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Alpha Natural Resources 10-Q 2008 SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form 10-Q
(Mark
One)
For
the quarterly period ended September 30, 2008
OR
For
the transition period from
to
Commission
File No. 1-32423
ALPHA
NATURAL RESOURCES, INC.
(Exact
name of registrant as specified in its charter)
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. þ Yes ¨ No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act.
þ Large accelerated
filer o Accelerated
filer ¨ Non-accelerated
filer
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
¨ Yes þ No
Number
of shares of the registrant’s Common Stock, $0.01 par value, outstanding as of
October 31, 2008 – 70,495,814
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30,
2008
(In
thousands, except percentages and share data)
(1) Business
and Basis of Presentation
Organization
and Business
Alpha
Natural Resources, Inc. and its consolidated subsidiaries (the “Company”) are
primarily engaged in the business of extracting, processing and marketing coal
from deep and surface mines, located in the Central and Northern Appalachian
regions of the United States, for sale to utility and steel companies in the
United States and in international markets.
Basis
of Presentation
The
accompanying interim condensed consolidated financial statements have been
prepared in accordance with U.S. generally accepted accounting principles for
interim financial reporting. Accounting measurements at interim dates inherently
rely on estimates more than at year-end; however, in the opinion of management,
all adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Significant items subject to such
estimates and assumptions include inventories; mineral reserves; allowance for
non-recoupable advanced mining royalties; asset retirement obligations; employee
benefit liabilities; future cash flows associated with assets; useful lives for
depreciation, depletion, and amortization; workers’ compensation and black lung
claims; postretirement benefits other than pensions; income taxes; revenue
recognized using the percentage of completion method; and fair value of
financial instruments. Due to the subjective nature of these
estimates, actual results could differ from those estimates. Results
of operations for the nine months ended September 30, 2008 are not necessarily
indicative of the results to be expected for the year ending December 31,
2008. These financial statements should be read in conjunction with the audited
financial statements and related notes as of and for the year ended
December 31, 2007 included in the Company's Annual Report on Form 10-K, and
Quarterly Report on Form 10-Q for the quarters ended March 31, 2008 and June 30,
2008, filed with the Securities and Exchange Commission.
Reclassifications
Prior
period coal revenues and cost of coal sales have been adjusted to exclude
changes in the fair value of coal and diesel fuel derivative contracts to
conform to the current year presentation. In addition, prior period
trade accounts payable and accrued expenses and other current liabilities have
been reclassified to reflect the current year presentation. These
reclassification adjustments had no effect on previously reported income from
operations, net income, current liabilities, or total liabilities.
On
September 26, 2008, the Company sold its interests in Gallatin Materials, LLC
(“Gallatin”), a lime manufacturing business, to an unrelated third
party. The results of operations for the current and prior periods
have been reported as discontinued operations (See Footnote
16).
(2) New
Accounting Pronouncements
In
May 2008, the Financial Accounting Standards Boards ("FASB") affirmed the
consensus of FASB Staff Position ("FSP") Accounting Principle Board (“APB”)
14-1, Accounting for
Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement) (“FSP APB 14-1”), which applies to
all convertible debt instruments that have a ‘‘net settlement feature,” which
means that such convertible debt instruments, by their terms, may be settled
either wholly or partially in cash upon conversion. FSP APB 14-1 requires
issuers of convertible debt instruments that may be settled wholly or partially
in cash upon conversion to separately account for the liability and equity
components in a manner reflective of the issuers’ nonconvertible debt borrowing
rate. FSP APB 14-1 is effective for financial statements issued for fiscal years
beginning after December 15, 2008 and interim periods within those
fiscal years. Early adoption is not permitted and retroactive
application to all periods presented is required. The Company is
currently assessing the impact of adopting FSP APB 14-1 on its consolidated
financial statements.
In April
2008, the FASB issued FSP No. FAS 142-3, Determination of the Useful Life of
Intangible Assets, (“FSP FAS 142-3”). FSP FAS 142-3 amends the factors
that should be considered in developing renewal or extension assumptions used to
determine the useful
life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible
Assets. This FSP is effective for financial statements issued for fiscal
years beginning after December 15, 2008, and interim periods within those
fiscal years. The guidance contained in this FSP for determining the useful life
of a recognized intangible asset is applied prospectively to intangible assets
acquired after the effective date. Additional disclosures required in this FSP
are applied prospectively to all intangible assets recognized as of, and
subsequent to, the effective date. The Company does not expect the
adoption of this guidance to have a material effect on its consolidated
financial statements. In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities (“SFAS 161”), which amends SFAS No.
133, Accounting for Derivative
Instruments and Hedging Activities (“SFAS 133”). SFAS 161 is
intended to improve financial reporting about derivative instruments and hedging
activities by requiring enhanced disclosures to enable investors to better
understand their effects on an entity’s financial position, financial
performance, and cash flows. The new standard also improves transparency about
the location and amounts of derivative instruments in an entity’s financial
statements; how derivative instruments and related hedged items are accounted
for under SFAS 133; and how derivative instruments and related hedged items
affect its financial position, financial performance, and cash flows. It is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, with early application encouraged. The
Company is currently assessing the impact of adopting SFAS 161 on its
consolidated financial statements.
In
December 2007, the FASB issued SFAS 141(R), Business Combinations (“SFAS
141(R)”), and SFAS No. 160, Accounting and Reporting of
Noncontrolling Interest in Consolidated Financial Statements, an amendment of
ARB No. 51 (“SFAS 160”). SFAS 141(R) and SFAS 160
will significantly change the accounting for and reporting of business
combination transactions and noncontrolling (minority) interests in consolidated
financial statements. SFAS 141(R) retains the fundamental requirements in
SFAS 141 while
providing additional definitions, such as the definition of the acquirer in a
purchase and improvements in the application of how the acquisition method is
applied. SFAS 160 will change the accounting and reporting for minority
interests, which will be recharacterized as noncontrolling interests, and
classified as a component of equity. These Statements become simultaneously
effective January 1, 2009. Early adoption is not permitted. The Company is
currently evaluating the impact this guidance will have on its consolidated
financial statements.
(3) Earnings
Per Share
Basic
earnings per share are computed by dividing net income by the weighted average
number of shares of common stock outstanding during the period. Diluted earnings
per share are computed using the treasury method by dividing net income by the
weighted average number of shares of common stock and dilutive common stock
equivalents outstanding during the period. Common stock equivalents include the
number of shares issuable upon exercise of outstanding options less the number
of shares that could have been purchased with the proceeds from the exercise of
the options based on the average price of common stock during the period and the
number of shares of common stock from the dilutive effect of the 2.375%
convertible senior notes due 2015. The convertible senior notes due
2015 become dilutive for earnings per share calculations when the average price
for the quarter exceeds the conversion price of $54.66. The shares that would be
issued to settle the conversion spread are included in the diluted earnings per
share calculation when the conversion option is in the money and amounted to
1,878,735 and 979,484 shares for the third quarter and year to date dilutive
earnings per share calculations, respectively. Restricted shares
which have not vested at the end of the reporting period are excluded from the
calculation of basic earnings per share.
The
computations of basic and diluted net income per share are set forth
below:
(4) Inventories
Inventories
consisted of the following:
(5) Income
Taxes
The
income tax provision from continuing operations and discontinued operations for
the three and nine months ended September 30, 2008 are as follows:
A
reconciliation of the statutory federal income tax expense at 35% to actual
income tax expense on income from continuing operations is as
follows:
At
September 30, 2008, the Company has concluded that it is more likely than not
that deferred tax assets, net of valuation allowances, currently recorded will
be realized. The amount of the valuation allowance takes into consideration the
Alternative Minimum Tax ("AMT") system as required by SFAS No. 109, Accounting for Income Taxes
(“SFAS 109”). The Company monitors the valuation allowance each quarter and
makes adjustments to the allowance as appropriate. In the second
quarter, due to revised projections of taxable income, the Company changed its
judgment with respect to the realizability of deferred tax assets. The
Company concluded that it was no longer a perpetual AMT taxpayer, and that the
valuation allowance related to its perpetual AMT position should be
released. In accordance with FAS 109, the amount of valuation allowance
related to its AMT position that existed at the beginning of the year, and that
will be realized in future years, was recognized as a discrete item in the
second quarter. The amount of valuation allowance related to deferred tax
assets that would be realized through current year operations was recognized
through the calculation of the annual effective tax rate. In the third
quarter, the Company revised its estimate of the amount of the valuation
allowance that would be realized in future years, and therefore recognized an
additional tax benefit as a discrete item in the third
quarter. (6) Long-Term
Debt
Long-term
debt consisted of the following:
On
October 26, 2005, Alpha Natural Resources, LLC (“ANR LLC”), entered into a
senior secured credit facility with a group of lending institutions led by
Citicorp North America, Inc., as administrative agent (the “Credit Agreement”).
The Credit Agreement originally consisted of a $250,000 term loan facility and a
$275,000 revolving credit facility. The revolving credit facility includes
borrowing capacity available for letters of credit.
In March
2008, the Company and its subsidiary, ANR LLC, entered into two amendments to
the Credit Agreement. One of these amendments increased the amount
available under the revolving credit portion of the facility from $275,000 to
$375,000. The other amendment, among other things, removed Alpha Natural
Resources, Inc. from the application of most of the restrictive covenants and
added exceptions to certain other covenants relating to payment of dividends and
distributions.
On April
7, 2008, the Company completed a public offering of $287,500 aggregate principal
amount of 2.375% convertible senior notes due 2015. The notes bear
interest at a rate of 2.375% per annum, payable semi-annually in arrears on
April 15 and October 15 of each year, beginning on October 15, 2008. The Notes
will mature on April 15, 2015, unless previously repurchased by the Company or
converted. The Company used the net proceeds from this offering and
concurrent offering of common stock, in part, to repurchase $175,000 aggregate
principal amount of the 10% senior notes due 2012, co-issued by ANR LLC and
Alpha Natural Resources Capital Corp, resulting in a $14,702 loss on early
extinguishment of debt. The notes are convertible in certain circumstances
and in specified periods (as described in the Supplemental Indenture) at an
initial conversion rate of 18.2962 shares of common stock per $1,000 principal
amount of notes, subject to adjustment upon the occurrence of certain events set
forth in the Indenture. Upon conversion of notes, holders will receive cash up
to the principal amount of the notes to be converted, and any excess conversion
value will be delivered in cash, shares of common stock or a combination
thereof, at the Company's election.
Since the
Company retired its $175,000 10% senior notes and the 2.375% convertible senior
notes due 2015 issued by the Company are not guaranteed by the Company’s
subsidiaries, separate financial information with respect to the Company and its
subsidiaries is no longer required.
On July
1, 2008, the $287,500 aggregate principal amount of 2.375% convertible senior
notes due 2015 became convertible at the option of the holders and remained
convertible through September 30, 2008, the last trading day of the current
fiscal quarter. The notes were convertible because the Company’s
common stock exceeded the conversion threshold price of $71.06 per share (130%
of the
applicable conversion price of $54.66 per share) for at least twenty trading
days within the thirty consecutive trading days ending June 30,
2008. As a result of the notes becoming convertible in the second
quarter of 2008, the Company was required to fully amortize the deferred debt
issuance costs in the amount of $8,904 incurred with the issuance of the
notes. In addition at June 30, 2008, the Company reclassified from
long-term to short-term the $287,500 aggregate principal amount of 2.375%
convertible senior notes due 2015 that became convertible. As of
September 30, 2008, no holders had converted their notes. On October
1, 2008, the Notes were no longer convertible since the Company’s common
stock did not exceed the conversion threshold price of $71.06 per share (130% of
the applicable conversion price of $54.66 per share) for at least twenty trading
days within the thirty consecutive trading days ending September 30,
2008. As a result, at September 30, 2008, the Company classified the
$287,500 aggregate principal amount of 2.375% convertible senior notes due 2015
as long term.
On
October 17, 2008, the Company’s $287,500 aggregate principal amount of 2.375%
convertible senior notes due 2015 became convertible at the option of the
holders. The notes became convertible because the Company’s previously
announced merger between the Company and Cliffs Natural Resources Inc.
(“Cliffs”) (formerly Cleveland-Cliffs Inc.) may be consummated as early as 30
business days (i.e., potentially as early as December 2, 2008) if the
merger were to be approved at the respective special meetings of the
shareholders of the two companies (which are now scheduled to take place on
November 21, 2008) and all other conditions to the closing of the merger were to
be satisfied or waived.
The
Credit Agreement places restrictions on the ability of ANR LLC and its
subsidiaries to make distributions or loans to the Company. The net assets of
ANR LLC are restricted, except for allowable distributions for the payment of
income taxes, administrative expenses, payments on qualified debt, and, in
certain circumstances, dividends or repurchases of common stock of the
Company.
All of
the Company borrowings under the Credit Agreement are at a variable rate, so the
Company is exposed to the effect of rising interest rates. As of September 30,
2008, the Company has a $233,125 term loan outstanding with a variable interest
rate based upon the 3-month London Interbank Offered Rate (“LIBOR”) (3.81% at
September 30, 2008) plus the applicable margin (1.75% at September 30, 2008). To
reduce the Company's exposure to rising interest rates, effective May 22, 2006,
the Company entered into a pay-fixed, receive variable interest rate swap on the
notional amount of $233,125 for a period of approximately six and one-half
years. In effect, this swap converted the variable interest rates based on LIBOR
to a fixed interest rate of 5.59% plus the applicable margin defined in the debt
agreement for the remainder of our term loan. The Company accounts for the
interest rate swap as a cash flow hedge and changes in fair value of the swap
are recorded to other comprehensive income (loss). The critical terms of the
swap and the underlying debt instrument that it hedges coincide, resulting in no
hedge ineffectiveness being recognized in the income statement during the
quarter ended September 30, 2008. The fair value of the swap at
September 30, 2008 was $14,199 which was recorded in other liabilities in the
condensed consolidated balance sheet and the offsetting unrealized loss of
$10,883, net of tax benefit, was recorded in accumulated other comprehensive
loss. As interest expense is accrued on the debt obligation, amounts in
accumulated other comprehensive loss related to the derivative hedging
instrument are reclassified into earnings to obtain a net cost on the debt
obligation of 5.59% plus the applicable margin.
(7) Asset
Retirement Obligation
At
September 30, 2008 and December 31, 2007, the Company has recorded
asset retirement obligation accruals for mine reclamation and closure costs
totaling $93,667 and $91,199, respectively. The portion of the costs expected to
be incurred within a year in the amounts of $8,314 and $8,179 at
September 30, 2008 and December 31, 2007, respectively, are included
in accrued expenses and other current liabilities. These regulatory obligations
are secured by surety bonds in the amount of $149,174 at September 30, 2008
and $142,471 at December 31, 2007. Changes in the reclamation obligation
were as follows:
(8) Share-Based
Compensation Awards
Share-based
compensation expense measured in accordance with SFAS 123(R), Accounting for Stock-Based
Compensation, ("SFAS
123(R)"), totaled $1,298
and $2,683 for the three months ended September 30, 2008 and 2007,
respectively. Share-based compensation expense measured in accordance
with SFAS 123(R) totaled $15,873 and $6,747 for the nine months ended September
30, 2008 and 2007, respectively. Share-based
compensation expense for the nine months ended September 30, 2008 includes a
$4,463 charge relating to stock grants to employees on May 1,
2008.
As of
September 30, 2008 and 2007, approximately 48% and 60%, respectively, of
share-based compensation expense is reported as selling, general and
administrative expenses, included in the Corporate and Eliminations category for
segment reporting purposes (Note 14), and approximately 52% and 40%,
respectively, is reported as a component of cost of sales, included in the Coal
Operations and All Other segment for segment reporting purposes (Note
14). As of September 30, 2008 and 2007, approximately ($46) and $127,
respectively, of share-based compensation costs was capitalized as a component
of inventories. Under SFAS 123(R), the Company is required to report the
benefits of income tax deductions that exceed recognized compensation as cash
flow from financing activities. The excess tax benefits during the three months
ended September 30, 2008 and 2007 were $1,353 and $0, respectively, and $3,143
and $0 for the nine months ended September 30, 2008 and 2007,
respectively.
Stock
Options
Stock
option activity for the nine months ended September 30, 2008 is summarized
in the following table:
The
aggregate intrinsic value of options outstanding at September 30, 2008 was
$18,159 and the aggregate intrinsic value of exercisable options was $4,323. The
total intrinsic value of options exercised during the three months ended
September 30, 2008 and 2007 was $852 and $130, respectively, and for the nine
months ended September 30, 2008 and 2007 was $6,425 and $200,
respectively. Cash received from the exercise of stock options during
the three months ended September 30, 2008 and 2007 was $228 and $473,
respectively, and $3,356 and $594 during the nine months ended September 30,
2008 and 2007, respectively. As of September 30, 2008, $1,901 of
unrecognized compensation cost related to stock options is expected to be
recognized as expense over a weighted-average period of 1.28 years. The
weighted-average grant date fair value of options outstanding at September 30,
2008 and 2007 was $7.37 and $7.53, respectively.
Restricted
Stock Awards
Non-vested
share award activity for the nine months ended September 30, 2008 is
summarized in the following table:
On May 1,
2008, the Company granted 25 shares of stock to all employees, except executive
officers, at a grant date value of $48.59 per share subject to a ninety-day
holding period before the shares could be sold. The fair value of non-vested
restricted share awards is based on the closing stock price on the date of
grant, and, for purposes of expense recognition, the total number of awards
expected
to vest is adjusted for estimated forfeitures. As of September 30, 2008,
there was $9,370 of unamortized compensation cost related to non-vested shares,
which is expected to be recognized as expense over a weighted-average period of
1.83 years.
Performance
Share Awards
2008
Granted Awards
The
Company granted 165,045 performance share awards for the nine months ended
September 30, 2008. Recipients of these awards can receive shares of
the Company's common stock at the end of a performance period which ends on
December 31, 2010, based on the Company's actual performance against
pre-established operating income goals, strategic goals, and total shareholder
return goals. In order to receive the shares, the recipient must also be
employed by the Company on the vesting date. The performance share awards
represent the number of shares of common stock to be awarded based on the
achievement of targeted performance and may range from 0 percent to 150 percent
of the targeted amount. The grant date fair value of the awards related to
operating income targets is based on the closing price of the Company's common
stock on the New York Stock Exchange on the grant date of the award and is being
amortized over the performance period. The awards related to strategic goals do
not meet the criteria for grant date pursuant to SFAS No. 123(R), Share-based
Payments (as amended) (“SFAS 123”). The fair value of the awards related to
total shareholder return targets is based upon a Monte Carlo simulation and is
being amortized over the performance period. For executive officers of the
Company to receive these performance share awards, the Company must achieve a
pre-determined EBITDA level during the performance period in addition to the
criteria set for all other employees participating in the plan. The
Company reassesses at each reporting date whether achievement of each of the
performance conditions is probable, as well as estimated forfeitures, and
adjusts the accruals of compensation expense as appropriate. At September 30,
2008, the Company assessed the operating income and total shareholder return
targets as probable of achievement. As of September 30, 2008, there was $2,317
of unamortized compensation cost related to the performance share awards for
2008. This unamortized compensation cost is expected to be recognized
over the remaining periods up to December 31, 2010.
(9)
Derivative Financial Instruments
Derivative
financial instruments are accounted for in accordance with SFAS 133, Accounting for Derivative Instruments and Hedging
Activities ("SFAS 133"), which requires all derivative financial
instruments to be reported on the balance sheet at fair value. Changes in fair
value are recognized either in earnings or equity, depending on whether the
transaction qualifies for hedge accounting and if so, the nature of the
underlying exposure being hedged and how effective the derivatives are at
offsetting price movements in the underlying exposure.
The
Company accounts for certain forward purchase and forward sale coal contracts
that do not qualify under the “normal purchase and normal sale” exception of
SFAS 133 as derivatives and records these contracts as assets or liabilities at
fair value. Changes in fair value of these coal derivative contracts have been
recorded as an (increase) decrease in fair value of certain derivative
instruments, net, and included as a component of costs and expenses in the
consolidated statements of income. At September 30, 2008, the Company
had unrealized gains (losses) on open purchase and open sales contracts of
$34,015 and ($29,071), respectively. The unrealized gains of $34,015 in open
purchases are recorded in prepaid expenses and other current
assets. The unrealized losses on open sales contracts are
recorded in accrued expenses and other current liabilities and other liabilities
in the amount of $25,800 and $3,271, respectively.
The
Company has utilized interest rate swap agreements to modify the interest
characteristics of a portion of the Company's outstanding debt. The swap
agreements essentially convert variable-rate debt to fixed-rate debt and have
been designated as cash flow hedges. Changes in the fair value of
interest rate swaps designated as hedging instruments of the variability of cash
flows associated with floating rate and long-term debt obligations are reported
in accumulated other comprehensive loss. These amounts are
subsequently reclassified into interest expense in the same period in which the
related floating rate debt obligation affects earnings.
The
Company is also exposed to the risk of fluctuations in cash flows related to its
purchase of diesel fuel. The Company has entered into diesel fuel swap
agreements and diesel put options to reduce the volatility in the price of
diesel fuel for its operations. The diesel fuel swap agreements and put options
are not designated as hedges for accounting purposes and therefore the changes
in fair value of these diesel fuel derivative instrument contracts have been
recorded as an (increase) decrease in fair value of certain derivative
instruments, net, and included as a component of costs and expenses in the
consolidated statements of income. These diesel fuel swaps and put
options use the NYMEX New York Harbor No. 2 Heating Oil (“No. 2 heating oil”)
futures contracts as the underlying
commodity reference price. Any unrealized loss is recorded in other current
liabilities and other liabilities and any unrealized gain is recorded in other
current assets and other assets.
As of
September 30, 2008, approximately 4,908 gallons or 75% of the Company's budgeted
2008 remaining diesel fuel usage has been capped with the swap agreements in
which the Company has agreed to pay a fixed price and receive a floating price
per gallon of No. 2 heating oil. The fixed prices for the notional
quantity of 4,908 gallons range from $2.39 to $3.93 per gallon for the last
three months of 2008. In addition, as of September 30, 2008, the
Company has in place swap agreements with respect to 22,700 gallons, at fixed
prices ranging from $2.74 to $4.10 per gallon, which mature in 2009 to
2011. At September 30, 2008, the fair value of these diesel fuel swap
agreements is a net liability of $7,108, which is recorded in prepaid expenses
and other current assets in the amount of $1,226, other assets in the
amount of $574, accrued expenses and other current liabilities in the
amount of $4947, and in other liabilities in the amount of
$3,961.
The
Company has also employed an options strategy – both purchasing and selling put
options – to protect cash flows in the event diesel prices decline. As of
September 30, 2008, the Company had purchased put options for 2,813 gallons at
strike prices ranging from $2.25 to $3.25 per gallon for the last three months
of 2008, and 2,646 gallons for the first six months of 2009 at a strike price of
$3.50 per gallon. In the event that No. 2 heating oil prices decline below the
strike price, the Company can exercise the put options and sell the 5,459
gallons at the strike price, therefore reducing the negative impact of any of
the swap agreements that have settlement prices above market. As of September
30, 2008, the Company had sold put options for 2,646 gallons for the first six
months of 2009 at a strike price of $3.00 per gallon. This was part of a put
spread strategy that effectively provided protection for market prices between
$3.00 and $3.50. In the event that No.2 heating oil prices decline below the
$3.00 strike price, then the sold put options will offset the purchased put
options with no net benefit or cost. At September 30, 2008, the fair
value of all diesel fuel put options is a net asset of $1,440 of which $2,515 is
recorded in prepaid expenses and other current assets and $1,075 is recorded in
accrued expenses and other current liabilities.
(10) Fair
Value Measurements
The
Company adopted SFAS No. 157, Fair Value Measurements
(“SFAS 157”) on January 1, 2008.
This statement defines fair value, establishes a framework for measuring fair
value and expands disclosures about fair value measurements. Additionally, on
January 1, 2008, the Company elected the partial adoption of SFAS 157 under
the provisions of FSP FAS 157-2, which amends SFAS 157 to
allow an entity to delay the application of
this statement until January 1, 2009 for certain
non-financial assets and liabilities. The adoption of SFAS 157 did not have
a material impact on our consolidated financial statements.
The
Company adopted SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities-Including an Amendment of FASB Statement
No. 115 (“SFAS 159”), on January 1, 2008. This standard permits
entities to choose to measure many financial instruments and certain other items
at fair value. The adoption of SFAS 159 did not impact our consolidated
financial statements, as the Company elected not to measure any additional
financial assets or liabilities at fair value other than those which were
recorded at fair value prior to adoption.
SFAS 157
clarifies that fair value is an exit price, representing the amount that would
be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants. As such, fair value is a
market-based measurement that should be determined based on assumptions that
market participants would use in pricing an asset and liability. As a
basis for considering such assumptions, SFAS 157 establishes a fair value
hierarchy that prioritizes the inputs used to measure fair value. The
hierarchy gives the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (level 1 measurement) and the lowest
priority to unobservable inputs (level 3 measurements). The three
levels of the fair value hierarchy defined by SFAS 157 are as
follows:
The
following table sets forth by level within the fair value hierarchy the
company's financial assets that were accounted for at fair value on a recurring
basis as of September 30, 2008. As required by SFAS 157, 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 valuation of fair value assets
and liabilities and their placement within the fair value hierarchy
levels.
The
following methods and assumptions were used to estimate the fair values of the
assets and liabilities in the tables above.
Level 2
Fair Value Measurements
Forward Coal Purchases and
Sales — The fair value of the forward coal purchases and sales
contracts were estimated using discounted cash flow calculations based upon
forward commodity price curves. The curves were obtained from
independent pricing services reflecting broker market quotes.
Diesel Fuel
Derivatives — Since the Company’s diesel fuel derivative instruments
are not traded on a market exchange, the fair values are determined using
valuation models which include assumptions about commodity prices based on those
observed in the underlying markets.
Interest Rate Swaps —
The fair value 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.
(11) Postretirement
Benefits Other Than Pensions
The
following table details the components of the net periodic benefit cost for the
Company’s retiree medical plan (the “Plan”):
The
Company provides current and certain retired employees and their dependents
postretirement medical benefits by accruing the costs of such benefits over the
service lives of employees. Premiums are paid by the Company based on
years of service, with the difference contributed by the employee, if any.
Employer contributions for postretirement medical benefits paid for the three
months ended September 30, 2008 and 2007 were $95 and $30, respectively, and for
the nine months ended September 30, 2008 and 2007 were $177 and $95,
respectively. Employee contributions are insignificant and the Plan is
unfunded.
Two of
the Company’s subsidiaries are required to make contributions to the 1974 UMWA
Pension Plan and Trust and/or the 1993 UMWA Benefit Plan. The
contributions made to these plans for the three months ended September 30, 2008
and 2007 were $551 and $345, respectively, and for the nine months ended
September 30, 2008 and 2007 were $1,714 and $1,080, respectively.
(12) Comprehensive
Income
Total
comprehensive income is as follows for the three months and nine months ended
September 30, 2008:
The
following table summarizes the components of accumulated other comprehensive
loss at September 30, 2008:
(13) Commitments
and Contingencies
(a)
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 and performance or surety bonds. No liabilities related to these
arrangements are reflected in the Company's condensed consolidated balance
sheets. Management does not expect any material losses to result from these
guarantees or off-balance sheet financial instruments. The amount of bank
letters of credit, excluding letters of credit issued under our Credit
Agreement, outstanding as of September 30, 2008 was $85,175. The amount of
surety bonds outstanding at September 30, 2008 related to the Company's
reclamation obligations is presented in Note 7 to the condensed consolidated
financial statements. The Company has provided guarantees for equipment
financing obtained by certain of its contract mining operators totaling
approximately $424 as of September 30, 2008. The estimated fair value of these
guarantees is not significant.
(b)
Discontinued Operations
On
September 26, 2008, as part of the sale of the Company's interest in Gallatin to
an unrelated third party, an escrow balance of $4,500 was established to
indemnify and guarantee the buyer against breaches of representations and
warranties in the sale agreement and contingencies that may have existed at
closing and materialize within one year from the sale date. The
Company recorded a liability of $650 as the fair value of this
guarantee.
(c)
Litigation
The
Company is a party to a number of legal proceedings incident to our normal
business activities. While we cannot predict the outcome of these proceedings,
we do not believe that any liability arising from these matters individually or
in the aggregate should have a material impact upon our consolidated cash flows,
results of operations or financial condition.
Nicewonder
Litigation
In
December 2004, prior to our Nicewonder Acquisition in October 2005, the
Affiliated Construction Trades Foundation brought an action against the West
Virginia Department of Transportation, Division of Highways (“WVDOH”) and
Nicewonder Contracting, Inc. ("NCI"), which became our wholly-owned indirect
subsidiary after 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. The plaintiff also
sought an injunction prohibiting performance of the contract but has not sought
monetary damages.
On
September 5, 2007, the Court ruled that WVDOH and the Federal Highway
Administration (which is now a party to the suit) could not, under the
circumstances of this case, enter into a contract not requiring the contractor
to pay the prevailing wages as required by the Davis-Bacon Act. Although the
Court has not yet decided what remedy it will impose, the Company expects a
ruling before the end of the first quarter of 2009. The Company
anticipates that the most likely remedy is a directive that the contract be
renegotiated for such payment. If that renegotiation occurs, WVDOH has committed
to agree, and NCI has a contractual right to insist, that additional costs
resulting from the order will be reimbursed by WVDOH and as such neither NCI nor
the Company believe, at this time, that they have any monetary expense from this
ruling. As of September 30, 2008, the Company had a $7,550 long-term receivable
for the recovery of these costs from WVDOH and a $7,550 long-term liability for
the obligations under the ruling.
(14) Segment
Information
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 the Central Appalachian and Northern Appalachian regions. The Company
has one reportable segment: Coal Operations, which as of September 30, 2008,
consisted of 35 underground mines and 27 surface mines located in Central
Appalachia and Northern Appalachia. Coal Operations also includes the Company's
coal sales function, which markets the Company's Appalachian coal to domestic
and international customers. The All Other category includes the Company's
equipment sales and repair operations, as well as other ancillary business
activities, including terminal services, coal and environmental analysis
services, and leasing of mineral rights. In addition, the All Other category
includes the operations of the Company's road construction businesses. The
Corporate and Eliminations category includes general corporate overhead and the
elimination of intercompany transactions. The revenue elimination amount
represents inter-segment revenues. The Company evaluates the performance of its
segment based on EBITDA from continuing operations which the Company defines as
income from continuing operations plus interest expense, income tax expense, and
depreciation, depletion and amortization, less interest income.
Operating
segment results and capital expenditures for the three months ended
September 30, 2008 and segment assets as of September 30, 2008 were as
follows:
Operating
segment results and capital expenditures for the nine months ended
September 30, 2008 and segment assets as of September 30, 2008 were as
follows:
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