Annual Reports

 
Quarterly Reports

  • 10-Q (Nov 8, 2013)
  • 10-Q (Aug 8, 2013)
  • 10-Q (May 7, 2013)
  • 10-Q (Nov 8, 2012)
  • 10-Q (Aug 9, 2012)
  • 10-Q (May 10, 2012)

 
8-K

 
Other

Alpha Natural Resources 10-Q 2011

Table of Contents

 

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended September 30, 2011

 

OR

 

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

 

For the transition period from            to           

 

Commission File No. 001-32331

 

 

ALPHA NATURAL RESOURCES, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

42-1638663

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification Number)

 

 

 

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

 

24212

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code:

(276) 619-4410

 

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

 

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

 

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

 

x Large accelerated filer

 

o Accelerated filer

 

 

 

o Non-accelerated filer

 

o Smaller reporting company

 

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

 

Number of shares of the registrant’s Common Stock, $0.01 par value, outstanding as of October 31, 2011 — 219,806,137

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

PART I — FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 

 

 

Condensed Consolidated Statements of Operations (Unaudited)

 

3

 

Condensed Consolidated Balance Sheets (Unaudited)

 

4

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

5

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

6

Item 2.

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

 

46

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

 

67

Item 4.

Controls and Procedures

 

68

 

 

 

 

 

PART II — OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

69

Item 1A.

Risk Factors

 

69

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

70

Item 6.

Exhibits

 

70

 

2



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

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

Revenues:

 

 

 

 

 

 

 

 

 

Coal revenues

 

$

1,997,934

 

$

896,435

 

$

4,395,804

 

$

2,621,805

 

Freight and handling revenues

 

213,834

 

85,330

 

480,760

 

240,386

 

Other revenues

 

93,010

 

19,867

 

155,419

 

61,850

 

Total revenues

 

2,304,778

 

1,001,632

 

5,031,983

 

2,924,041

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

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

 

1,675,209

 

664,723

 

3,517,796

 

1,896,989

 

Freight and handling costs

 

213,834

 

85,330

 

480,760

 

240,386

 

Other expenses

 

58,063

 

11,967

 

118,792

 

36,094

 

Depreciation, depletion and amortization

 

242,699

 

94,003

 

475,762

 

280,228

 

Amortization of acquired intangibles, net

 

(73,274

)

52,398

 

(57,023

)

173,988

 

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

 

72,701

 

43,584

 

329,656

 

135,604

 

Total costs and expenses

 

2,189,232

 

952,005

 

4,865,743

 

2,763,289

 

Income from operations

 

115,546

 

49,627

 

166,240

 

160,752

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest expense

 

(49,148

)

(17,834

)

(94,726

)

(58,458

)

Interest income

 

931

 

967

 

2,988

 

2,495

 

Loss on early extinguishment of debt

 

(5,212

)

 

(9,768

)

(1,349

)

Miscellaneous income, net

 

309

 

1,261

 

333

 

783

 

Total other expense, net

 

(53,120

)

(15,606

)

(101,173

)

(56,529

)

Income from continuing operations before income taxes

 

62,426

 

34,021

 

65,067

 

104,223

 

Income tax benefit (expense)

 

4,002

 

(1,660

)

(2,178

)

(18,010

)

Income from continuing operations

 

66,428

 

32,361

 

62,889

 

86,213

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

Loss from discontinued operations before income taxes

 

 

(911

)

 

(2,574

)

Income tax benefit

 

 

424

 

 

1,073

 

Loss from discontinued operations

 

 

(487

)

 

(1,501

)

Net income

 

$

66,428

 

$

31,874

 

$

62,889

 

$

84,712

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.30

 

$

0.27

 

$

0.38

 

$

0.72

 

Loss from discontinued operations

 

 

 

 

(0.01

)

Net income

 

$

0.30

 

$

0.27

 

$

0.38

 

$

0.71

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per common share:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.29

 

$

0.27

 

$

0.37

 

$

0.71

 

Loss from discontinued operations

 

 

 

 

(0.01

)

Net income

 

$

0.29

 

$

0.27

 

$

0.37

 

$

0.70

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares - basic

 

224,394,487

 

119,623,075

 

166,931,448

 

119,862,369

 

Weighted average shares - diluted

 

226,281,985

 

121,498,825

 

168,833,010

 

121,767,294

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

3



Table of Contents

 

ALPHA NATURAL RESOURCES INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

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

 

 

 

September 30,

 

December 31,

 

 

 

2011

 

2010

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

575,298

 

$

554,772

 

Trade accounts receivable, net

 

635,840

 

281,138

 

Inventories, net

 

496,105

 

198,172

 

Prepaid expenses and other current assets

 

680,672

 

341,755

 

Total current assets

 

2,387,915

 

1,375,837

 

Property, equipment and mine development costs (net of accumulated depreciation and amortization of $1,190,713 and $866,041, respectively)

 

2,847,355

 

1,129,222

 

Owned and leased mineral rights and land (net of accumulated depletion of $506,751 and $337,810, respectively)

 

8,553,211

 

1,985,661

 

Goodwill

 

2,675,497

 

382,440

 

Other non-current assets

 

717,750

 

306,123

 

Total assets

 

$

17,181,728

 

$

5,179,283

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current portion of long-term debt

 

$

38,529

 

$

11,839

 

Trade accounts payable

 

513,416

 

121,553

 

Accrued expenses and other current liabilities

 

1,008,100

 

313,754

 

Total current liabilities

 

1,560,045

 

447,146

 

Long-term debt

 

2,931,272

 

742,312

 

Pension and postretirement medical benefit obligations

 

1,103,170

 

719,355

 

Asset retirement obligations

 

743,282

 

209,987

 

Deferred income taxes

 

1,570,096

 

249,408

 

Other non-current liabilities

 

1,023,482

 

155,039

 

Total liabilities

 

8,931,347

 

2,523,247

 

 

 

 

 

 

 

Commitments and Contingencies (Note 19)

 

 

 

 

 

 

 

 

 

 

 

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, 231.0 million issued and 220.1 million outstanding at September 30, 2011 and 124.3 million issued and 120.5 million outstanding at December 31, 2010

 

2,310

 

1,242

 

Additional paid-in capital

 

8,075,647

 

2,238,526

 

Accumulated other comprehensive loss

 

(127,935

)

(27,583

)

Treasury stock, at cost: 10.9 million and 3.8 million shares at September 30, 2011 and December 31, 2010, respectively

 

(256,919

)

(50,538

)

Retained earnings

 

557,278

 

494,389

 

Total stockholders’ equity

 

8,250,381

 

2,656,036

 

Total liabilities and stockholders’ equity

 

$

17,181,728

 

$

5,179,283

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

4



Table of Contents

 

ALPHA NATURAL RESOURCES INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

(Amounts in thousands)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2011

 

2010

 

Operating activities:

 

 

 

 

 

Net income

 

$

62,889

 

$

84,712

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation, depletion, accretion and amortization

 

520,585

 

307,563

 

Amortization of acquired intangibles, net

 

(57,023

)

173,988

 

Mark-to-market adjustments for derivatives

 

(57,392

)

11,880

 

Stock-based compensation

 

55,856

 

24,403

 

Employee benefit plans, net

 

45,305

 

40,786

 

Loss on early extinguishment of debt

 

9,768

 

1,349

 

Deferred income taxes

 

(5,801

)

(41,668

)

Other, net

 

16,064

 

(3,367

)

Changes in operating assets and liabilities:

 

 

 

 

 

Trade accounts receivable, net

 

(169,509

)

(85,342

)

Inventories, net

 

122,530

 

(20,766

)

Prepaid expenses and other current assets

 

27,238

 

31,692

 

Other non-current assets

 

(23,528

)

(2,684

)

Trade accounts payable

 

82,222

 

11,029

 

Accrued expenses and other current liabilities

 

(97,020

)

30,464

 

Pension and postretirement medical benefit obligations

 

(89,530

)

(53,840

)

Asset retirement obligations

 

(13,457

)

(4,255

)

Other non-current liabilities

 

108,035

 

5,107

 

Net cash provided by operating activities

 

537,232

 

511,051

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

Cash paid for acquisition, net of cash acquired

 

(713,382

)

 

Capital expenditures

 

(314,929

)

(222,960

)

Acquisition of mineral rights under federal lease

 

(65,013

)

(36,108

)

Purchases of marketable securities

 

(350,617

)

(322,492

)

Sales of marketable securities

 

434,349

 

141,180

 

Purchase of equity-method investments

 

(8,000

)

(3,000

)

Other, net

 

(4,672

)

(1,957

)

Net cash used in investing activities

 

(1,022,264

)

(445,337

)

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

Principal repayments of long-term debt

 

(1,307,834

)

(50,934

)

Proceeds from borrowings on long-term debt

 

2,100,000

 

 

Debt issuance costs

 

(84,306

)

(8,710

)

Excess tax benefit from stock-based awards

 

 

8,112

 

Common stock repurchases

 

(206,381

)

(41,580

)

Proceeds from exercise of stock options

 

4,079

 

4,292

 

Net cash provided by (used in) financing activities

 

505,558

 

(88,820

)

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

20,526

 

(23,106

)

Cash and cash equivalents at beginning of period

 

554,772

 

465,869

 

Cash and cash equivalents at end of period

 

$

575,298

 

$

442,763

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Cash paid for interest

 

$

25,112

 

$

49,577

 

Cash paid for income taxes

 

$

17,874

 

$

43,737

 

Non-cash investing and financing activities:

 

 

 

 

 

Issuance of equity in connection with Acquisition

 

$

5,673,092

 

$

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

5



Table of Contents

 

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

(1)         Business and Basis of Presentation

 

Business

 

Alpha Natural Resources, Inc. and its consolidated subsidiaries (the “Company” 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 beyond those available from its own production.

 

On June 1, 2011, pursuant to the terms of the previously announced Agreement and Plan of Merger dated as of January 28, 2011 (the “Merger Agreement”), the Company completed its acquisition (the “Acquisition”) of Massey Energy Company, a Delaware corporation (“Massey”). Massey, together with its affiliates, was a major U.S. coal producer operating mines and associated processing and loading facilities in Central Appalachia.

 

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 nine months ended September 30, 2011 are not necessarily indicative of the results to be expected for the year ending December 31, 2011. 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, 2010, filed February 25, 2011.

 

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; revenue recognized using the percentage of completion method; 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.

 

Reclassifications

 

Certain amounts in the Condensed Consolidated Balance Sheets as of December 31, 2010 have been reclassified to conform to the current year presentation.

 

(2)         Acquisition

 

On June 1, 2011, the Company completed its acquisition of 100% of the outstanding common stock of Massey, a coal producer with operations located primarily in Virginia, West Virginia, and Kentucky. The Company issued 1.025 shares of Alpha common stock and $10.00 in cash for each share of Massey common stock. Upon closing of the Acquisition, Alpha shareholders owned 54% of the combined company and Massey shareholders owned 46% of the combined company.

 

The condensed consolidated statements of operations include acquisition related expenses (on a pre-tax basis) of $101,698 for the three months ended September 30, 2011, which includes $62,625 in cost of coal sales primarily related to the impact of acquisition accounting and related fair value adjustments to coal inventory and expenses for benefit integration activities, $35,993 in other expenses, $7,798 in selling, general and administrative expenses and ($4,718) in other revenues. For the nine months ended September 30, 2011, the condensed consolidated statements of operations include acquisition related expenses (on a pre-tax basis) of $372,037, which includes $180,353 in cost of coal sales primarily related to the impact of

 

6



Table of Contents

 

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

acquisition accounting and related fair value adjustments to coal inventory, expenses for benefit integration activities and employee severance and stock compensation expenses, $44,703 in other expenses, $154,729 in selling, general and administrative expenses and ($7,748) in other revenues.

 

Total revenues reported in the condensed consolidated statements of operations for the three and nine months ended September 30, 2011 included revenues of $811,463 and $1,148,657, respectively, from operations acquired from Massey. The amount of earnings from continuing operations from the operations acquired from Massey included in the consolidated results of operations for the three and nine months ended September 30, 2011 is not readily determinable due to various intercompany transactions and allocations that have occurred in connection with the operations of the combined company.

 

The fair value of the total consideration transferred was approximately $6,714,057. The acquisition date fair value of each class of consideration transferred was as follows:

 

Common shares

 

$

5,649,592

 

Other equity awards

 

23,500

 

Cash

 

1,040,965

 

Total purchase price

 

$

6,714,057

 

 

The Company issued 105,984,847 shares of common stock in the transaction. Fair value of common stock issued was determined by the closing price of Alpha’s common stock on the day of the Acquisition. The fair value of other equity awards was determined in accordance with the provisions of Accounting Standards Codification (“ASC”) 505. The total purchase price has been preliminarily allocated to the net tangible and intangible assets of Massey as follows:

 

 

 

Provisional
June 30, 2011

 

Provisional
adjustments

 

Provisional
September 30, 2011

 

 

 

 

 

 

 

 

 

Inventories

 

$

436,228

 

$

(15,765

)

$

420,463

 

Other current assets

 

810,280

 

144,174

 

954,454

 

Property, equipment and mine development costs

 

1,721,950

 

(1,129

)

1,720,821

 

Owned and leased mineral rights and land

 

6,636,296

 

319

 

6,636,615

 

Goodwill

 

2,155,158

 

137,899

 

2,293,057

 

Other intangible assets

 

368,928

 

 

368,928

 

Other non-current assets

 

91,754

 

(96

)

91,658

 

Total assets

 

12,220,594

 

265,402

 

12,485,996

 

 

 

 

 

 

 

 

 

Total current liabilities

 

737,998

 

164,465

 

902,463

 

Long-term debt, including current portion

 

1,397,408

 

(3

)

1,397,405

 

Pension and post-retirement medical benefits, including current portion

 

296,631

 

1,895

 

298,526

 

Asset retirement obligation, including current portion

 

414,925

 

182,065

 

596,990

 

Deferred income taxes, including current portion

 

1,491,869

 

(78,895

)

1,412,974

 

Below-market contract obligations

 

724,775

 

(5,397

)

719,378

 

Other liabilities

 

332,556

 

1,272

 

333,828

 

Total liabilities

 

5,396,162

 

265,402

 

5,661,564

 

 

 

 

 

 

 

 

 

Equity component of convertible notes

 

110,375

 

 

110,375

 

 

 

 

 

 

 

 

 

Net tangible and intangible assets acquired

 

$

6,714,057

 

$

 

$

6,714,057

 

 

The above purchase price allocation includes provisional amounts for certain assets and liabilities. The purchase price allocation will continue to be refined primarily in the areas of mineral reserves, asset retirement obligations, income taxes, below-market contract obligations (coal supply agreements assumed under which the Company is obligated to deliver coal at below-market prices), other contingencies and goodwill.  During the measurement period, the Company expects to receive additional detailed information to refine the provisional allocation presented above, including final third party valuation reports and pre-acquisition period tax returns. The Company’s provisional estimate of goodwill has been allocated to Eastern Coal Operations; however, the Company has not completed the allocation of goodwill to all of its reporting units. None of the goodwill will be deductible for income tax purposes. During the three months ended September 30, 2011, the Company recorded certain adjustments to the provisional opening balance sheet, including adjustments to total current liabilities primarily for litigation-related matters for which the Company also recorded corresponding increases to other receivables for indemnification and insurance receivables, adjustments to asset retirement obligations of $182,065 for post closing water treatment costs related to selenium discharges and

 

7



Table of Contents

 

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

property and equipment and the deferred income tax effects of $78,895 related to all the provisional adjustments. As a result of the provisional adjustments made, the provisional amount of goodwill was increased $137,899. As a result of the provisional changes made during the three months ended September 30, 2011, the Company updated depreciation, amortization and accretion amounts previously recorded and restated its results of operations for the six months ended June 30, 2011 to increase income from continuing operations before income taxes by $4,672 and net income by $2,965. These amounts are also included in the Company’s results of operations for the nine months ended September 30, 2011.

 

Intangible assets and liabilities related to coal supply agreements and transportation agreements will be amortized over the actual amount of tons shipped under each contract. Noncompete agreements and mine permits will be amortized over weighted average useful lives of approximately 17 months and 94 months, respectively.

 

The following unaudited pro forma information has been prepared for illustrative purposes only and assumes the Acquisition occurred on January 1, 2010. The unaudited pro forma results have been prepared based on estimates and assumptions, which the Company believes are reasonable, however, they are not necessarily indicative of the consolidated results of operations had the Acquisition occurred on January 1, 2010, or of future results of operations.

 

The unaudited pro forma results for the nine months ended September 30, 2011 and for the three and nine months ended September 30, 2010 are as follows:

 

 

 

Three Months Ended
September 30, 2010

 

Total revenues

 

 

 

As reported

 

$

1,001,632

 

Pro forma

 

$

1,809,587

 

 

 

 

 

Income from continuing operations

 

 

 

As reported

 

$

32,361

 

Pro forma

 

$

37,053

 

 

 

 

 

Earnings per share from continuing operations-basic and diluted

 

 

 

As reported

 

$

0.27

 

Pro forma

 

$

0.16

 

 

 

 

Nine Months Ended
September 30, 2011

 

Nine Months Ended
September 30, 2010

 

Total revenues

 

 

 

 

 

As reported

 

$

5,031,983

 

$

2,924,041

 

Pro forma

 

$

6,566,398

 

$

5,243,574

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

 

 

 

 

As reported

 

$

62,889

 

$

86,213

 

Pro forma

 

$

(44,251

)

$

87,745

 

 

 

 

 

 

 

Earnings (loss) per share from continuing operations-basic

 

 

 

 

 

As reported

 

$

0.38

 

$

0.72

 

Pro forma

 

$

(0.20

)

$

0.39

 

 

 

 

 

 

 

Earnings (loss) per share from continuing operations-diluted

 

 

 

 

 

As reported

 

$

0.37

 

$

0.71

 

Pro forma

 

$

(0.20

)

$

0.39

 

 

(3)         New Accounting Pronouncements

 

In September 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-08, Testing for Goodwill Impairment (“ASU 2011-08”).  ASU 2011-08 is intended to simplify how entities test for goodwill impairment by adding a qualitative review step to assess whether the required quantitative impairment analysis is necessary.  ASU 2011-08 permits an entity to first

 

8



Table of Contents

 

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount.  If it is concluded that this is not the case, it is not necessary to perform the two-step impairment test as described in ASC Topic 350, Intangibles-Goodwill and Other. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company anticipates that the adoption of this standard will not have a material impact on its consolidated financial statements and footnote disclosures.

 

In September 2011, the FASB also issued ASU 2011-09, Disclosures about an Employer’s Participation in a Multiemployer Plan (“ASU 2011-09”), which is intended to increase disclosures about an employer’s participation in a multiemployer pension plan. ASU 2011-09 requires additional disclosures about an employer’s participation in a multiemployer pension plan. This guidance is effective for fiscal years ending after December 15, 2011 and is required to be applied retrospectively for all periods presented.  The Company plans to provide the additional required disclosures in the notes to its December 31, 2011 consolidated financial statements.

 

(4)                       Earnings Per Share

 

The number of shares used to calculate basic earnings per common share is based on the weighted average number of the Company’s outstanding common shares during the respective periods. The number of shares used to calculate diluted earnings per common share is based on the number of common shares used to calculate basic earnings per share plus the dilutive effect of stock options and other stock-based instruments held by the Company’s employees and directors during each period, the Company’s outstanding 2.375% convertible senior notes due 2015 (the “2.375% Convertible Notes”), and for periods subsequent to the Acquisition, the outstanding 3.25% convertible senior notes due 2015 issued by Massey (the “3.25% Convertible Notes”). The 2.375% Convertible Notes and 3.25% Convertible Notes become dilutive for earnings per common share calculations in certain circumstances.  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 68,548 shares for the nine months ended September 30, 2011 diluted earnings per share calculation. As of September 30, 2011, the 2.375% Convertible Notes and the 3.25% Convertible Notes were not convertible.

 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares - basic

 

224,394,487

 

119,623,075

 

166,931,448

 

119,862,369

 

Dilutive impact of stock options and restricted stock plans

 

1,887,498

 

1,875,750

 

1,833,014

 

1,904,925

 

Dilutive impact of Convertible Notes - 2.375%

 

 

 

68,548

 

 

Weighted average shares - diluted

 

226,281,985

 

121,498,825

 

168,833,010

 

121,767,294

 

 

(5)                       Inventories, net

 

Inventories, net consisted of the following:

 

 

 

September 30,

 

December 31,

 

 

 

2011

 

2010

 

Raw coal

 

$

18,358

 

$

14,115

 

Saleable coal

 

373,251

 

130,364

 

Materials, supplies and other, net

 

104,496

 

53,693

 

Total inventories, net

 

$

496,105

 

$

198,172

 

 

9



Table of Contents

 

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

(6)                       Prepaid Expenses and Other Current Assets

 

Prepaid expenses and other current assets consisted of the following:

 

 

 

September 30,

 

December 31,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Marketable securities - short term (1)

 

$

173,087

 

$

217,191

 

Prepaid insurance

 

33,064

 

3,292

 

Notes and other receivables

 

294,183

 

17,951

 

Deferred income taxes - current

 

3,579

 

29,652

 

Deferred longwall move expenses

 

14,993

 

6,313

 

Refundable income taxes

 

16,475

 

9,918

 

Derivative financial instruments

 

12,484

 

13,558

 

Prepaid freight

 

55,779

 

23,330

 

Deposits

 

46,167

 

293

 

Other prepaid expenses

 

30,861

 

20,257

 

Total prepaid expenses and other current assets

 

$

680,672

 

$

341,755

 

 


(1)             Short-term marketable securities consisted of the following:

 

 

 

September 30, 2011

 

 

 

 

 

Unrealized

 

 

 

 

 

Cost

 

Gain

 

Loss

 

Fair value

 

Short-term marketable securities:

 

 

 

 

 

 

 

 

 

U.S. treasury and agency securities (a)

 

$

22,330

 

$

58

 

$

 

$

22,388

 

Corporate debt securities (a)

 

150,704

 

7

 

(12

)

150,699

 

Total short-term marketable securities

 

$

173,034

 

$

65

 

$

(12

)

$

173,087

 

 

 

 

December 31, 2010

 

 

 

 

 

Unrealized

 

 

 

 

 

Cost

 

Gain

 

Loss

 

Fair value

 

Short-term marketable securities:

 

 

 

 

 

 

 

 

 

U.S. treasury and agency securities (a)

 

$

71,777

 

$

158

 

$

 

$

71,935

 

Corporate debt securities (a)

 

145,237

 

24

 

(5

)

145,256

 

Total short-term marketable securities

 

$

217,014

 

$

182

 

$

(5

)

$

217,191

 

 


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

 

10



Table of Contents

 

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

(7)                       Property, Equipment and Mine Development Costs

 

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

 

 

 

September 30,

 

December 31,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Plant and mining equipment

 

$

3,539,499

 

$

1,647,217

 

Mine development

 

245,316

 

209,898

 

Coalbed methane equipment

 

12,718

 

10,153

 

Office equipment and software

 

50,231

 

33,416

 

Vehicles and other

 

6,606

 

10,436

 

Construction in progress

 

183,698

 

84,143

 

Total property, equipment and mine development costs

 

4,038,068

 

1,995,263

 

Less accumulated depreciation, depletion and amortization

 

1,190,713

 

866,041

 

Total property, equipment and mine development costs, net

 

$

2,847,355

 

$

1,129,222

 

 

(8)                       Goodwill

 

Balance at December 31, 2010

 

$

382,440

 

Increase in goodwill due to Acquisition

 

2,293,057

 

Balance at September 30, 2011

 

$

2,675,497

 

 

(9)                       Other Non-current Assets

 

Other non-current assets consisted of the following:

 

 

 

September 30,

 

December 31,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Marketable securities - long term (1)

 

$

21,143

 

$

60,159

 

Acquired intangible assets, net

 

416,218

 

162,734

 

Deferred financing costs, net

 

91,027

 

17,041

 

Advance mining royalties, net

 

61,542

 

14,408

 

Virginia tax credit, net

 

14,423

 

16,317

 

Equity-method investments

 

41,095

 

15,130

 

Derivative financial instruments

 

1,176

 

3,045

 

Other

 

71,126

 

17,289

 

Total other non-current assets

 

$

717,750

 

$

306,123

 

 

11



Table of Contents

 

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 


(1)             Long-term marketable securities, with maturity dates between one and three years, consisted of the following:

 

 

 

September 30, 2011

 

 

 

 

 

Unrealized

 

 

 

 

 

Cost

 

Gain

 

Loss

 

Fair value

 

Long-term marketable securities:

 

 

 

 

 

 

 

 

 

U.S. treasury and agency securities (a)

 

$

17,592

 

$

87

 

$

(7

)

$

17,672

 

Mutual funds held in rabbi trust (b)

 

3,840

 

171

 

(540

)

3,471

 

Total long-term marketable securities

 

$

21,432

 

$

258

 

$

(547

)

$

21,143

 

 

 

 

December 31, 2010

 

 

 

 

 

Unrealized

 

 

 

 

 

Cost

 

Gain

 

Loss

 

Fair value

 

Long-term marketable securities:

 

 

 

 

 

 

 

 

 

U.S. treasury and agency securities (a)

 

$

60,326

 

$

44

 

$

(211

)

$

60,159

 

 


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

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

 

(10)                          Accrued Expenses and Other Current Liabilities

 

Accrued expenses and other current liabilities consisted of the following:

 

 

 

September 30,

 

December 31,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Wages and employee benefits

 

$

202,426

 

$

111,631

 

Current portion of asset retirement obligations

 

143,400

 

13,006

 

Taxes other than income taxes

 

133,654

 

62,041

 

Freight

 

17,904

 

16,446

 

Current portion of self insured workers’ compensation obligations

 

23,010

 

7,935

 

Interest payable

 

37,372

 

10,590

 

Derivative financial instruments

 

66,837

 

19,929

 

Current portion of pension and postretirement medical benefit obligations

 

37,398

 

28,265

 

Income taxes payable

 

6,734

 

6,278

 

Other

 

339,365

 

37,633

 

Total accrued expenses and other current liabilities

 

$

1,008,100

 

$

313,754

 

 

12


 


Table of Contents

 

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

(11)         Long-Term Debt

 

Long-term debt consisted of the following:

 

 

 

September 30,

 

December 31,

 

 

 

2011

 

2010

 

6.00% senior notes due 2019

 

$

800,000

 

$

 

6.25% senior notes due 2021

 

700,000

 

 

Term loan due 2016

 

592,500

 

 

Term loan due 2014

 

 

227,896

 

3.25% convertible senior notes due 2015

 

658,673

 

 

7.25% senior notes due 2014

 

 

298,285

 

2.375% convertible senior notes due 2015

 

287,500

 

287,500

 

Other

 

23,284

 

7,819

 

Debt discount, net

 

(92,156

)

(67,349

)

Total long-term debt

 

2,969,801

 

754,151

 

Less current portion

 

38,529

 

11,839

 

Long-term debt, net of current portion

 

$

2,931,272

 

$

742,312

 

 

New Notes Indenture and the New Senior Notes

 

On June 1, 2011, Alpha, certain of Alpha’s wholly owned domestic subsidiaries (collectively, the “Alpha Guarantors”) and Union Bank, N.A., as trustee, entered into an indenture (the “Base Indenture”) and a first supplemental indenture (the “First Supplemental Indenture” and, together with the Base Indenture, the “New Notes Indenture”) governing Alpha’s newly issued 6.00% senior notes due 2019 (the “2019 Notes”) and 6.25% senior notes due 2021 (the “2021 Notes” and, together with the 2019 Notes, the “New Senior Notes”).

 

On June 1, 2011, in connection with the Acquisition, Alpha, the Alpha Guarantors, Massey, and certain wholly owned subsidiaries of Massey (the “Massey Guarantors” and together with the Alpha Guarantors the “Guarantors”), and Union Bank, N.A., as trustee, entered into a supplemental indenture (the “Second Supplemental Indenture”) to the New Notes Indenture pursuant to which Massey and certain wholly owned subsidiaries of Massey agreed to become additional guarantors for the New Senior Notes.

 

The 2019 Notes bear interest at a rate of 6.00% per annum, payable semi-annually on June 1 and December 1 of each year, beginning on December 1, 2011, and will mature on June 1, 2019. The 2021 Notes bear interest at a rate of 6.25% per annum, payable semi-annually on June 1 and December 1 of each year, beginning on December 1, 2011, and will mature on June 1, 2021.

 

As of September 30, 2011, the carrying values of the 2019 Notes and 2021 Notes were $800,000 and $700,000, respectively.

 

Alpha may redeem the 2019 Notes, in whole or in part, at any time prior to June 1, 2014, at a price equal to 100.000% of the aggregate principal amount of the 2019 Notes plus a “make-whole” premium, plus accrued and unpaid interest, if any, to, but not including, the applicable redemption date.  Alpha may redeem the 2019 Notes, in whole or in part, at any time during the twelve months commencing June 1, 2014, at 103.000% of the aggregate principal amount of the 2019 Notes, at any time during the twelve months commencing June 1, 2015, at 101.500% of the aggregate principal amount of the 2019 Notes, and at any time after June 1, 2016 at 100.000% of the aggregate principal amount of the 2019 Notes, in each case plus accrued and unpaid interest, if any, to, but not including, the applicable redemption date.  In addition, Alpha may redeem up to 35% of the aggregate principal amount of the 2019 Notes with the net cash proceeds from certain equity offerings, at any time prior to June 1, 2014, at a redemption price equal to 106.000% of the aggregate principal amount of the 2019 Notes, plus accrued and unpaid interest, if any, to, but not including the applicable redemption date, provided that at least 65% of the aggregate principal amount of the 2019 notes originally issued under the New Notes Indenture remains outstanding after the redemption and the redemption occurs within 180 days of the closing of such equity offering.

 

Alpha may redeem the 2021 Notes, in whole or in part, at any time prior to June 1, 2016, at a price equal to 100.000% of the aggregate principal amount of the 2021 Notes plus a “make-whole” premium, plus accrued and unpaid interest, if any, to, but not including, the applicable redemption date.  Alpha may redeem the 2021 Notes, in whole or in part, at any time during the twelve months commencing June 1,

 

13



Table of Contents

 

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

2016, at 103.125% of the aggregate principal amount of the 2021 Notes, at any time during the twelve months commencing June 1, 2017, at 102.083% of the aggregate principal amount of the 2021 Notes, at any time during the twelve months commencing June 1, 2018 at 101.042% of the aggregate principal amount of the 2021 Notes, and at any time after June 1, 2019, at 100.000% of the aggregate principal amount of the 2021 Notes, in each case plus accrued and unpaid interest, if any, to, but not including, the applicable redemption date.  In addition, Alpha may redeem up to 35% of the aggregate principal amount of the 2021 Notes with the net cash proceeds from certain equity offerings, at any time prior to June 1, 2016, at a redemption price equal to 106.250% of the aggregate principal amount of the 2021 Notes, plus accrued and unpaid interest, if any, to, but not including the applicable redemption date, provided that at least 65% of the aggregate principal amount of the 2021 notes originally issued under the New Notes Indenture remains outstanding after the redemption and the redemption occurs within 180 days of the date of the closing of such equity offering.

 

Upon the occurrence of a change in control repurchase event with respect to either series of the New Senior Notes, unless Alpha has exercised its right to redeem those New Senior Notes, Alpha will be required to offer to repurchase each holder’s New Senior Notes of such series at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to, but not including, the date of repurchase.

 

The New Notes Indenture contains covenants that limit, among other things, Alpha’s ability to:

 

·                  incur, or permit its subsidiaries to incur, additional debt;

·                  issue, or permit its subsidiaries to issue, certain types of stock;

·                  pay dividends on Alpha’s or its subsidiaries’ capital stock or repurchase Alpha’s common stock;

·                  make certain investments;

·                  enter into certain types of transactions with affiliates;

·                  incur liens on certain assets to secure debt;

·                  limit dividends or other payments by its restricted subsidiaries to Alpha and its other restricted subsidiaries;

·                  consolidate, merge or sell all or substantially all of its assets; and

·                  make certain payments on Alpha’s or its subsidiaries’ subordinated debt.

 

These covenants are subject to a number of important qualifications and exceptions. These covenants may not apply at any time after the New Senior Notes are assigned a credit grade rating of at least BB+ (stable) from Standard & Poor’s Ratings Services and of at least Ba1 (stable) from Moody’s Investor Service, Inc.

 

Third Amended and Restated Credit Agreement

 

On May 19, 2011, in connection with the Acquisition, Alpha entered into a Third Amended and Restated Credit Agreement to amend and restate in its entirety the credit agreement dated as of July 30, 2004, as amended as of November 12, 2004 and as of October 18, 2005, as amended and restated as of July 7, 2006, as amended effective July 31, 2009 and as further amended and restated as of April 15, 2010 (as so amended and restated, the “Existing Credit Agreement”; the Existing Credit Agreement, as amended and restated by the Third Amended and Restated Credit Agreement, is referred to as the “New Credit Agreement”), with Citicorp North America, Inc., as administrative agent and as collateral agent, Bank of America, N.A., JPMorgan Chase Bank, N.A., PNC Bank, National Association, The Royal Bank of Scotland plc and Union Bank, N.A. and The Bank of Tokyo-Mitsubishi UFJ, Ltd., as co-documentation agents, Morgan Stanley Senior Funding, Inc., as sole syndication agent, Citigroup Global Markets Inc. and Morgan Stanley Senior Funding, Inc., as joint lead arrangers and joint book managers, and various other financial institutions, as lenders. The terms of the New Credit Agreement amended and restated and superseded the Existing Credit Agreement in its entirety upon the satisfaction of certain conditions precedent, which included the consummation of the Acquisition (the satisfaction of such conditions precedent is referred to as the “initial Credit Event”). The Existing Credit Agreement remained in full force and effect until the occurrence of the initial Credit Event.

 

Upon the occurrence of the initial Credit Event, the New Credit Agreement provided for a $600,000 senior secured term loan A facility (the “Term Loan Facility”) and a $1,000,000 senior secured revolving credit facility (the “Revolving Facility”).  Pursuant to the New Credit Agreement, Alpha may request incremental term loans or increase the revolving commitments under the Revolving Facility in an aggregate amount of up to $1,250,000 plus an additional $750,000 subject to compliance with a consolidated senior secured leverage ratio.  The lenders under these facilities will not be under any obligation to provide any such incremental loans or commitments, and any such addition of or increase in such loans or commitments will be subject to certain customary conditions precedent.

 

As of September 30, 2011, the carrying value of the Term Loan Facility was $591,792, net of debt discount of $708, with $37,500 classified as current portion of long-term debt.  There were no borrowings outstanding under the Revolving Facility as of September 30, 2011.

 

14



Table of Contents

 

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

Letters of credit outstanding at September 30, 2011 under the Revolving Facility were $14,411.

 

Interest Rate and Fees.  Borrowings under the New Credit Agreement bear interest at a rate per annum equal to an applicable margin plus, at Alpha’s option, either (a) a base rate determined by reference to the highest of (i) the rate that Citibank, N.A. announces from time to time as its prime or base commercial lending rate, (ii) the federal funds effective rate plus 0.50% and (iii) a LIBO rate for a 30-day interest period as determined on such day, plus 1.00%, or (b) a LIBO rate for the interest period relevant to such borrowing adjusted for certain additional costs.  The initial applicable margin for borrowings under the New Credit Agreement is 1.50% with respect to base rate borrowings and 2.50% with respect to LIBO rate borrowings.  Commencing October 1, 2011, the applicable margin for borrowings under the New Credit Agreement will be subject to adjustment each fiscal quarter based on Alpha’s consolidated leverage ratio for the preceding fiscal quarter.  Swingline loans will bear interest at a rate per annum equal to the base rate plus the applicable margin.  The interest rate in effect at September 30, 2011 was 2.74%. In addition to paying interest on outstanding principal under the New Credit Agreement, Alpha is required to pay a commitment fee to the lenders under the Revolving Facility in respect of the unutilized commitments thereunder. The initial commitment fee is 0.50% per annum.  Commencing October 1, 2011, the commitment fee will be subject to adjustment each fiscal quarter based on Alpha’s consolidated leverage ratio for the preceding fiscal quarter.  Alpha must also pay customary letter of credit fees and agency fees.

 

Mandatory Prepayments.  The New Credit Agreement requires Alpha to prepay outstanding loans, subject to certain exceptions, with (i) 100% of the net cash proceeds (including the fair market value of noncash proceeds) from certain asset sales and condemnation events in excess of the greater of $1,500,000 and 15% of consolidated tangible assets as of the end of each fiscal year, (ii) 100% of the aggregate gross proceeds (including the fair market value of noncash proceeds) from certain Intracompany Disposals (as defined in the New Credit Agreement) exceeding $500,000 during the term of the New Credit Agreement and (iii) 100% of the net cash proceeds from any incurrence or issuance of certain debt, other than debt permitted under the New Credit Agreement. Mandatory prepayments will be applied first to the Term Loan Facility and thereafter to reductions of the commitments under the Revolving Facility. If at any time the aggregate amount of outstanding revolving loans, swingline loans, unreimbursed letter of credit drawings and undrawn letters of credit under the Revolving Facility exceeds the commitment amount, Alpha will be required to repay outstanding loans or cash collateralize letters of credit in an aggregate amount equal to such excess, with no reduction of the commitment amount.

 

Voluntary Prepayments; Reductions in Commitments. Alpha may prepay, in whole or in part, amounts outstanding under the New Credit Agreement, with prior notice but without premium or penalty (other than customary “breakage” costs with respect to LIBO rate loans) and in certain minimum amounts.  Alpha may also repurchase loans outstanding under the Term Loan Facility pursuant to standard reverse Dutch auction and open market purchase provisions, subject to certain limitations and exceptions.  Alpha may make voluntary reductions to the unutilized commitments of the Revolving Facility from time to time without premium or penalty.

 

Amortization and Final Maturity.  Beginning on September 30, 2011, Alpha is required to make scheduled quarterly amortization payments with respect to loans under the Term Loan Facility.  In the last two quarters of 2011 and the first two quarters of 2012, each quarterly amortization payment will be in an amount equal to 1.25% of the original principal amount of the term loans.  In the last two quarters of 2012 and the first two quarters of 2013, each quarterly amortization payment will be in an amount equal to 2.5% of the original principal amount of the term loans.  In the last two quarters of 2013 and the first two quarters of 2014, each quarterly amortization payment will be in an amount equal to 3.75% of the original principal amount of the term loans.  In the last two quarters of 2014 and the first two quarters of 2015, each quarterly amortization payment will be in an amount equal to 5% of the original principal amount of the term loans.  In the last two quarters of 2015 and the first two quarters of 2016, each quarterly amortization payment will be in an amount equal to 12.5% of the original principal amount of the term loans.  There is no scheduled amortization under the Revolving Facility.  The principal amount outstanding on the loans under the Revolving Facility will be due and payable on June 30, 2016.  The Term Loan Facility and Revolving Facility will each mature on June 30, 2016.

 

Guarantees and Collateral.  All obligations under the New Credit Agreement are unconditionally guaranteed by certain of Alpha’s existing wholly owned domestic subsidiaries, and are required to be guaranteed by certain of Alpha’s future wholly owned domestic subsidiaries.  All obligations under the New Credit Agreement and certain hedging and cash management obligations with lenders and affiliates of lenders thereunder are secured, subject to certain exceptions, by substantially all of Alpha’s assets and the assets of Alpha’s subsidiary guarantors, in each case subject to exceptions, thresholds and limitations.

 

Certain Covenants and Events of Default. The New Credit Agreement contains a number of negative covenants that, among other things and subject to certain exceptions, restrict Alpha’s ability and the ability of Alpha’s subsidiaries to:

 

15



Table of Contents

 

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

·                                          make investments, loans and acquisitions;

·                                          incur additional indebtedness;

·                                          incur liens;

·                                          consolidate or merge;

·                                          sell assets, including capital stock of its subsidiaries;

·                                          pay dividends on its capital stock or redeem, repurchase or retire its capital stock or its other Indebtedness;

·                                          engage in transactions with its affiliates;

·                                          materially alter the business it conducts; and

·                                          create restrictions on the payment of dividends or other amounts to Alpha from Alpha’s restricted subsidiaries.

 

In addition, the New Credit Agreement requires Alpha to comply with certain financial ratio maintenance covenants.

 

The New Credit Agreement also contains customary representations and warranties, affirmative covenants and events of default, including a cross-default provision in respect of any other indebtedness that has an aggregate principal amount exceeding $25,000.

 

Existing Credit Agreement

 

The Existing Credit Agreement consisted of term loans and revolving credit facility commitments due on July 31, 2014.  During the nine months ended September 30, 2011, borrowings under the Existing Credit Agreement totaling $227,896 were repaid.  The Existing Credit Agreement was replaced with the New Credit Agreement as described above.  As of December 31, 2010, the Company’s secured term loans under the Existing Credit Agreement had a carrying value of $226,705, net of debt discount of $1,191, with $11,839 classified as current portion of long-term debt.

 

3.25% Convertible Senior Notes due 2015

 

As a result of the Acquisition, the Company became a guarantor of Massey’s 3.25% Convertible Notes, with aggregate principal outstanding at June 1, 2011 of $659,063.  The 3.25% Convertible Notes bear interest at a rate of 3.25% per annum, payable semi-annually in arrears on August 1 and February 1 of each year.  The 3.25% Convertible Notes will mature on August 1, 2015, unless earlier repurchased by the Company or converted.  The 3.25% Convertible Notes had a fair value of $730,900 at the acquisition date.  The Company accounts for the 3.25% Convertible Notes under ASC 470-20, which 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.  As of September 30, 2011, the carrying amount of the debt was $622,803, net of debt discount of $35,870.  As of September 30, 2011, the carrying amount of the equity component totaled $110,375.  The debt discount is being accreted over the four-year term of the 3.25% Convertible Notes, and provides for an effective interest rate of 4.21%.

 

The 3.25% Convertible Notes are senior unsecured obligations and rank equally with all of the Company’s existing and future senior unsecured indebtedness. The 3.25% Convertible Notes are guaranteed on a senior unsecured basis by Massey’s subsidiaries (which are among the Company’s subsidiaries), other than certain minor subsidiaries of Massey. The 3.25% Convertible Notes are effectively subordinated to all of the Company’s existing and future secured indebtedness and all existing and future liabilities of the Company’s non-guarantor subsidiaries, including trade payables. The 3.25% Convertible Notes are convertible in certain circumstances and in specified periods at a conversion rate, subject to adjustment, of the value of 11.4560 shares of common stock per $1,000 principal amount of 3.25% Convertible Notes. From and after the effective time of the Acquisition, the consideration deliverable upon conversion of a 3.25% Convertible Notes ceased to be based upon Massey common stock and instead became based upon Reference Property (as defined in the indenture governing the 3.25% Convertible Notes, (the “3.25% Convertible Notes Indenture”)) consisting of 1.025 shares of Alpha common stock (subject to adjustment upon the occurrence of certain events set forth in the 3.25% Convertible Notes Indenture) plus $10.00 in cash per share of Massey common stock. Upon conversion of the 3.25% Convertible Notes, holders will receive cash up to the principal amount of the notes being converted, and any excess conversion value will be delivered in cash, Reference Property, or a combination thereof, at the Company’s election.

 

6.875% Senior Notes due 2013

 

The Company assumed Massey’s 6.875% senior notes due 2013 (the “2013 Notes”) with an aggregate principal amount outstanding of $760,000 as part of the Acquisition. On June 1, 2011, the Company paid $525,532, which included a premium payment and accrued but unpaid interest, pursuant to its cash tender offer for the 2013 Notes.  In addition, on June 1, 2011, the Company paid $274,504 into a redemption settlement trust to redeem all the 2013 Notes that remained outstanding after the tender offer.  The Company recorded an asset of $265,557 in prepaid expenses and other current assets at the time of the payment to the redemption trust.  The Company recorded the debt at its fair value, of $264,017, on June 1, 2011. Upon redemption of the 2013 Notes on the redemption date of July 1, 2011, the related asset and liability were removed from the condensed consolidated balance sheets and the Company recorded a loss on early extinguishment of $752.

 

7.25% Senior Notes Due August 1, 2014

 

Foundation PA Coal Company, LLC (“Foundation PA”), one of the Company’s subsidiaries, had notes that were scheduled to mature on August 1, 2014 (the “2014 Notes”) in the aggregate principal amount of $298,285 at December 31, 2010. The 2014 Notes were guaranteed on a

 

16



Table of Contents

 

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

senior unsecured basis by Alpha Natural Resources, Inc. and all of its subsidiaries other than Foundation PA, Alpha Coal India Private Limited, ANR Receivables Funding LLC, Coalsolv, LLC, Gray Hawk Insurance Company and Rockridge Coal Company. In connection with the Acquisition, Massey and certain subsidiaries of Massey also became guarantors of the 2014 Notes.  The 2014 Notes pay interest semi-annually and were redeemable at Foundation PA’s option, at a redemption price equal to 101.208% and 100% of the principal amount if redeemed during the twelve month periods beginning August 1, 2011 and 2012, respectively, plus accrued interest.  The outstanding 2014 Notes were redeemed and became due and payable on August 18, 2011 (the “Redemption Date”) at a redemption price equal to 101.208% of the principal amount of the 2014 Notes, plus any and all accrued and unpaid interest up to but excluding the Redemption Date.  The Company paid $302,909, including interest, to redeem the 2014 Notes.  The Company recognized a loss on early extinguishment of debt of $4,438 including the premium paid.  As of December 31, 2010, the carrying value of the 2014 Notes was $297,272, net of debt discount of $1,013.

 

2.375% Convertible Senior Notes Due April 15, 2015

 

As of September 30, 2011 and December 31, 2010, the Company had $287,500 aggregate principal amount of 2.375% Convertible Notes. The 2.375% Convertible 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, and will mature on April 15, 2015, unless earlier repurchased by the Company or converted.  The Company accounts for the 2.375% Convertible Notes under ASC 470-20, which 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.  The related deferred loan costs and discount are being amortized and accreted, respectively, over the seven-year term of the 2.375% Convertible Notes, and provide for an effective interest rate of 8.64%.  As of September 30, 2011 and December 31, 2010, the carrying amounts of the debt component were $231,922 and $222,355, respectively.  As of September 30, 2011 and December 31, 2010, the unamortized debt discount was $55,578 and $65,145, respectively. As of September 30, 2011 and December 31, 2010, the carrying amount of the equity component was $69,851.

 

The 2.375% Convertible Notes are the Company’s senior unsecured obligations and rank equally with all of the Company’s existing and future senior unsecured indebtedness. The 2.375% Convertible Notes are effectively subordinated to all of the Company’s existing and future secured indebtedness and all existing and future liabilities of the Company’s subsidiaries, including trade payables. The 2.375% Convertible Notes are convertible in certain circumstances and in specified periods at an initial conversion rate of 18.2962 shares of common stock per $1,000 principal amount of 2.375% Convertible Notes, subject to adjustment upon the occurrence of certain events set forth in the indenture governing the 2.375% Convertible Notes (the “2.375% Convertible Notes Indenture”). Upon conversion of the 2.375% Convertible 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.

 

Accounts Receivable Securitization

 

The Company and certain of its subsidiaries are party to an accounts receivable securitization facility with a third party financial institution (the “A/R Facility”). The capacity of the A/R Facility was increased from $150,000 to $190,000 in June 2011.  As of September 30, 2011 and December 31, 2010, letters of credit in the amount of $151,990 and $63,805, respectively, were outstanding under the A/R Facility and no cash borrowing transactions had taken place.

 

On October 19, 2011, the Company and certain of its subsidiaries entered into a Second Amended and Restated Receivables Purchase Agreement (the “New A/R Facility”), which expires on October 17, 2014 and replaces the A/R Facility.  The capacity of the New A/R Facility is $275,000.

 

(12)                Asset Retirement Obligations

 

As of September 30, 2011 and December 31, 2010, the Company had recorded asset retirement obligation accruals for mine reclamation and closure costs totaling $886,682 and $222,993, respectively. Changes in the asset retirement obligations were as follows:

 

17



Table of Contents

 

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

Total asset retirement obligations at December 31, 2010

 

$

222,993

 

Asset retirement obligations assumed in Acquisition (1)

 

596,990

 

Accretion for the period

 

24,450

 

Revisions in estimated cash flows (1)

 

55,706

 

Expenditures for the period

 

(13,457

)

Total asset retirement obligations at September 30, 2011

 

$

886,682

 

Less current portion

 

143,400

 

Long-term portion

 

$

743,282

 

 


(1)             As a result of certain matters related to the treatment of mine water discharges for selenium more fully discussed in Note 19, the Company reviewed its asset retirement obligation cost estimates during the quarter and revised estimates where necessary including for those permits where tentative settlements have been reached. During the three months ended September 30, 2011, the Company increased its asset retirement obligations by $55,316, of which $37,137 was related to inactive mine sites and was recorded as a component of cost of coals sales in the Statements of Operations. In addition, the Company increased the provisional opening balance sheet amounts (Note 2) for asset retirement obligations by $182,065 related to the post closing cost of treating water discharges for selenium.

 

(13)         Other Non-current Liabilities

 

Other non-current liabilities consisted of the following:

 

 

 

September 30,

 

December 31,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Self insured workers’ compensation obligations

 

$

168,977

 

$

43,767

 

Black lung obligations

 

135,627

 

45,021

 

Below-market contract obligations, net

 

596,937

 

13,031

 

Derivative financial instruments

 

23,329

 

9,050

 

Income taxes

 

13,960

 

13,960

 

Deferred production taxes

 

19,962

 

12,230

 

Other

 

64,690

 

17,980

 

Total other non-current liabilities

 

$

1,023,482

 

$

155,039

 

 

(14)         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 2.375% Convertible Notes, 3.25% Convertible Notes and New Senior Notes, were estimated using observable market prices as these securities are traded. The fair values of the senior notes and the term loans were estimated based on market rates of interest offered to the Company for debt of similar maturities.

 

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

 

18



Table of Contents

 

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

 

 

September 30, 2011

 

December 31, 2010

 

 

 

Carrying

 

 

 

Carrying

 

 

 

 

 

Amount

 

Fair Value

 

Amount

 

Fair Value

 

6.00% senior notes due 2019

 

$

800,000

 

$

776,000

 

$

 

$

 

6.25% senior notes due 2021

 

700,000

 

675,500

 

 

 

Term loan due 2016(1)

 

591,792

 

611,553

 

 

 

Term loan due 2014(2)

 

 

 

226,705

 

231,475

 

3.25% convertible senior notes due 2015(3)

 

622,803

 

570,592

 

 

 

7.25% senior notes due 2014(4)

 

 

 

297,272

 

303,505

 

2.375% convertible senior notes due 2015(5)

 

231,922

 

209,628

 

222,355

 

383,094

 

Total

 

$

2,946,517

 

$

2,843,273

 

$

746,332

 

$

918,074

 

 


(1)  Net of debt discount of $708 as of September 30, 2011.

(2)  Net of debt discount of $1,191 as of December 31, 2010.

(3)  Net of debt discount of $35,870 as of September 30, 2011.

(4)  Net of debt discount of $1,013 as of December 31, 2010.

(5)  Net of debt discount of $55,578 and $65,145 as of September 30, 2011 and December 31, 2010, respectively.

 

ASC 820 requires disclosures about how fair value is determined for assets and liabilities and a hierarchy for which these assets and liabilities must be grouped, based on significant levels of inputs as follows:

 

Level 1 — Quoted prices in active markets for identical assets or liabilities;

Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and

Level 3 — Unobservable inputs in which there is little or no market data which require the reporting entity to develop its own assumptions.

 

The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).

 

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 September 30, 2011 and December 31, 2010, 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.

 

 

 

September 30, 2011

 

 

 

 

 

Quoted Prices

 

Significant Other

 

Significant

 

 

 

 

 

in Active

 

Observable

 

Unobservable

 

 

 

Total Fair

 

Markets

 

Inputs

 

Inputs

 

 

 

Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Financial assets (liabilities):

 

 

 

 

 

 

 

 

 

U.S. treasury and agency securities

 

$

40,060

 

$

40,060

 

$

 

$

 

Mutual funds held in rabbi trust

 

$

3,471

 

$

3,471

 

$

 

$

 

Corporate debt securities

 

$

150,699

 

$

 

$

150,699

 

$

 

Forward coal sales

 

$

(56,362

)

$

 

$

(56,362

)

$

 

Forward coal purchases

 

$

202

 

$

 

$

202

 

$

 

Commodity swaps

 

$

(7,315

)

$

 

$

(7,315

)

$

 

Commodity options

 

$

(17

)

$

 

$

(17

)

$

 

Interest rate swaps

 

$

(13,014

)

$

 

$

(13,014

)

$

 

 

19



Table of Contents

 

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

 

 

December 31, 2010

 

 

 

 

 

Quoted Prices

 

Significant Other

 

Significant

 

 

 

 

 

in Active

 

Observable

 

Unobservable

 

 

 

Total Fair

 

Markets

 

Inputs

 

Inputs

 

 

 

Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Financial assets (liabilities):

 

 

 

 

 

 

 

 

 

U.S. treasury and agency securities

 

$

132,094

 

$

132,094

 

$

 

$

 

Corporate debt securities

 

$

145,256

 

$

 

$

145,256

 

$

 

Forward coal sales

 

$

(3,958

)

$

 

$

(3,958

)

$

 

Forward coal purchases

 

$

2,674

 

$

 

$

2,674

 

$

 

Commodity swaps

 

$

10,523

 

$

 

$

10,523

 

$

 

Commodity options

 

$

(264

)

$

 

$

(264

)

$

 

Interest rate swaps

 

$

(21,304

)

$

 

$

(21,304

)

$

 

Freight swaps

 

$

(47

)