fluor moved for a reduction in the surety bond amount pending appeal.  The Missouri Court of Appeals granted Fluor’s motion on March 1, 2012 and reduced the amount of the surety bonds required to be submitted by the defendants collectively to $150,000, which Fluor has submitted on behalf of itself and Alpha Appalachia’s subsidiaries. The Company has recorded an indemnity receivable of $118,500 and has accrued a liability of $118,500, included in prepaid expenses and other current assets and accrued expenses and other current liabilities, respectively, in the condensed consolidated balance sheet at March 31, 2012.

 

In connection with Fluor’s sale of the Prior Business to a group of purchasers (the “Rennert Entities”) in 1994, the Rennert Entities had agreed to indemnify Fluor and its affiliates for losses and liabilities arising from the Prior Business. In late 2010, the Rennert Entities settled with the plaintiffs in the Alexander-Pederson-Helig cases without indemnifying or obtaining a release for the benefit of Fluor and Alpha Appalachia’s subsidiaries.

 

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ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands except share and per share data)

 

In January 2012, the Rennert Entities filed suit against Fluor and two of Alpha Appalachia’s subsidiaries in the United States District Court for the Eastern District of Missouri seeking return of funds previously paid by the Rennert Entities to settle personal injury and property damage claims against Fluor and Alpha Appalachia’s subsidiaries allegedly arising out of the Prior Business and a declaration of non-liability for indemnification with respect to the Alexander-Pederson-Helig cases and any future claims or judgments against Fluor and Alpha Appalachia’s subsidiaries arising out of the Prior Business.  Also in January 2012, Fluor filed suit against the Rennert Entities in Missouri state court alleging various breach of contract and tort claims and seeking a declaratory judgment regarding the Rennert Entities’ indemnification obligations to Fluor and Alpha Appalachia’s subsidiaries against claims arising out of the Prior Business.  On February 21, 2012, Appalachia Holding and DRIH joined Fluor as plaintiffs in this suit. At the same time, Fluor, Appalachia Holding and DRIH moved to dismiss, or in the alternative, to stay the suit pending in federal court in Missouri in favor of the Missouri state court action.

 

Other Legal Proceedings

 

In addition to the matters disclosed above, the Company and its subsidiaries are involved in a number of legal proceedings incident to its normal business activities.  While the Company cannot predict the outcome of these proceedings, the Company does not believe that any liability arising from these matters individually or in the aggregate should have a material impact upon its consolidated cash flows, results of operations or financial condition.

 

(15)     Segment Information

 

The Company discloses information about operating segments based on the way that management organizes the enterprise for making operating decisions and assessing performance. The Company periodically evaluates its application of accounting guidance for reporting its segments.

 

The Company extracts, processes and markets steam and metallurgical coal from surface and deep mines for sale to electric utilities, steel and coke producers, and industrial customers. The Company operates only in the United States with mines in Northern and Central Appalachia and the Powder River Basin. The Company has two reportable segments: Western Coal Operations, which consists of two Powder River Basin surface mines as of March 31, 2012, and Eastern Coal Operations, which consists of 87 underground mines and 43 surface mines in Northern and Central Appalachia as of March 31, 2012, as well as road construction and coal brokerage activities.

 

In addition to the two reportable segments, the All Other category includes an idled underground mine in Illinois; expenses associated with certain closed mines; Dry Systems Technologies; revenues and royalties from the sale of coalbed methane and natural gas extraction; equipment sales and repair operations; terminal services; the leasing of mineral rights; general corporate overhead and corporate assets and liabilities. The Company evaluates the performance of its segments based on EBITDA, which the Company defines as net income (loss) plus interest expense, income tax expense, amortization of acquired intangibles, net, and depreciation, depletion and amortization, less interest income and income tax benefit.

 

Segment operating results and capital expenditures for the three months ended March 31, 2012 were as follows:

 

 

 

Eastern

 

Western

 

 

 

 

 

 

 

Coal

 

Coal

 

All

 

 

 

 

 

Operations

 

Operations

 

Other

 

Consolidated

 

Total revenues

 

$

1,756,508

 

$

154,737

 

$

23,403

 

$

1,934,648

 

Depreciation, depletion, and amortization

 

$

264,105

 

$

15,001

 

$

6,789

 

$

285,895

 

Amortization of acquired intangibles, net

 

$

(40,474

)

$

3,581

 

$

1,626

 

$

(35,267

)

EBITDA

 

$

216,718

 

$

19,948

 

$

(14,603

)

$

222,063

 

Capital expenditures

 

$

110,524

 

$

8,100

 

$

7,150

 

$

125,774

 

 

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ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands except share and per share data)

 

Segment operating results and capital expenditures for the three months ended March 31, 2011 were as follows:

 

 

 

Eastern

 

Western

 

 

 

 

 

 

 

Coal

 

Coal

 

All

 

 

 

 

 

Operations

 

Operations

 

Other

 

Consolidated

 

Total revenues

 

$

965,063

 

$

150,535

 

$

15,140

 

$

1,130,738

 

Depreciation, depletion, and amortization

 

$

69,658

 

$

15,075

 

$

3,905

 

$

88,638

 

Amortization of acquired intangibles, net

 

$

14,931

 

$

11,052

 

$

 

$

25,983

 

EBITDA

 

$

196,622

 

$

22,703

 

$

(26,324

)

$

193,001

 

Capital expenditures

 

$

23,514

 

$

9,723

 

$

23,864

 

$

57,101

 

 

The following table presents a reconciliation of EBITDA to net income (loss):

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2012

 

2011

 

EBITDA

 

$

222,063

 

$

193,001

 

Interest expense

 

(45,434

)

(15,610

)

Interest income

 

1,097

 

1,045

 

Income tax (expense) benefit

 

43,785

 

(13,967

)

Depreciation, depletion and amortization

 

(285,895

)

(88,638

)

Amortization of acquired intangibles, net

 

35,267

 

(25,983

)

Net income (loss)

 

$

(29,117

)

$

49,848

 

 

The following table presents total assets and goodwill as of March 31, 2012 and December 31, 2011:

 

 

 

Total Assets

 

Goodwill, net

 

 

 

March 31,

 

December 31,

 

March 31,

 

December 31,

 

 

 

2012

 

2011

 

2012

 

2011

 

Eastern Coal Operations

 

$

14,076,954

 

$

14,391,584

 

$

2,201,028

 

$

2,201,028

 

Western Coal Operations

 

652,411

 

657,419

 

53,308

 

53,308

 

All Other

 

1,411,801

 

1,464,701

 

5,912

 

5,912

 

Total

 

$

16,141,166

 

$

16,513,704

 

$

2,260,248

 

$

2,260,248

 

 

The Company markets produced, processed, and purchased coal to customers in the United States and in international markets. Export revenues totaled $767,707, or approximately 40%, of total revenues for the three months ended March 31, 2012. Export revenues totaled $498,994, or approximately 44%, of total revenues for the three months ended March 31, 2011.

 

(16)    Supplemental Guarantor and Non-Guarantor Financial Information

 

On June 1, 2011, the Company issued senior notes and may issue new registered debt securities (the “New Notes”) in the future that are and will be, respectively, fully and unconditionally guaranteed, jointly and severally, on a senior or subordinated unsecured basis by certain of the Company’s subsidiaries (the “Guarantor Subsidiaries”).

 

Presented below are condensed consolidating financial statements as of March 31, 2012 and December 31, 2011 and for the three months ended March 31, 2012 and 2011, respectively, based on the guarantor structure that was put in place in connection with the issuance of the Company’s senior notes, and would be in place in the event the Company issues New Notes in the future. The tables below refer to the Company as the issuer of its senior notes and of any New Notes that may be issued in the future. “Non-Guarantor Subsidiaries” refers, for the tables below, to ANR Receivables Funding LLC, Alpha Coal India Private Limited, Coalsolv, LLC, Gray Hawk Insurance Company and

 

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NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands except share and per share data)

 

Rockridge Coal Company. The Non-Guarantor Subsidiaries are not guarantors of the Company’s senior notes and would not be guarantors of any New Notes. Separate consolidated financial statements and other disclosures concerning the Guarantor Subsidiaries are not presented because management believes that such information would not be material to holders of any New Notes or related guarantees that may be issued by the Company.

 

Alpha Natural Resources, Inc. and Subsidiaries

Supplemental Condensed Consolidating Balance Sheet

March 31, 2012

 

 

 

Parent

 

Guarantor

 

Non-Guarantor

 

 

 

Total

 

 

 

(Issuer)

 

Subsidiaries

 

Subsidiaries

 

Eliminations

 

Consolidated

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

3,965

 

$

483,403

 

$

139

 

$

 

$

487,507

 

Trade accounts receivable, net

 

 

39,408

 

401,057

 

 

440,465

 

Inventories, net

 

 

551,934

 

 

 

551,934

 

Prepaid expenses and other current assets

 

 

737,344

 

2,798

 

 

740,142

 

Total current assets

 

3,965

 

1,812,089

 

403,994

 

 

2,220,048

 

 

 

 

 

 

 

 

 

 

 

 

 

Property, equipment and mine development costs, net

 

 

2,723,102

 

 

 

2,723,102

 

Owned and leased mineral rights and land, net