XNYS:ANR Alpha Natural Resources Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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 June 30, 2012
OR
¨
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   ¨ 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   ¨ 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). ¨ Yes   x   No

Number of shares of the registrant's Common Stock, $0.01 par value, outstanding as of July 31, 2012 - 220,353,763



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
June 30,
 
Six Months Ended
June 30,
 
2012
 
2011
 
2012
 
2011
Revenues:
 
 
 
 
 
 
 
Coal revenues
$
1,565,281

 
$
1,410,892

 
$
3,204,839

 
$
2,397,870

Freight and handling revenues
233,357

 
150,871

 
442,707

 
266,926

Other revenues
49,471

 
36,275

 
135,176

 
63,980

Total revenues
1,848,109

 
1,598,038

 
3,782,722

 
2,728,776

Costs and expenses:
 
 
 
 
 
 
 
Cost of coal sales (exclusive of items shown separately below)
1,406,394

 
1,106,999

 
2,821,790

 
1,841,984

Freight and handling costs
233,357

 
150,871

 
442,707

 
266,926

Other expenses
10,444

 
38,227

 
29,837

 
56,806

Depreciation, depletion and amortization
272,850

 
147,111

 
558,622

 
235,749

Amortization of acquired intangibles, net
(17,286
)
 
(8,928
)
 
(52,798
)
 
17,055

Selling, general and administrative expenses (exclusive of depreciation, depletion and amortization shown separately above)
46,011

 
189,671

 
111,022

 
256,955

Asset impairment and restructuring
1,010,878

 

 
1,014,934

 

Goodwill impairment
1,525,332

 

 
1,525,332

 

Total costs and expenses
4,487,980

 
1,623,951

 
6,451,446

 
2,675,475

Income (loss) from operations
(2,639,871
)
 
(25,913
)
 
(2,668,724
)
 
53,301

Other income (expense):
 
 
 
 
 
 
 
Interest expense
(46,534
)
 
(29,968
)
 
(91,968
)
 
(45,578
)
Interest income
1,324

 
1,012

 
2,421

 
2,057

Loss on early extinguishment of debt

 
(4,556
)
 

 
(4,556
)
Miscellaneous expense, net
627

 
859

 
1,266

 
25

Total other expense, net
(44,583
)
 
(32,653
)
 
(88,281
)
 
(48,052
)
Income (loss) before income taxes
(2,684,454
)
 
(58,566
)
 
(2,757,005
)
 
5,249

Income tax (expense) benefit
449,798

 
8,498

 
493,583

 
(5,469
)
Net loss
$
(2,234,656
)
 
$
(50,068
)
 
$
(2,263,422
)
 
$
(220
)
Basic loss per common share
$
(10.14
)
 
$
(0.32
)
 
$
(10.29
)
 
$

Diluted loss per common share
$
(10.14
)
 
$
(0.32
)
 
$
(10.29
)
 
$

Weighted average shares - basic
220,295,415

 
155,238,304

 
220,040,698

 
137,723,715

Weighted average shares - diluted
220,295,415

 
155,238,304

 
220,040,698

 
137,723,715


See accompanying Notes to Condensed Consolidated Financial Statements.


1


ALPHA NATURAL RESOURCES INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
(Amounts in thousands)

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2012
 
2011
 
2012
 
2011
Net loss
$
(2,234,656
)
 
$
(50,068
)
 
$
(2,263,422
)
 
$
(220
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Adjustments to and amortization of employee benefit costs, net of income tax of $11,246 and $6,028, and $10,175 and $6,141 for the three and six months ended June 30, 2012 and 2011, respectively
(18,798
)
 
(9,961
)
 
(17,009
)
 
(10,136
)
Change in fair value of cash flow hedges, net of income tax of $14,052 and $7,550, and $4,380 and $(3,049) for the three and six months ended June 30, 2012 and 2011, respectively
(23,488
)
 
(11,256
)
 
(7,338
)
 
5,032

Unrealized gains (losses) on available-for-sale marketable securities:
 
 
 
 
 
 
 
Unrealized holding gains (losses) arising during the period, net of income tax of $(12) and $(124), and $35 and $(77) for the three and six months ended June 30, 2012 and 2011, respectively
20

 
200

 
(57
)
 
126

Less: reclassification adjustment for (gains) losses included in net income (loss), net of tax of $1 and $0, and $3 and $(1) for the three and six months ended June 30, 2012 and 2011, respectively
(4
)
 

 
(7
)
 
3

Total other comprehensive loss, net of tax
(42,270
)
 
(21,017
)
 
(24,411
)
 
(4,975
)
Total comprehensive loss
$
(2,276,926
)
 
$
(71,085
)
 
$
(2,287,833
)
 
$
(5,195
)

See accompanying Notes to Condensed Consolidated Financial Statements.

2


ALPHA NATURAL RESOURCES INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Amounts in thousands, except share and per share data)
 
June 30,
2012
 
December 31,
2011
 
(Unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
252,192

 
$
585,882

Trade accounts receivable, net
534,562

 
641,975

Inventories, net
503,565

 
492,022

Prepaid expenses and other current assets
675,745

 
828,196

Total current assets
1,966,064

 
2,548,075

Property, equipment and mine development costs (net of accumulated depreciation and amortization of $1,663,642 and $1,398,569, respectively)
2,394,587

 
2,812,069

Owned and leased mineral rights and land (net of accumulated depletion of $695,316 and $590,575, respectively)
7,483,048

 
8,284,328

Goodwill, net
755,859

 
2,281,191

Other acquired intangibles (net of accumulated amortization of $605,271 and $551,584, respectively)
284,195

 
347,889

Other non-current assets
456,938

 
320,493

Total assets
$
13,340,691

 
$
16,594,045

Liabilities and Stockholders' Equity
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
68,720

 
$
46,029

Trade accounts payable
364,223

 
504,059

Accrued expenses and other current liabilities
1,035,581

 
1,359,160

Total current liabilities
1,468,524

 
1,909,248

Long-term debt
2,919,529

 
2,922,052

Pension and postretirement medical benefit obligations
1,275,310

 
1,214,724

Asset retirement obligations
863,585

 
743,613

Deferred income taxes
953,698

 
1,507,923

Other non-current liabilities
785,250

 
921,441

Total liabilities
8,265,896

 
9,219,001

 
 
 
 
Commitments and Contingencies (Note 16)

 

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, 231.9 million issued and 220.4 million outstanding at June 30, 2012 and 231.0 million issued and 219.8 million outstanding at December 31, 2011
2,319

 
2,310

Additional paid-in capital
8,067,891

 
8,073,512

Accumulated other comprehensive income (loss)
(226,241
)
 
(201,830
)
Treasury stock, at cost: 11.5 million and 11.2 million shares at June 30, 2012 and December 31, 2011, respectively
(269,599
)
 
(262,795
)
Accumulated deficit
(2,499,575
)
 
(236,153
)
Total stockholders' equity
5,074,795

 
7,375,044

Total liabilities and stockholders' equity
$
13,340,691

 
$
16,594,045


See accompanying Notes to Condensed Consolidated Financial Statements.

3


ALPHA NATURAL RESOURCES INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(Amounts in thousands)
 
Six Months Ended
June 30,
 
2012
 
2011
Operating activities:
 
 
 
Net loss
$
(2,263,422
)
 
$
(220
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation, depletion, accretion and amortization
612,019

 
257,806

Amortization of acquired intangibles, net
(52,798
)
 
17,055

Mark-to-market adjustments for derivatives
(43,641
)
 
4,276

Stock-based compensation
(2,464
)
 
47,009

Goodwill impairment
1,525,332

 

Asset impairment and restructuring
1,014,934

 

Employee benefit plans, net
36,916

 
24,993

Loss on early extinguishment of debt

 
4,556

Deferred income taxes
(496,054
)
 
2,893

Other, net
2,786

 
(12,070
)
Changes in operating assets and liabilities:
 
 
 
Trade accounts receivable, net
107,413

 
(194,931
)
Inventories, net
(11,544
)
 
61,740

Prepaid expenses and other current assets
169,277

 
5,046

Other non-current assets
520

 
(15,230
)
Trade accounts payable
(126,389
)
 
88,141

Accrued expenses and other current liabilities
(275,141
)
 
(40,857
)
Pension and postretirement medical benefit obligations
(24,220
)
 
(25,086
)
Asset retirement obligations
(22,287
)
 
(4,833
)
Other non-current liabilities
(15,888
)
 
74,586

Net cash provided by operating activities
135,349

 
294,874

Investing activities:
 
 
 
Cash paid for Massey Aquisition, net of cash acquired

 
(711,387
)
Capital expenditures
(245,244
)
 
(172,668
)
Acquisition of mineral rights under federal lease
(36,108
)
 
(36,108
)
Purchase of equity-method investments
(10,100
)
 
(4,000
)
Purchases of marketable securities
(261,990
)
 
(298,015
)
Sales of marketable securities
109,288

 
200,173

Other, net
5,973

 
(3,185
)
Net cash used in investing activities
(438,181
)
 
(1,025,190
)
Financing activities:
 
 
 
Principal repayments of long-term debt
(15,000
)
 
(737,610
)
Principal repayments of capital lease obligations
(1,767
)
 

Payment to redemption trust

 
(264,017
)
Proceeds from borrowings on long-term debt

 
2,100,000

Debt issuance costs
(6,436
)
 
(84,041
)
Excess tax benefit from stock-based awards

 
4,777

Common stock repurchases
(6,804
)
 
(32,310
)
Proceeds from exercise of stock options
149

 
3,030

Other
(1,000
)
 

Net cash (used in) provided by financing activities
(30,858
)
 
989,829

Net (decrease) increase in cash and cash equivalents
(333,690
)
 
259,513

Cash and cash equivalents at beginning of period
585,882

 
554,772

Cash and cash equivalents at end of period
$
252,192

 
$
814,285

Supplemental cash flow information:
 
 
 
Cash paid for interest
$
73,349

 
$
23,817

Cash paid for income taxes
$
1,834

 
$
16,947

Cash received for income tax refunds
$
36,264

 
$

Non-cash investing and financing activities:

 

Issuance of equity in connection with Massey Acquisition
$

 
$
5,673,092

Capital equipment leases
$
26,527

 
$

See accompanying Notes to Condensed Consolidated Financial Statements.

4


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” and “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 and six months ended June 30, 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 allocated to the net tangible and intangible assets of Massey as follows:

5

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
 
Final as of
June 30, 2012
 
 
 
 
 
 
Inventories
$
414,310

 
$

 
$
414,310

Other current assets
998,034

 
61,949

 
1,059,983

Property, equipment and mine development costs
1,705,531

 
(8,885
)
 
1,696,646

Owned and leased mineral rights and land
6,445,688

 
399

 
6,446,087

Goodwill
2,613,442

 
87,646

 
2,701,088

Other intangible assets
365,379

 
(5,889
)
 
359,490

Other non-current assets
90,788

 
2

 
90,790

Total assets
12,633,172

 
135,222

 
12,768,394

 
 
 
 
 
 
Total current liabilities
1,128,922

 
145,412

 
1,274,334

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

 
18,330

 
628,836

Deferred income taxes, including current portion
1,303,415

 
(23,145
)
 
1,280,270

Below-market contract obligations
707,969

 
(5,375
)
 
702,594

Other liabilities, including current portion of black lung and workers' compensation
365,866

 

 
365,866

Total liabilities
5,808,740

 
135,222

 
5,943,962

 
 
 
 
 
 
Equity component of convertible notes
110,375

 

 
110,375

 
 
 
 
 
 
Net tangible and intangible assets acquired
$
6,714,057

 
$

 
$
6,714,057


The Company finalized the purchase price allocation as of May 31, 2012.

Goodwill has been allocated to Eastern Coal Operations. The 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 six months ended June 30, 2012, the Company recorded adjustments to the provisional opening balance sheet and certain immaterial corrections as shown in the above table. Adjustments were made primarily to reflect corrections to asset retirement obligations, updated estimates of certain tax liabilities, updated estimates of certain property values, updated estimates of below market contract liabilities, updated estimates for litigation related matters and related insurance recoveries, 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 three months ended June 30, 2011, September 30, 2011, December 31, 2011, and March 31, 2012 for the changes to the provisional opening balance sheet of Massey and for certain other immaterial corrections and reclassifying adjustments. As a result, the Company recorded additional goodwill impairment of $57,012, increased its net loss before income taxes by $50,131, and increased its net loss by $53,152 for the year ended December 31, 2011 and decreased its net loss by $351 for the three months ended March 31, 2012.

The following unaudited pro forma information has been prepared for illustrative purposes only and assumes the Massey Acquisition occurred on January 1, 2011. The unaudited pro forma results have been prepared based on estimates and

6

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

assumptions which the Company believes are reasonable, however, they are not necessarily indicative of the consolidated results of operations had the Massey Acquisition occurred on January 1, 2011, or of future results of operations.

 
 
Three Months Ended
June 30, 2011
 
 
Six Months Ended
June 30, 2011
Total revenues:
 
 
 
 
 
As reported
 
$
1,598,038

 
 
$
2,728,776

Pro forma
 
$
2,201,057

 
 
$
4,263,191

 
 
 
 
 
 
Net loss:
 
 
 
 
 
As reported
 
$
(50,068
)
 
 
$
(220
)
Pro forma
 
$
(125,139
)
 
 
$
(104,323
)
Loss per common share-basic:
 
 
 
 
 
As reported
 
$
(0.32
)
 
 
$

Pro forma
 
$
(0.55
)
 
 
$
(0.46
)
Loss per common share-diluted:
 
 
 
 
 
As reported
 
$
(0.32
)
 
 
$

Pro forma
 
$
(0.55
)
 
 
$
(0.46
)

(3)    Asset Impairment and Restructuring

On June 8, 2012, the Company announced plans to curtail coal mining operations in its Eastern operations as continued market pressures and new regulations on coal-fired power plants make production from certain mines in those areas currently uneconomic. This announcement was in addition to a prior announcement made in February 2012 regarding plans to curtail mining at certain mines in its Eastern operations.

U.S. GAAP requires that a long-lived asset group that is held and used should be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the long-lived asset group might not be recoverable. As a result of the June 8, 2012 announcement, the Company determined that indicators of impairment with respect to certain of its long-lived assets or asset groups exist. The Company's asset groups generally consist of the assets and applicable liabilities of one or more mines and preparation plants and associated coal reserves for which cash flows are largely independent of cash flows of other mines, preparation plants and associated reserves.

The Company determined that the undiscounted cash flows were less than the carrying value for certain asset groups. The Company estimated the fair value of these asset groups using a discounted cash flow analysis utilizing market-place participant assumptions. The carrying values of the asset groups exceeded their fair value and accordingly, the Company recorded asset impairment charges of $990,923, of which $985,346 was recorded for asset groups in our Eastern Coal Operations segment and $5,577 was recorded for an asset group in our Other segment. The asset impairment charges reduced the carrying values of mineral reserves $714,580, property, plant and equipment $271,827, and other acquired intangibles $4,516. The asset impairments established a new cost basis on which future depreciation, depletion and amortization will be based.

In connection with the plans to curtail mining operations and the associated company actions, the Company also recorded severance expenses of $15,436 ($11,380 in the three months ended June 30, 2012), $2,031 for professional fees and other expenses, and reserved $6,544 for advanced royalties and deposits which may not be recoverable.

(4)    Goodwill, Net

In connection with the testing of certain of our long-lived assets for impairment (see Note 3), the Company also performed a goodwill impairment test as of June 1, 2012 and recorded a goodwill impairment charge for the three months ended June 30,

7

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

2012 of $1,525,332 to reduce the carrying value of goodwill to its implied fair value for nine reporting units in its Eastern Coal Operations segment and one reporting unit in its Western Coal Operations segment.

The valuation methodology utilized to estimate the fair value of the reporting units was based on both a market and income approach and is within the range of fair values yielded under each approach. The income approach was based on a discounted cash flow methodology in which expected future net cash flows were discounted to present value, using an appropriate after-tax weighted average cost of capital. The market approach was based on a guideline company and similar transaction approach. Under the guideline company approach, certain operating metrics from a selected group of publicly traded guideline companies that have similar operations to the Company's reporting units was used to estimate the fair value of the reporting units. Under the similar transaction approach, recent merger and acquisition transactions for companies that have similar operations to the Company's reporting units were used to estimate the fair value of the Company's reporting units.
 
Balance as of December 31, 2011
 
 Acquisitions
 
 Impairments
 
Balance as of June 30, 2012
Goodwill:
 
 
 
 
 
 
 
Eastern operations
$
3,024,308

 
$

 
$

 
$
3,024,308

Western operations
53,308

 

 

 
53,308

All other
5,912

 

 

 
5,912

Total goodwill
$
3,083,528

 
$

 
$

 
$
3,083,528

 
 
 
 
 
 
 
 
Accumulated impairment losses:
 
 
 
 
 
 
 
Eastern operations
$
(802,337
)
 
$

 
$
(1,472,024
)
 
$
(2,274,361
)
Western operations

 

 
(53,308
)
 
(53,308
)
All other

 

 

 

Total accumulated impairment losses
$
(802,337
)
 
$

 
$
(1,525,332
)
 
$
(2,327,669
)
 
 
 
 
 
 
 
 
Goodwill, net:
 
 
 
 
 
 
 
Eastern operations
$
2,221,971

 
$

 
$
(1,472,024
)
 
$
749,947

Western operations
53,308

 

 
(53,308
)
 

All other
5,912

 

 

 
5,912

Total goodwill, net
$
2,281,191

 
$

 
$
(1,525,332
)
 
$
755,859

 
 
 
 
 
 
 
 
 
Balance as of December 31, 2010
 
 Acquisitions
 
 Impairments
 
Balance as of December 31, 2011
Goodwill:
 
 
 
 
 
 
 
Eastern operations
$
323,220

 
$
2,701,088

 
$

 
$
3,024,308

Western operations
53,308

 

 

 
53,308

All other
5,912

 

 

 
5,912

Total goodwill
$
382,440

 
$
2,701,088

 
$

 
$
3,083,528

 
 
 
 
 
 
 
 
Accumulated impairment losses:
 
 
 
 
 
 
 
Eastern operations
$

 
$

 
$
(802,337
)
 
$
(802,337
)
Western operations

 

 

 

All other

 

 

 

Total accumulated impairment losses
$

 
$

 
$
(802,337
)
 
$
(802,337
)
 
 
 
 
 
 
 
 
Goodwill, net:
 
 
 
 
 
 
 
Eastern operations
$
323,220

 
$
2,701,088

 
$
(802,337
)
 
$
2,221,971

Western operations
53,308

 

 

 
53,308

All other
5,912

 

 

 
5,912

Total goodwill, net
$
382,440

 
$
2,701,088

 
$
(802,337
)
 
$
2,281,191


8

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)


(5)    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 June 30, 2012, the 2.375% Convertible Notes and the 3.25% Convertible Notes were not convertible. In periods of net loss, the number of shares used to calculate diluted earnings per share is the same as basic earnings per share.

(6)    Inventories, net

Inventories, net consisted of the following:
 
June 30,
2012
 
December 31,
2011
Raw coal
$
72,597

 
$
52,215

Saleable coal
319,673

 
340,672

Materials, supplies and other, net
111,295

 
99,135

Total inventories, net
$
503,565

 
$
492,022


(7)    Marketable Securities

Short-term marketable securities, included in prepaid expenses and other current assets, consisted of the following:
 
June 30, 2012
 
 
 
Unrealized
 
 
 
Cost
 
Gain
 
Loss
 
Fair value
Short-term marketable securities:
 
 
 
 
 
 
 
U.S. treasury and agency securities (a)
$
36,778

 
$
49

 
$
(1
)
 
$
36,826

Corporate debt securities (a)
64,295
 
12
 
(21
)
 
64,286

Total short-term marketable securities
$
101,073

 
$
61

 
$
(22
)
 
$
101,112

 
 
 
 
 
 
 
 
 
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:

9

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

 
June 30, 2012
 
 
 
Unrealized
 
 
 
Cost
 
Gain
 
Loss
 
Fair value
Long-term marketable securities:
 
 
 
 
 
 
 
U.S. treasury and agency securities (a)
$
69,375

 
$
32

 
$
(29
)
 
$
69,378

Corporate debt securities (a)
80,439
 
52
 
(93
)
 
80,398

Mutual funds held in rabbi trust (b)
5,990
 
1,187
 
(1,045
)
 
6,132

Total long-term marketable securities
$
155,804

 
$
1,271

 
$
(1,167
)
 
$
155,908

 
 
 
 
 
 
 
 
 
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.

(8)    Property, Equipment and Mine Development Costs

Property, equipment and mine development costs consisted of the following:

 
June 30, 2012
 
December 31, 2011
Plant and mining equipment
$
3,551,591

 
$
3,684,154

Mine development
276,910

 
272,629

Coalbed methane equipment
16,024

 
15,210

Office equipment and software
64,669

 
56,547

Vehicles and other
6,605

 
6,605

Construction in progress
142,430

 
175,493

Total property, equipment and mine development costs
4,058,229

 
4,210,638

Less accumulated depreciation and amortization
1,663,642

 
1,398,569

Total property, equipment and mine development costs, net
$
2,394,587

 
$
2,812,069


For discussion regarding asset impairment charges recorded during the three and six months ended June 30, 2012, see Note 3.

(9)    Long-Term Debt

Long-term debt consisted of the following:

10

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

 
June 30,
2012
 
December 31, 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
570,000

 
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
47,405

 
23,554

Debt discount, net
(75,329
)
 
(86,646
)
Total long-term debt
2,988,249

 
2,968,081

Less current portion
68,720

 
46,029

Long-term debt, net of current portion
$
2,919,529

 
$
2,922,052


Credit Agreement Amendment
On June 26, 2012, the Company entered into an amendment (the “Credit Agreement Amendment”) to the Third Amended and Restated Credit Agreement, dated as of May 19, 2011, by and among the Company, the lenders party thereto, the issuing banks party thereto, Citicorp North America, Inc. as administrative and collateral agent and Citigroup Global Markets Inc. and Morgan Stanley Senior Funding, Inc. as joint lead arrangers and joint book managers (the “Credit Agreement”). The Credit Agreement Amendment, among other things:
1) replaces the maximum net leverage ratio covenant with a maximum net secured leverage ratio covenant through the end of 2014, increases the maximum net leverage ratio covenant for the first and second quarters of 2015, and decreases the minimum interest coverage ratio covenant from the fourth quarter of 2012 through the end of 2013;
2) adds a minimum liquidity covenant of $500,000 through the end of 2014;
3) increases the applicable margin for borrowings under the Credit Agreement if the Company’s consolidated net leverage ratio is greater than 3.75 to 1.00 for the preceding fiscal quarter;
4) modifies the requirements for incremental term loan or revolving credit facilities in excess of $500,000; and
5) provides additional real property collateral to secure obligations under the Credit Agreement and certain hedging and cash management obligations with lenders and affiliates of lenders.

Accounts Receivable Securitization Facility Amendment
On June 26, 2012, ANR Receivables Funding, LLC (“ANR Receivables”) and Alpha Natural Resources, LLC (“ANR LLC”), each of which are subsidiaries of the Company, entered into an amendment (the “A/R Facility Amendment”) to the Second Amended and Restated Receivables Purchase Agreement, dated as of October 19, 2011, by and among ANR Receivables, ANR LLC, certain financial institutions from time to time parties thereto as conduit purchasers, committed purchasers, purchaser agents and LC Participants (as defined therein) and PNC Bank, National Association, as administrator and LC Bank (as defined therein). The A/R Facility Amendment, among other things, replaces the maximum net leverage ratio termination event with a termination event based on a maximum net secured leverage ratio through the end of 2014 and increases the maximum net leverage ratio termination event for the first and second quarters of 2015.

(10)    Asset Retirement Obligations

As of June 30, 2012 and December 31, 2011, the Company had recorded asset retirement obligation accruals for mine reclamation and closure costs totaling $986,234 and $934,606 respectively. Changes in the asset retirement obligations for the six months ended June 30, 2012 were as follows:

11

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

Total asset retirement obligations at December 31, 2011
$
934,606

Accretion for the period
32,336

Sites added during the period
2,154

Revisions in estimated cash flows
39,425

Expenditures for the period
(22,287
)
Total asset retirement obligations at June 30, 2012
$
986,234

Less current portion
122,649

Long-term portion
$
863,585


(11)    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 loans 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.

The estimated fair values of long-term debt were as follows:
 
June 30, 2012
 
December 31, 2011
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
6.00% senior notes due 2019
$
800,000

 
$
712,000

 
$
800,000

 
$
780,000

6.25% senior notes due 2021
700,000

 
598,500

 
700,000

 
682,500

Term loan due 2016(1)
569,405

 
576,123

 
584,330

 
584,989

3.25% convertible senior notes due 2015(2)
629,311

 
570,035

 
624,946

 
596,955

2.375% convertible senior notes due 2015(3)
242,128

 
243,297

 
235,251

 
276,596

Total long-term debt
$
2,940,844

 
$
2,699,955

 
$
2,944,527

 
$
2,921,040

(1) 
Net of debt discount of $595 and $670 as of June 30, 2012 and December 31, 2011, respectively.
(2) 
Net of debt discount of $29,362 and $33,727 as of June 30, 2012 and December 31, 2011, respectively.
(3) 
Net of debt discount of $45,372 and $52,249 as of June 30, 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 June 30, 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.


12

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

 
June 30, 2012
 
Total Fair
Value
 
Quoted Prices
in Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Financial assets (liabilities):
 
 
 
 
 
 
 
U.S. treasury and agency securities
$
106,204

 
$
106,204

 
$

 
$

Mutual funds held in rabbi trust
$
6,132

 
$
6,132

 
$

 
$

Corporate debt securities
$
144,684

 
$

 
$
144,684

 
$

Forward coal sales
$
80,800

 
$

 
$
80,800

 
$

Forward coal purchases
$
(24,788
)
 
$

 
$
(24,788
)
 
$

Commodity swaps
$
(10,618
)
 
$

 
$
(10,618
)
 
$

Commodity options
$
176

 
$

 
$
176

 
$

Interest rate swaps
$
(4,445
)
 
$

 
$
(4,445
)
 
$


 
December 31, 2011
 
Total Fair
Value
 
Quoted Prices
in Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(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,

13

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

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.

(12)    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 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 7% of cost of coal sales for the six months ended June 30, 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 June 30, 2012, the Company had swap agreements outstanding to hedge the variable cash flows related to 60% and 39% of anticipated diesel fuel usage for the remaining six months of 2012 and calendar year 2013, respectively. The average fixed price per swap for diesel fuel hedges is $2.92 per gallon and $3.01 per gallon for the remaining six months of 2012 and calendar year 2013, respectively. As of June 30, 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 six 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 six months ended June 30, 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 June 30, 2012, the Company had swap agreements outstanding to hedge the variable cash flows related to approximately 80% and 76% of anticipated natural gas production for the remaining six 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

14

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

in current period earnings and losses.

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
cash flow hedging instruments
 
June 30,
2012
 
December 31,
2011
Commodity swaps (1)
 
$
11,301

 
$
16,532

Commodity options (1)
 
193

 
112

 
 
$
11,494

 
$
16,644

 
 
 
 
 
Derivatives not designated as
cash flow hedging instruments
 
June 30,
2012
 
December 31,
2011
Forward coal sales (2)
 
$
80,800

 
$
27,254

 
 


 


Total asset derivatives
 
$
92,294

 
$
43,898

(1) 
As of June 30, 2012, $7,402 is recorded in prepaid expenses and other current assets and $4,092 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 June 30, 2012, $73,889 is recorded in prepaid expenses and other current assets and $6,911 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.

 
 
Liability Derivatives
Derivatives designated as
cash flow hedging instruments
 
June 30,
2012
 
December 31,
2011
Commodity swaps (1)
 
$
21,273

 
$
12,874

 
 
 
 
 
Derivatives not designated as
cash flow hedging instruments
 
June 30,
2012
 
December 31,
2011
Forward coal purchases (2)
 
$
24,788

 
$
15,456

Commodity swaps (3)
 
646

 
436

Commodity options-coal (4)
 
17

 
17

Interest rate swaps (5)
 
4,445

 
10,097

Total
 
$
29,896

 
$
26,006

Total liability derivatives
 
$
51,169

 
$
38,880

(1) 
As of June 30, 2012, $14,057 is recorded in accrued expenses and other current liabilities and $7,216 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 June 30, 2012, $24,788 is recorded in accrued expenses and other current liabilities in the Condensed Consolidated Balance Sheets. As of December 31, 2011, $15,456 is recorded in accrued expenses and other current liabilities in the Condensed Consolidated Balance Sheets.
(3) 
As of June 30, 2012, $646 is recorded in accrued expenses and other current liabilities 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 June 30, 2012, $17 is recorded in accrued expenses and other 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

15

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

non-current liabilities in the Condensed Consolidated Balance Sheets.
(5) 
As of June 30, 2012, $4,445 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 six months ended June 30, 2012 and 2011 and their location within the Condensed Consolidated Financial Statements:

Derivatives designated as
cash flow hedging instruments
 
Gain (loss) reclassified
from accumulated other
comprehensive income (loss) to earnings
 
Gain (loss) recorded
in accumulated other
comprehensive income (loss)
 
2012
 
2011
 
2012
 
2011
Commodity swaps (1) (2) (3)
 
$
7,583

 
$
8,101

 
$
230

 
$
13,133

Commodity options (1) (2)
 

 

 
15

 

 
 
$
7,583

 
$
8,101

 
$
245

 
$
13,133

(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.

Derivatives not designated as
cash flow hedging instruments
 
Gain (loss) recorded in earnings
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2012
 
2011
 
2012
 
2011
Forward coal sales (1)
 
$
4,296

 
$
(5,169
)
 
$
53,555

 
$
(2,806
)
Forward coal purchases (1)
 
3,952

 
2,305

 
(9,332
)
 
422

Commodity swaps (2)
 
(626
)
 
(476
)
 
(251
)
 
(391
)
Commodity options-coal (1)
 

 

 

 
(65
)
Interest rate swap (3)
 
(9
)
 
(1,076
)
 
(330
)
 
(1,520
)
Freight swap (2)
 

 

 

 
84

 
 
$
7,613

 
$
(4,416
)
 
$
43,642

 
$
(4,276
)
(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 three months ended June 30, 2012, the Company reclassified $183 out of accumulated other comprehensive income (loss) because the underlying forecasted transaction was probable of not occurring. During the next twelve months, the Company expects to reclassify approximately $(2,003), net of tax, to earnings. The following table summarizes the changes to accumulated other comprehensive income (loss) related to hedging activities during the six months ended June 30, 2012 and 2011:
 
Six Months Ended
June 30,
 
2012
 
2011
Balance at beginning of period
$
1,333

 
$
8,443

Net change associated with current year hedging transactions
245

 
13,133

Net amounts reclassified to earnings
(7,583
)
 
(8,101
)
Balance at end of period
$
(6,005
)
 
$
13,475


(13)    Income Taxes

16

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)


Income tax expense (benefit) for the three and six months ended June 30, 2012 and 2011 was $(449,798), $(493,583), $(8,498) and $5,469, 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
June 30,
 
Six Months Ended
June 30,
 
2012
 
2011
 
2012
 
2011
Federal statutory income tax expense (benefit)
$
(939,559
)
 
$
(20,498
)
 
$
(964,952
)
 
$
1,837

Increases (reductions) in taxes due to:
 
 
 
 
 
 
 
Percentage depletion allowance
(14,184
)
 
10,038

 
(32,902
)
 
756

State taxes, net of federal tax impact
(19,033
)
 
(1,251
)
 
(21,730
)
 
(161
)
State statutory tax rate change, net of federal tax impact
(6,397
)
 
(9,325
)
 
(6,397
)
 
(9,325
)
State apportionment change, net of federal tax impact

 
8,343

 

 
8,343

Non-deductible acquisition costs

 
5,961

 

 
5,961

Non-deductible goodwill impairment
506,634

 

 
506,634

 

Change in valuation allowance
21,300

 

 
22,754

 

Other, net
1,441

 
(1,766
)
 
3,010

 
(1,942
)
Income tax expense (benefit)
$
(449,798
)
 
$
(8,498
)
 
$
(493,583
)
 
$
5,469


(14)    Employee Benefit Plans

The Company sponsors or participates in several benefit plans for its employees, including postretirement 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
June 30,
 
Six Months Ended
June 30,
 
2012
 
2011
 
2012
 
2011
Service Cost
$

 
$
1,095

 
$

 
$
1,095

Interest cost
8,333

 
4,932

 
16,196

 
8,083

Expected return on plan assets
(9,129
)
 
(5,918
)
 
(19,163
)
 
(10,003
)
Amortization of net actuarial gain (loss)
556

 
126

 
735

 
(134
)
Gain on settlement

 
(2,182
)
 

 
(2,182
)
Net periodic benefit credit
$
(240
)
 
$
(1,947
)
 
$
(2,232
)
 
$
(3,141
)

Components of Net Periodic Costs of Other Postretirement Benefit Plans

The components of net periodic benefit costs are as follows:


17

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
June 30,
 
Six Months Ended
June 30,
 
2012
 
2011
 
2012
 
2011
Service cost
$
3,484

 
$
920

 
$
8,084

 
$
5,208

Interest cost
10,275

 
10,864

 
22,175

 
19,657

Amortization of prior service cost (credit)
109

 
(238
)
 
209

 
(476
)
Amortization of net actuarial (gain) loss
(346
)
 
599

 
1,904

 
599

Net periodic benefit cost
$
13,522

 
$
12,145

 
$
32,372

 
$
24,988



Components of Net Periodic Costs of Black Lung

The components of net periodic benefit costs are as follows:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2012
 
2011
 
2012
 
2011
Service cost
$
2,447

 
$
754

 
$
3,954

 
$
1,161

Interest cost
1,051

 
989

 
2,844

 
1,580

Expected return on plan assets
(14
)
 
(7
)
 
(27
)
 
(13
)
Amortization of net actuarial loss
(318
)
 
209

 

 
418

Net periodic benefit cost
$
3,166

 
$
1,945

 
$
6,771

 
$
3,146


The Company participates in the United Mine Workers of America 1974 Pension Plan (the “Plan”). The Plan is a multi-employer pension plan and was considered “seriously endangered” by the Plan's certifying actuary for the plan year beginning July 1, 2011. A funding improvement plan was sent to all participating companies for adoption. The goals of the funding improvement plan are to improve the funded status and to avoid an accumulated funding deficiency for all plan years in the funding improvement period. The funding improvement plan provides increased contribution rates beginning in 2017. The Plan's funded status is reviewed annually by the certifying actuary.

(15)    Stock-Based Compensation Awards

On May 17, 2012, the Company's stockholders approved the 2012 Long-Term Incentive Plan (the “2012 LTIP”). The principal purpose of the 2012 LTIP is to advance the interests of the Company and its stockholders by providing incentives to certain eligible persons who contribute significantly to the strategic and long-term performance objectives and growth of the Company. The 2012 LTIP is currently authorized for the issuance of awards of up to 6,400,000 shares of common stock, and as of June 30, 2012, 5,731,804 shares of common stock were available for grant under the plan. The 2012 LTIP provides 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 purpose of the 2012 LTIP. Prior to the approval of the 2012 LTIP, the Company issued awards under the 2010 Long Term Incentive Plan (the “2010 LTIP”) and the Alpha Appalachia 2006 Stock and Incentive Compensation Plan (the “2006 SICP”). Upon approval of the 2012 LTIP, no additional awards were issued or are able to be issued under the 2010 LTIP or the 2006 SICP. The 2012 LTIP, the 2010 LTIP and the 2006 SICP are collectively referred to as the “Stock Plans.”

During the six months ended June 30, 2012, the Company awarded certain of its executives and key employees 1,212,895 time-based restricted share units and 1,149,392 performance-based restricted share units under the Stock Plans. 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 performance-based restricted share units awarded under the Stock Plans during the six months ended June 30, 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 June 30, 2012, the Company had three types of stock-based awards outstanding: restricted stock, restricted share units

18

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

(both time-based and performance-based), and stock options. As a result of assessing the pre-established performance criteria for the performance-based restricted share units awarded during 2010 and 2011, the cumulative stock-based compensation expense recognized during the related vesting periods was reversed during the three months ended June 30, 2012. Stock-based compensation expense (benefit) totaled $(9,478) and $36,061 for the three months ended June 30, 2012 and 2011, respectively. Stock-based compensation expense (benefit) totaled $(2,464) and $47,009, for the six months ended June 30, 2012 and 2011, respectively. For the three months ended June 30, 2012 and 2011, approximately 97% and 76%, respectively, of stock-based compensation expense (benefit) is reported as selling, general and administrative expenses. For the six months ended June 30, 2012 and 2011, approximately 70% and 74%, respectively, of stock-based compensation expense (benefit) is reported as selling, general and administrative expenses. Approximately 3% and 24% of stock-based compensation expense (benefit) was recorded as cost of coal sales for the three months ended June 30, 2012 and 2011, respectively. Approximately 30% and 26%, of stock-based compensation expense (benefit) was recorded as cost of coal sales for the six months ended June 30, 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 six months ended June 30, 2012 and 2011, the Company repurchased 355,517 and 193,948, respectively, of common shares from employees at an average price paid per share of $19.14 and $58.32, respectively.

(16)    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 a federal coal lease, which contains an estimated 130,200 tons of proven and probable coal reserves in the Powder River Basin. The original lease bid totaled $143,415, payable in annual installments. The annual installment due in 2012 is $28,683. 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. The Company does not expect any material losses to result from these guarantees or other off-balance sheet financial instruments.
 

19

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

Letters of Credit
 
The amount of outstanding bank letters of credit issued under the Company's accounts receivable securitization program as of June 30, 2012 was $160,298. As of June 30, 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 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, (i) the claimed amount may be exaggerated or unsupported; (ii) the claim may be based on a novel legal theory or involve a large number of parties; (iii) there may be uncertainty as to the likelihood of a class being certified or the ultimate size of the class; (iv) there may be uncertainty as to the outcome of pending appeals or motions; and/or (v) there may be significant factual issues to be resolved. As a result, the Company may be unable to estimate a range of possible loss for matters that have not yet progressed sufficiently through discovery and development of important factual information and legal issues. Other matters have progressed sufficiently that the Company is able to estimate a range of possible loss. Accordingly, for those legal proceedings and governmental examinations disclosed below as to which a loss is reasonably possible in future periods and for which the Company is able to estimate a range of possible loss, the current estimated range is up to $500,000 in excess of the accrued liability (if any) related to those matters. This aggregate range represents the Company's estimate of additional possible loss in excess of the accrued liability (if any) with respect to these matters and net of third party indemnification arrangements (if any, other than insurance) as described below related to those matters, based on currently available information, including any damages claimed by the plaintiffs, and is subject to significant judgment and a variety of assumptions and inherent uncertainties. For example, at the time of making an estimate, the Company may have only preliminary, incomplete, or inaccurate information about the facts underlying a claim; its assumptions about the future rulings of the court or other tribunal on significant issues, or the behavior and incentives of adverse parties, regulators, indemnitors or co-defendants, may prove to be wrong; and the outcomes it is attempting to predict are often not amenable to the use of statistical or other quantitative analytical tools. In addition, from time to time an outcome may occur that the Company had not accounted for in its estimate because it had considered that outcome to be remote. Furthermore, as noted above, the aggregate range does not include any matters for which the Company is not able to estimate a range of possible loss. Accordingly, the estimated aggregate range of possible loss does not represent the Company's maximum loss exposure. The legal proceedings and governmental examinations underlying the estimated range will change from time to time, and actual results may vary significantly from the current estimate. The Company intends to defend these legal proceedings vigorously, litigating or settling cases where in the Company's judgment it would be in the best interest of shareholders to do so.

For purposes of Financial Accounting Standards Board Accounting Standards Codification Topic 450 (“ASC 450”), an event is “reasonably possible” if “the chance of the future event or events occurring is more than remote but less than likely” and an event is “remote” if “the chance of the future event or events occurring is slight.” ASC 450 requires accrual for a liability when it is (a) “probable that one or more future events will occur confirming the fact of loss” and (b) “the amount of loss can be reasonably estimated.” If a range of loss is estimated, the best estimate within the range is required to be accrued. If no amount within the range is a better estimate, the minimum amount of the range is required to be accrued.
 
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 expense, net of expected insurance recoveries, associated with litigation-related reserves of $29,300 and $800 during the three months ended June 30, 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

20

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

(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 March 30, 2012, the court entered an order setting a July 13, 2012 deadline for the parties to serve their initial discovery disclosures. On July 9, 2012, the Court entered an order maintaining the stay of discovery until the earlier of either the completion of the United States' criminal investigation of the UBB explosion or January 15, 2013.
 
On April 25, 2011, the defendants moved to dismiss the operative complaint.  On March 27, 2012, the court denied the defendants' motion to dismiss. On July 16, 2012, the Company filed its answer to the consolidated amended class action complaint.
 
Niitsoo v. Alpha Natural Resources, Inc., et al.

On July 13, 2012, a purported class action brought on behalf of former Massey stockholders was filed in Boone County, West Virginia Circuit Court. The complaint asserts claims under the Securities Act of 1933, as amended, against the Company and certain of its officers and current and former directors, and generally asserts that the defendants made false statements about the Company's Emerald mine in its public filings associated with its acquisition of Massey. The plaintiff seeks, among other relief, an award of compensatory damages in an amount to be proven at trial.

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, 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 has 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. On April 20, 2012, the Company was authorized by regulatory authorities to close the UBB mine permanently, and on June 19, 2012, the sealing of the mine was completed.

On June 28, 2012, sixteen individuals who claim to have been injured in the UBB explosion filed a petition in the United

21

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

States District Court for the Southern District of West Virginia to amend or set aside the Agreement. On July 27, 2012, Alpha and Alpha Appalachia filed a motion to dismiss.

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 has 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. Twenty-seven of the twenty-nine settlements that have been reached with the families of the deceased miners have received court approval and the remaining two settlements have yet to be approved by the court. 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. The stay was lifted on July 6, 2012 but mediation was ordered to continue. On July 20, 2012, the stay was reinstated for discovery-related activities at the request of the United States Attorney and by agreement of the parties. This stay is expected to remain in effect until the criminal investigation is completed or until January 15, 2013, whichever is earlier.

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. 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. On May 14, 2012, the Court entered an order dismissing this case with prejudice.
  
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.

22

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

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. 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, which were consolidated for all purposes with In re Massey on February 9, 2011 and February 24, 2011, respectively.
 
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.
 
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 stays 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. On June 15, 2012, the Court held a hearing on Defendants' motion to extend the Stay Order and granted the motion, extending the stay of proceedings until the earlier of either the completion of the United States' criminal investigation or January 15, 2013.
 
West Virginia State Court Derivative Suit
 
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 ob