FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2006
OR
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o |
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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. 1-32423
ALPHA NATURAL RESOURCES, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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02-0733940 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification Number) |
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One Alpha Place, P.O. Box 2345
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24212 |
(Address of principal executive offices)
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(Zip Code) |
Registrants 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. Yes þ No o
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.
o Large accelerated filer o Accelerated filer þ 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 o No þ
Number of shares of the Registrants Common Stock, $0.01 par value, outstanding as of
August 8, 2006 64,995,357.
Item 1. Financial Statements
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
(In thousands, except share and per share amounts)
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June 30, |
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December 31, |
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2006 |
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2005 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
|
$ |
4,800 |
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|
39,622 |
|
Trade accounts receivable, net |
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|
160,117 |
|
|
|
147,961 |
|
Notes and other receivables |
|
|
3,692 |
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|
10,330 |
|
Inventories |
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|
84,859 |
|
|
|
84,885 |
|
Prepaid expenses and other current assets |
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|
38,788 |
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|
|
36,117 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total current assets |
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|
292,256 |
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|
318,915 |
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|
|
|
|
|
|
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Property, plant, and equipment, net |
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|
649,769 |
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|
582,750 |
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Goodwill |
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18,641 |
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|
|
18,641 |
|
Other intangibles, net |
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|
9,193 |
|
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|
11,014 |
|
Deferred income taxes |
|
|
39,863 |
|
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|
38,967 |
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Other assets |
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43,770 |
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|
|
43,371 |
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Total assets |
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$ |
1,053,492 |
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|
1,013,658 |
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Liabilities and Stockholders Equity |
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Current liabilities: |
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Current portion of long-term debt |
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$ |
3,224 |
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|
3,242 |
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Notes payable |
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|
8,783 |
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|
59,014 |
|
Bank overdraft |
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|
14,416 |
|
|
|
17,065 |
|
Trade accounts payable |
|
|
79,611 |
|
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|
99,746 |
|
Deferred income taxes |
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|
12,575 |
|
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|
11,243 |
|
Accrued expenses and other current liabilities |
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|
88,500 |
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|
93,531 |
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|
|
|
|
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|
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Total current liabilities |
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207,109 |
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|
283,841 |
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Long-term debt, net of current portion |
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452,369 |
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|
423,547 |
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Workers compensation benefits |
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6,516 |
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|
5,901 |
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Postretirement medical benefits |
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|
28,874 |
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24,461 |
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Asset retirement obligation |
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55,389 |
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46,296 |
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Deferred gains on sale of property interests |
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|
5,274 |
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5,762 |
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Other liabilities |
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24,484 |
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11,085 |
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Total liabilities |
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|
780,015 |
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|
800,893 |
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Stockholders equity: |
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Preferred stock par value $0.01, 10,000,000 shares
authorized, none issued |
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Common stock par value $0.01, 100,000,000 shares
authorized, 64,995,357 and 64,420,414 shares issued
and outstanding |
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|
650 |
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|
644 |
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Additional paid-in capital |
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|
204,500 |
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193,608 |
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Accumulated other comprehensive (loss) |
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(525 |
) |
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Retained earnings |
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68,852 |
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|
18,513 |
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Total stockholders equity |
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273,477 |
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212,765 |
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Total liabilities and stockholders equity |
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$ |
1,053,492 |
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|
1,013,658 |
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See accompanying notes to condensed consolidated financial statements.
3
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income (Unaudited)
(In thousands, except share and per share amounts)
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Three months ended |
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Six months ended |
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June 30, |
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June 30, |
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2006 |
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2005 |
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2006 |
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2005 |
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Revenues: |
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Coal revenues |
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$ |
436,529 |
|
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$ |
364,070 |
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$ |
860,903 |
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$ |
637,204 |
|
Freight and handling revenues |
|
|
50,935 |
|
|
|
48,239 |
|
|
|
97,327 |
|
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|
79,991 |
|
Other revenues |
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|
8,217 |
|
|
|
5,327 |
|
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|
19,761 |
|
|
|
12,596 |
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|
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Total revenues |
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495,681 |
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|
417,636 |
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|
977,991 |
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|
729,791 |
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Costs and expenses: |
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Cost of coal sales (exclusive of items shown
separately below) |
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|
345,505 |
|
|
|
293,493 |
|
|
|
676,391 |
|
|
|
519,777 |
|
Freight and handling costs |
|
|
50,935 |
|
|
|
48,239 |
|
|
|
97,327 |
|
|
|
79,991 |
|
Cost of other revenues |
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|
5,445 |
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|
|
4,319 |
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|
|
13,396 |
|
|
|
10,384 |
|
Depreciation, depletion and amortization |
|
|
34,207 |
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|
|
15,075 |
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|
67,841 |
|
|
|
29,245 |
|
Selling, general and administrative expenses
(exclusive of depreciation and amortization shown separately above) |
|
|
18,583 |
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|
|
14,870 |
|
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|
35,392 |
|
|
|
62,776 |
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|
|
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Total costs and expenses |
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|
454,675 |
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|
|
375,996 |
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|
|
890,347 |
|
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|
702,173 |
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Income from operations |
|
|
41,006 |
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|
41,640 |
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|
|
87,644 |
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|
27,618 |
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Other income (expense): |
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Interest expense |
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|
(10,786 |
) |
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|
(6,647 |
) |
|
|
(21,063 |
) |
|
|
(12,764 |
) |
Interest income |
|
|
171 |
|
|
|
191 |
|
|
|
358 |
|
|
|
478 |
|
Miscellaneous income (expense), net |
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|
1,413 |
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|
32 |
|
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|
1,696 |
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|
(9 |
) |
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|
Total other income (expense), net |
|
|
(9,202 |
) |
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|
(6,424 |
) |
|
|
(19,009 |
) |
|
|
(12,295 |
) |
|
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|
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|
|
|
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|
Income from continuing operations before income taxes
and minority interest |
|
|
31,804 |
|
|
|
35,216 |
|
|
|
68,635 |
|
|
|
15,323 |
|
Income tax expense |
|
|
8,676 |
|
|
|
9,089 |
|
|
|
18,296 |
|
|
|
11,599 |
|
Minority interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,918 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
Income from continuing operations |
|
|
23,128 |
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|
|
26,127 |
|
|
|
50,339 |
|
|
|
806 |
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|
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Discontinued operations: |
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|
|
|
|
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|
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|
Income (loss) from discontinued operations before income taxes and
minority interest |
|
|
|
|
|
|
359 |
|
|
|
|
|
|
|
(379 |
) |
Income tax expense(benefit) |
|
|
|
|
|
|
93 |
|
|
|
|
|
|
|
(93 |
) |
Minority interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(72 |
) |
|
|
|
|
|
|
|
|
|
|
|
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|
Income (loss) from discontinued operations |
|
|
|
|
|
|
266 |
|
|
|
|
|
|
|
(214 |
) |
|
|
|
|
|
|
|
|
|
|
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|
Net income |
|
$ |
23,128 |
|
|
$ |
26,393 |
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|
$ |
50,339 |
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|
$ |
592 |
|
|
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|
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Net income per basic share, as adjusted in 2005 |
|
|
|
|
|
|
|
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|
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|
|
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|
Income from continuing operations |
|
$ |
0.36 |
|
|
|
0.43 |
|
|
$ |
0.79 |
|
|
|
0.01 |
|
Loss from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per basic share |
|
$ |
0.36 |
|
|
$ |
0.43 |
|
|
$ |
0.79 |
|
|
$ |
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
Net income per diluted share, as adjusted in 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.36 |
|
|
$ |
0.43 |
|
|
$ |
0.79 |
|
|
$ |
0.01 |
|
Loss from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per diluted share |
|
$ |
0.36 |
|
|
$ |
0.43 |
|
|
$ |
0.79 |
|
|
$ |
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
4
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
|
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|
|
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|
Six months ended |
|
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
Operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
50,339 |
|
|
|
592 |
|
Adjustments to reconcile net income
to net cash provided by (used in) operating
activities: |
|
|
|
|
|
|
|
|
Depreciation, depletion and amortization |
|
|
67,841 |
|
|
|
29,528 |
|
Amortization of debt issuance costs |
|
|
1,132 |
|
|
|
875 |
|
Accretion of asset retirement obligation |
|
|
2,246 |
|
|
|
1,631 |
|
Virginia tax credit |
|
|
|
|
|
|
(343 |
) |
Stock-based compensation non-cash |
|
|
9,945 |
|
|
|
32,312 |
|
Amortization of deferred gains on sales
of property interests |
|
|
(488 |
) |
|
|
(395 |
) |
Amortization of deferred gain on railroad incentives |
|
|
(154 |
) |
|
|
(340 |
) |
Gain on sale of fixed assets, net |
|
|
(134 |
) |
|
|
113 |
|
Gain on sale of discontinued operations |
|
|
|
|
|
|
(704 |
) |
Loss on settlement of asset retirement obligation |
|
|
322 |
|
|
|
490 |
|
Provision for non-recoupable advance royalties |
|
|
469 |
|
|
|
|
|
Minority interest |
|
|
|
|
|
|
2,846 |
|
Deferred income taxes |
|
|
5,274 |
|
|
|
1,588 |
|
Other |
|
|
116 |
|
|
|
44 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Trade accounts receivable |
|
|
(12,198 |
) |
|
|
(55,382 |
) |
Notes and other receivables |
|
|
4,558 |
|
|
|
(477 |
) |
Inventories |
|
|
4,349 |
|
|
|
(37,953 |
) |
Prepaid expenses and other current
assets |
|
|
(2,583 |
) |
|
|
10,261 |
|
Other assets |
|
|
(1,934 |
) |
|
|
(4,065 |
) |
Trade accounts payable |
|
|
(20,891 |
) |
|
|
16,275 |
|
Accrued expenses and other current
liabilities |
|
|
(12,655 |
) |
|
|
(1,386 |
) |
Workers compensation benefits |
|
|
(928 |
) |
|
|
(266 |
) |
Postretirement medical benefits |
|
|
4,413 |
|
|
|
4,503 |
|
Asset retirement obligation |
|
|
615 |
|
|
|
(1,772 |
) |
Other liabilities |
|
|
773 |
|
|
|
605 |
|
|
|
|
|
|
|
|
Net cash provided by (used in)
operating activities |
|
|
100,427 |
|
|
|
(1,420 |
) |
|
|
|
|
|
|
|
5
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited) (Continued)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
Investing activities: |
|
|
|
|
|
|
|
|
Capital expenditures |
|
$ |
(84,000 |
) |
|
|
(66,521 |
) |
Proceeds from disposition of property, plant,
and equipment |
|
|
264 |
|
|
|
5,148 |
|
Purchase of equity investment |
|
|
(107 |
) |
|
|
(654 |
) |
Purchase of acquired companies |
|
|
(28,273 |
) |
|
|
(389 |
) |
Collections on note receivable from coal supplier |
|
|
3,000 |
|
|
|
2,612 |
|
Payment of additional consideration on prior acquisition |
|
|
|
|
|
|
(5,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(109,116 |
) |
|
|
(64,804 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
Repayments of notes payable |
|
|
(50,232 |
) |
|
|
(8,230 |
) |
Proceeds from issuance of long-term debt |
|
|
200,000 |
|
|
|
70,000 |
|
Repayments on long-term debt |
|
|
(171,806 |
) |
|
|
(944 |
) |
Increase (decrease) in bank overdraft |
|
|
(2,649 |
) |
|
|
8,239 |
|
Proceeds from initial public offering, net of offering costs |
|
|
|
|
|
|
598,066 |
|
Repayment of restructuring notes payable |
|
|
|
|
|
|
(517,692 |
) |
Distributions to prior members of ANR Holdings, LLC
subsequent to Internal Restructuring |
|
|
(2,400 |
) |
|
|
(72,335 |
) |
Distributions to prior members of ANR Holdings, LLC
prior to Internal Restructuring |
|
|
|
|
|
|
(7,732 |
) |
Debt issuance costs |
|
|
|
|
|
|
(422 |
) |
Proceeds from exercise of stock options |
|
|
954 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities |
|
|
(26,133 |
) |
|
|
68,950 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
and cash equivalents |
|
|
(34,822 |
) |
|
|
2,726 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period |
|
|
39,622 |
|
|
|
7,391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
4,800 |
|
|
|
10,117 |
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
6
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 2006
(In thousands, except percentages and share data)
(1) Business and Basis of Presentation
Organization and Business
Alpha Natural Resources, Inc. and its operating subsidiaries are 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.
On February 11, 2005, Alpha Natural Resources, Inc., a Delaware corporation (Alpha) succeeded
to the business of ANR Holdings, LLC, a Delaware limited liability company (ANR Holdings) in a
series of internal restructuring transactions which are referred to collectively as the Internal
Restructuring, and on February 18, 2005, Alpha completed the initial public offering of its common
stock. Prior to the Internal Restructuring, ANR Fund IX Holdings, L.P. and Alpha NR Holding, Inc.
(the FR Affiliates), entities under the common control of First Reserve GP IX, Inc., were the
owners of 54.7% of the membership interests in ANR Holdings, and the remaining membership interests
in ANR Holdings were held by affiliates of American Metals & Coal International, Inc. (AMCI), Alpha
Coal Management, LLC (ACM) and Madison Capital Funding, LLC. The financial statements for the six
months ended June 30, 2005 are presented on a combined basis including the combined financial
results for the FR Affiliates and subsidiaries for the period from January 1, 2005 to February 11,
2005, and the consolidated results for Alpha and subsidiaries from February 12, 2005 to June 30,
2005. The financial statements for the three and six months ended June 30, 2006 are presented on a
consolidated basis. The entities included in the accompanying financial statements are
collectively referred to as the Company.
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 year-end; however,
in the opinion of management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Results of operations for the six months
ended June 30, 2006 are not necessarily indicative of the results to be expected for the year
ending December 31, 2006. 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, 2005
included in the
Companys Annual Report on Form 10-K filed with the Securities and Exchange Commission.
7
In the course of preparing the second quarter financial statements, the Company and its
independent auditors identified certain forward purchase and forward sale contracts that are
considered derivative instruments under SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities (SFAS No. 133) that do not qualify under the normal purchase and normal
sales exception. Transactions that do not qualify for this exception are required to be marked to
market.
Accordingly, the Company has reviewed these contracts to assess the impact, if any, that
mark-to-market adjustments would have had on previously issued financial statements. Upon
completion of that review, the Company concluded that previously issued financial statements were
not materially misstated.
At the beginning of the second quarter of 2006, the Company recorded adjustments to
mark-to-market all its open contracts for coal sales and purchase in the over-the-counter
market (OTC) and certain third party purchase and sales contracts. These adjustments resulted in
an increase in coal sales revenue of $3,057 and a decrease in cost of coal sales of $564, resulting
in a net after-tax increase to net income in the amount of $2,656 in the quarter. The Company has
assessed the impact of these adjustments and does not believe these amounts are material to any
previously issued financial statements or to its expected full year results for 2006.
During the second quarter ended June 30, 2006, the Company recorded as coal sales revenue
mark-to-market gains on open OTC coal sales contracts in the amount of $2,851 and mark-to-market
losses on open OTC coal purchase contracts as cost of coal sales in the amount of $2,136, resulting
in an after-tax net impact of $524 on earnings for the quarter.
At June 30, 2006, the Company had unrealized gains (losses) on open sales and purchases
contracts in the amount of $5,908 and ($1,572), respectively. These open sales and purchase contracts are
recorded in prepaid expenses and other current assets and accrued expenses and other current
liabilities, respectively.
(2) Earnings Per Share
Due to the Internal Restructuring on February 11, 2005 and initial public offering of common
stock completed on February 18, 2005, the calculation of earnings per share for the six months
ended June 30, 2005 reflects certain adjustments, as described below.
The numerator for purposes of computing basic and diluted net income (loss) per share,
as adjusted for the six months ended June 30, 2005, includes the reported net income (loss)
and a pro forma adjustment for income taxes to reflect the pro forma income taxes for ANR
Fund IX Holdings, L.P.s portion of reported pre-tax income (loss), which would have been
recorded if the issuance of the shares of common stock received by the FR Affiliates in
exchange for their ownership in ANR Holdings in connection with the Internal Restructuring
had occurred as of January 1, 2005. For purposes of the computation of basic and diluted net
income (loss) per share, as adjusted, the pro forma adjustment for income taxes only applies
to the percentage interest owned by ANR Fund IX Holding, L.P., the non-taxable FR Affiliate.
No pro forma adjustment for income taxes is required for the percentage interest owned by
Alpha NR Holding, Inc., the taxable FR Affiliate, because income taxes have already been
recorded in the historical results of operations. Furthermore, no pro forma adjustment to
reported net income (loss) is necessary subsequent to February 11, 2005 because Alpha is
subject to income taxes.
The denominator for purposes of computing basic net income (loss) per share, as adjusted
for the three months ended June 30, 2005 and the six months ended June 30, 2005, reflects the
retroactive impact of the common shares received by the FR Affiliates in exchange for their
ownership in ANR Holdings in connection with the Internal Restructuring on a weighted-average
outstanding share basis as being outstanding as of January 1, 2005. The common shares issued
to the minority interest owners of ANR Holdings in connection with the Internal
Restructuring, including the immediately vested shares granted to management, have been
reflected as being outstanding as of February 11, 2005 for purposes of computing the basic
net income (loss) per share, as adjusted. The unvested shares granted to management on
February 11, 2005 that vest monthly over the two-year period from January 1, 2005 to December
31, 2006 are included in the basic net income (loss) per share, as adjusted, computation as
they vest on a weighted-average outstanding share basis starting on February 11, 2005. The
33,925,000 new shares issued in connection with the initial public offering have been
reflected as being outstanding since February 14, 2005, the date of the initial public
offering, for purposes of computing the basic net income (loss) per share, as
adjusted.
8
The unvested shares issued to management are considered options for purposes of
computing diluted net income (loss) per share, as adjusted. Therefore, for diluted purposes,
all remaining unvested shares granted to management are added to the denominator subsequent
to February 11, 2005 using the treasury stock method, if the effect is dilutive. In addition,
the treasury stock method is used for outstanding stock options, if dilutive, beginning with
the November 10, 2004 grant of options to management to purchase units in ACM that were
automatically converted into options to purchase up to 596,985 shares of Alpha Natural
Resources, Inc. common stock at an exercise price of $12.73 per share.
9
The computations of basic and diluted net income per share, as adjusted, are set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported income from continuing operations |
|
$ |
23,128 |
|
|
$ |
26,127 |
|
|
$ |
50,339 |
|
|
$ |
806 |
|
Deduct: Income tax effect of ANR Fund IX Holdings, L.P. income
from continuing operations prior to Internal Restructuring |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(91 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, as adjusted |
|
|
23,128 |
|
|
|
26,127 |
|
|
|
50,339 |
|
|
|
715 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported income (loss) from discontinued operations |
|
|
|
|
|
|
266 |
|
|
|
|
|
|
|
(214 |
) |
Deduct: Income tax effect of ANR Fund IX Holdings, L.P. loss
from discontinued operations prior to Internal Restructuring |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, as adjusted |
|
|
|
|
|
|
266 |
|
|
|
|
|
|
|
(212 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, as adjusted |
|
$ |
23,128 |
|
|
$ |
26,393 |
|
|
$ |
50,339 |
|
|
$ |
503 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares basic |
|
|
64,012,586 |
|
|
|
61,091,806 |
|
|
|
63,907,353 |
|
|
|
50,220,404 |
|
Dilutive effect of stock options and restricted stock awards |
|
|
182,153 |
|
|
|
471,167 |
|
|
|
151,109 |
|
|
|
218,607 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares diluted |
|
|
64,194,739 |
|
|
|
61,562,973 |
|
|
|
64,058,463 |
|
|
|
50,439,011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per basic share, as adjusted in 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.36 |
|
|
$ |
0.43 |
|
|
$ |
0.79 |
|
|
$ |
0.01 |
|
Income (loss) from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per basic share |
|
$ |
0.36 |
|
|
$ |
0.43 |
|
|
$ |
0.79 |
|
|
$ |
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per diluted share, as adjusted in 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.36 |
|
|
$ |
0.43 |
|
|
$ |
0.79 |
|
|
$ |
0.01 |
|
Income (loss) from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per diluted share |
|
$ |
0.36 |
|
|
$ |
0.43 |
|
|
$ |
0.79 |
|
|
$ |
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3) Inventories
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Raw coal |
|
$ |
5,024 |
|
|
$ |
6,401 |
|
Saleable coal |
|
|
64,063 |
|
|
|
65,318 |
|
Materials and supplies |
|
|
15,772 |
|
|
|
13,166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total inventories |
|
$ |
84,859 |
|
|
$ |
84,885 |
|
|
|
|
|
|
|
|
10
(4) Long-Term Debt
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Term loan |
|
$ |
248,750 |
|
|
$ |
250,000 |
|
10% Senior notes due 2012 |
|
|
175,000 |
|
|
|
175,000 |
|
Revolving credit facility |
|
|
30,000 |
|
|
|
|
|
Variable rate term notes |
|
|
|
|
|
|
293 |
|
Capital lease obligations |
|
|
1,843 |
|
|
|
1,496 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt |
|
|
455,593 |
|
|
|
426,789 |
|
|
|
|
|
|
|
|
|
|
Less current portion |
|
|
3,224 |
|
|
|
3,242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, net of current
portion |
|
$ |
452,369 |
|
|
$ |
423,547 |
|
|
|
|
|
|
|
|
The Company manages its overall exposure to fluctuations in interest rates by entering into
interest rate hedging transactions to achieve an appropriate mix of fixed and floating-rate
instruments within its debt portfolio. The Company entered into a $233,125 (notional amount)
interest rate swap, effective May 9, 2006 until October 21, 2012, which has been designated as a
cash flow hedge. Under the terms of the interest rate swap, the Company receives variable interest
rate payments based upon a 3-month LIBOR and makes fixed interest rate payments of 5.59% plus an applicable margin of 1.75% at June 30, 2006. When
the hedged debt and swap are considered together, the combined cash flows are the equivalent of
paying a fixed rate of interest of 5.59% on debt of $233,125 through October 21, 2012. Settlements
paid on the swap agreement were $128,642 for the three months ended June 30, 2006. Net amounts to
be paid or received under the interest rate swap agreement are accrued as an adjustment to interest
expense. Any change in fair value of the interest rate swaps is recorded in accumulated other comprehensive Income.
As of June 30, 2006 the fair value of the interest rate swap was a liability of $525.
(5) Asset Retirement Obligation
At June 30, 2006 and December 31, 2005, the Company has recorded asset retirement obligation
accruals for mine reclamation and closure costs totaling $62,602 and $53,487, respectively. The
portion of the costs expected to be incurred within a year in the amounts of $7,213 and $7,190 at
June 30, 2006 and December 31, 2005, respectively, are included in accrued expenses and other
current liabilities. These regulatory obligations are secured by surety bonds in the amount of
$130,641 at June 30, 2006 and $116,680 at December 31, 2005. Changes in the reclamation
obligation were as follows:
|
|
|
|
|
Total asset retirement obligation at December 31, 2005 |
|
$ |
53,487 |
|
|
|
|
|
|
Accretion for the six months ended June 30, 2006 |
|
|
2,247 |
|
Sites added during the six months ended June 30, 2006 |
|
|
8,323 |
|
Expenditures for the six months ended June 30, 2006 |
|
|
(1,893 |
) |
Change in estimates |
|
|
116 |
|
Settlement of asset retirement obligation |
|
|
322 |
|
|
|
|
|
Total asset retirement obligation at June 30, 2006 |
|
$ |
62,602 |
|
|
|
|
|
11
(6) Stock-Based Compensation Awards
Adoption of New Accounting Method
Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 123(R), Share-Based Payment (SFAS 123R), which requires that the measurement and
recognition of compensation expense for all stock-based payment awards made to employees and
directors be based on estimated fair value over the requisite service or vesting period. Prior to
January 1, 2006, the Company measured stock-based compensation expense using the intrinsic value
method of accounting in accordance with Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations (APB 25).
In adopting SFAS 123R, the Company has elected to use the modified prospective transition
method, and accordingly, has not restated results from prior periods. Under this transition
method, stock-based compensation expense for the six months ended June 30, 2006 includes
compensation expense for all stock-based compensation awards granted prior to, but not yet vested
as of January 1, 2006, based on the grant date fair value estimated in accordance with the original
provisions of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123). Stock-based
compensation expense for all awards granted after December 31, 2005 is also based on the grant-date
fair value estimated in accordance with the provisions of SFAS 123R.
Stock-based compensation expense measured in accordance with SFAS 123R totaled $6,112 ($5,313
on a net-of-tax basis, or $.08 per basic and diluted share) for the three months ended June 30,
2006 and $9,945 ($8,978 on a net-of-tax basis, or $.14 per basic and diluted share) for the six
months ended June 30, 2006. The adoption of SFAS 123R resulted in increased expense of
approximately $467 ($340 on a net-of-tax basis, or $.01 per basic and diluted share) for the
three months ended June 30, 2006 and $934 ($685 on a net-of-tax basis, or $.01 per basic and
diluted share) for the six months ended June 30, 2006 as compared to the stock-based compensation
expense that would have been recorded pursuant to APB 25.
Approximately 92% of stock-based compensation expense is reported as selling, general and
administrative expenses and is included in the Corporate and Eliminations category for segment
reporting purposes (Note 9). Approximately 8% of the stock-based compensation expense was recorded
as part of the Cost of Sales category on the condensed consolidated statement of operations.
Under SFAR 123R the Company is required to report the benefits of
income tax deductions that exceed recognized compensation as cash flow from financing activities.
Such excess tax benefits were insignificant for the six months ended June 30, 2006.
The following table illustrates the effect on the net income, as adjusted and the net income
per basic and diluted share as if the Company had applied the fair value recognition provisions of
SFAS 123R to stock-based compensation for the three months and six months ended June 30, 2005.
12
|
|
|
|
|
|
|
|
|
|
|
Three months |
|
Six months |
|
|
ended |
|
ended |
|
|
June 30, |
|
June 30, |
|
|
2005 |
|
2005 |
|
|
|
Net income, as
adjusted (Note 2) |
|
$ |
26,393 |
|
|
$ |
503 |
|
Add: shared-based
employee compensation
cost, included in net
loss,
as adjusted, net of
income taxes and
minority interest |
|
|
2,508 |
|
|
|
38,029 |
|
Deduct: share-based
employee compensation
cost determined
under the fair
value based
method,
net of income taxes
and minority
interest |
|
|
(2,709 |
) |
|
|
(38,375 |
) |
|
|
|
Pro forma net income,
adjusted for effect
of fair value of
stock options |
|
$ |
26,192 |
|
|
$ |
157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share
basic and diluted,
adjusted for
stock options |
|
$ |
0.43 |
|
|
$ |
|
|
|
|
|
The fair value of stock options granted during the three months ended June 30, 2005 was
estimated on the date of the grant using the Black-Scholes option pricing model with the following
assumptions:
|
|
|
|
|
Expected life (years) |
|
|
4.0 |
|
Expected volatility |
|
|
38.0 |
% |
Risk-free interest rate |
|
|
3.38 |
% |
Expected annual dividend |
|
$ |
0.10 |
|
The Expected life for options represents an estimate of the period of time the stock options are
expected to remain outstanding. The Companys expected life is based upon a review of academic
research on employee exercise behavior on comparable size companies with similar contractual lives
and vesting periods because of the lack of history at Alpha.
The Expected volatility assumption is based on stock price volatility of a group of publicly
traded industry peers as a proxy because the Company was not publicly
traded at the time the options were granted.
The Risk-free interest rate assumption is based upon the yield on a U.S. Treasury strip (i.e.,
zero coupon bond) with a remaining life equal to the four-year expected life of the options.
The Expected annual dividend was based upon the Companys expected dividend policy. The
quarterly expected dividend range is between $.02 and $.03 per share,
or $.08 and $.12 per share per year. A mid-range was
selected for the assumptions above, however, the Company does not currently pay a
dividend.
No
stock options have been granted during the first half of 2006.
Disclosure of Share-Based Payment Arrangements
In November 2004, ACM adopted the Alpha Coal Management LLC 2004 Long-Term Incentive Plan (the
Alpha Coal Management Long-Term Incentive Plan) to provide equity-based incentive compensation to
those key employees and others who make significant contributions to the strategic and long-term
performance objectives and growth of the Company. On
November 10, 2004, ACM granted options to
13
purchase 800,000 units of ACM to 22 members of the Companys management team under the Alpha Coal
Management Long-Term Incentive Plan. These options vest over a period of five years (with
accelerated vesting upon a change of control) and have a term of ten years. In connection with this
grant of options, ACM entered into a letter agreement with ANR Holdings pursuant to which ANR
Holdings agreed to issue to ACM additional membership interests representing sharing ratios in the
aggregate amount equal to 1% of the outstanding membership interests upon exercise of awards
granted by ACM under the Alpha Coal Management Long-Term Incentive Plan. In connection with the
Internal Restructuring on February 11, 2005, this plan was amended and restated, the outstanding
options to purchase units of ACM were automatically converted into options to purchase shares of
Alpha Natural Resources, Inc. common stock and Alpha Natural Resources, Inc. assumed the
obligations of ACM pursuant to this plan. After the Internal Restructuring, there were outstanding
under the plan options to purchase an aggregate of 596,985 shares of common stock at an exercise
price of $12.73 per share. No additional options or awards will be granted under the plan.
As part of the Internal Restructuring, the officers and employees who were members of ACM
contributed all of their interest in ANR Holdings to Alpha in exchange for 2,772,157 shares of
Alpha common stock. Pursuant to the stockholder agreements, an aggregate of 1,344,930 shares of
common stock held by the Companys executives were unvested on the grant date and subject to
forfeiture. The stockholder agreement provides that an executive holding unvested shares whose
employment is terminated by us for cause, as defined in the stockholder agreement, or who
voluntarily terminates his employment will forfeit all of the unvested shares if the termination is
prior to December 31,2005 and one half of the unvested shares if the termination is after December
31, 2005 and prior to December 31, 2006. The stockholder agreement also provides that an executive
holding unvested shares whose employment is terminated by the Company without cause, or due to
retirement, death or disability, will become vested upon termination in a percentage of the total
shares initially subject to vesting equal to the number of full calendar months then elapsed since
December 31, 2004 divided by 24. The stockholder agreement further provides that vesting of all
unvested shares will accelerate upon a change of control of the Company, as defined in the
stockholder agreement.
In connection with the Internal Restructuring, Alpha Natural Resources, Inc. adopted, and its
stockholders approved, the Alpha Natural Resources, Inc. Long-Term Incentive Plan (the Long-Term
Incentive Plan). The principal purpose of the Long-Term Incentive Plan is to attract, motivate,
reward and retain selected employees, consultants and directors through the granting of stock-based
compensation awards. The Long-Term Incentive Plan provides for a variety of awards, including
non-qualified stock options, incentive stock options (within the meaning of Section 422 of the
Code), stock appreciation rights, unvested shares, dividend equivalents, performance-based awards
and other stock-based awards. The total number of shares of Alpha Natural Resources, Inc. common
stock initially available for issuance or delivery under the Long-Term Incentive Plan is 3,338,841
shares, and the maximum number of shares that may be subject to awards made to any one plan
participant in any fiscal year will be 2,000,000 shares.
On February 11, 2005 the Company granted certain of its executive officers, directors and key
employees options to purchase an aggregate of 692,905 shares of Alpha Natural Resources, Inc.
common stock at the initial public offering price of $19.00 per share. During the remainder of
2005, an additional 70,000 stock options were granted as well as 12,000 nonvested shares of stock.
All options granted during 2005 pursuant to the Long-Term Incentive Plan vest over a period of five
years and have a term of ten years. The nonvested shares of stock vest over a three-year period.
In the six months ended June 30, 2006, all awards granted pursuant to the Long-Term Incentive Plan
consisted of nonvested shares and performance shares. The nonvested shares generally vest in
one-third increments on January 1, 2007, 2008 and 2009. The performance share awards entitle the
grantee to receive a specified number of shares of Alpha common stock in the future, subject to the
achievement of certain pre-established operating income and return on invested capital targets for
the years 2006 through 2008. The performance share awards generally vest at the end of 2008.
14
Stock option activity for the six months ended June 30, 2006 is summarized in the following
table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
Weighted- |
|
|
Average |
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
|
Number of |
|
|
Exercise |
|
|
Contract |
|
|
|
Shares |
|
|
Price |
|
|
Life (Years) |
|
Outstanding at December 31, 2005 |
|
|
1,253,593 |
|
|
$ |
16.71 |
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(60,195 |
) |
|
$ |
15.86 |
|
|
|
|
|
Forfeited/Cancelled |
|
|
(36,000 |
) |
|
$ |
19.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2006 |
|
|
1,157,398 |
|
|
$ |
16.68 |
|
|
|
8.54 |
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2006 |
|
|
174,041 |
|
|
$ |
17.24 |
|
|
|
8.55 |
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value of options outstanding at June 30, 2006 was $3,403 and the
aggregate intrinsic value of exercisable options was $414. The total intrinsic value of options
exercised during the three months ended June 30, 2006 and 2005 was $243 and $0, respectively and
for the six months ended June 30, 2006 $361 and $0, respectively. Cash received from the exercise
of stock options during the three and six months ended June 30, 2006 was $544 and $954,
respectively. As of June 30, 2006, $6,536 of unrecognized compensation cost related to
stock options is expected to be recognized as expense over a weighted-average period of 3.51 years.
Nonvested share award activity for the six months ended June 30, 2006 is summarized in the
following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
Average |
|
|
|
Number of |
|
|
Grant Date |
|
|
|
Shares |
|
|
Fair Value |
|
Nonvested shares outstanding at December 31, 2005 |
|
|
684,465 |
|
|
$ |
19.15 |
|
Granted |
|
|
519,242 |
|
|
|
21.26 |
|
Vested |
|
|
(358,848 |
) |
|
|
19.31 |
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested shares outstanding at June 30, 2006 |
|
|
844,859 |
|
|
$ |
20.38 |
|
|
|
|
|
|
|
|
The fair value of nonvested share awards is estimated based on the average of the high and low
market 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 June 30, 2006, there was $9,600 of unamortized compensation cost related to nonvested
shares which is expected to be recognized as expense over a weighted-average period of 2.63 years.
This amount excludes $6,388 of unamortized costs remaining with respect to unvested shares issued
in connection with the Internal Restructuring to certain officers and employees, which will be
amortized over the remaining vesting period which ends December 31, 2006.
In addition to the above, the Company granted 148,268 performance share awards in March 2006,
all of which remain outstanding as of June 30, 2006. Recipients of these awards will receive
shares of Alpha common stock at the end of a three-year performance period which ends on December
31, 2008, based on the Companys actual performance against pre-established operating income and
return on invested capital targets. In order to receive the shares, the recipient generally must
also be employed by the Company on the
15
vesting date. The performance share awards represent the
number of common shares to be awarded based on the achievement of targeted performance, however the
actual number of shares to be awarded based on performance may range from 0 percent to 200 percent
of the targeted amount. The grant date fair value of a performance share award is based on the
closing market price of Alphas common stock on the date of award and is being amortized over the
performance period. The Company reassesses at each reporting date whether achievement of the
performance conditions is probable, as well as estimated forfeitures, and adjusts the accrual of
compensation expense as appropriate. As of June 30, 2006, there was $2,686 of unamortized
compensation cost related to performance share awards which is expected to be recognized as expense
over the next 2.5 years.
(7) Postretirement Benefits Other Than Pensions
The following table details the components of the net periodic benefit cost for postretirement
benefits other than pensions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Service cost |
|
$ |
859 |
|
|
$ |
1,000 |
|
|
$ |
1,920 |
|
|
$ |
1,944 |
|
Interest cost |
|
|
766 |
|
|
|
717 |
|
|
|
1,413 |
|
|
|
1,255 |
|
Amortization of net (gain) or loss |
|
|
85 |
|
|
|
15 |
|
|
|
93 |
|
|
|
9 |
|
Amortization of prior service cost |
|
|
489 |
|
|
|
608 |
|
|
|
1,136 |
|
|
|
1,306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
2,199 |
|
|
$ |
2,340 |
|
|
$ |
4,562 |
|
|
$ |
4,514 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employer contributions for benefits paid for the six months ended June 30, 2006 and 2005 were
$0 and $10, respectively. Employee contributions are not expected to be made and the plan is
unfunded.
Two of the Companys subsidiaries are required to make contributions to the 1993 UMWA Benefit
Plan of fifty cents per signatory hour worked. The contributions that the Company made to this
plan for the quarters ended June 30, 2006 and 2005 were $8 and $8 respectively and $15 and $15 for
the six months ended June 30, 2006 and 2005, respectively.
(8) Related Party Transactions
The Company had the following receivable balances from affiliated parties as of June 30, 2006
and December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
AMCI |
|
$ |
63 |
|
|
$ |
10,390 |
|
Robindale Energy & Subsidiary |
|
|
|
|
|
|
63 |
|
|
|
|
|
|
|
|
Total |
|
$ |
63 |
|
|
$ |
10,453 |
|
|
|
|
|
|
|
|
As of June 30, 2006, $63 of receivables from AMCI are included in notes and other
receivables. As of December 31, 2005, $7,847 of receivables from AMCI were included in trade
accounts receivable, net and $2,543 are included in notes and other receivables. The majority of
the AMCI receivables at December 31, 2005 relate to coal sales transactions in the normal course of
business.
16
The Company had the following balances payable to affiliated parties as of June 30, 2006 and
December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
AMCI |
|
$ |
7,535 |
|
|
$ |
13,735 |
|
First Reserve Fund IX, L.P. |
|
|
|
|
|
|
4,500 |
|
Foundation Energy |
|
|
|
|
|
|
2,605 |
|
Robindale Energy & Subsidiary |
|
|
10 |
|
|
|
51 |
|
|
|
|
|
|
|
|
Total |
|
$ |
7,545 |
|
|
$ |
20,891 |
|
|
|
|
|
|
|
|
At December 31, 2005 and June 30, 2006, the amount payable to AMCI of $13,735 and $7,535,
respectively, are included in accrued expenses and other current liabilities. First Reserve Fund
IX, L.P. is no longer a related party since it sold all of its remaining shares on January 25,
2006 and its two designees on Alphas Board of Directors
resigned effective January 19 and 25, 2006,
respectively.
(9) 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 July 31,
2006, consisted of 39 underground mines and 28 surface mines located in Central Appalachia and
Northern Appalachia. Coal Operations also includes the Companys purchased coal sales function,
which markets the Companys Appalachian coal to domestic and international customers. The All Other
category includes the Companys equipment sales and repair operations, as well as other ancillary
business activities, including terminal services, trucking services, coal and environmental
analysis services, and leasing of mineral rights. In addition, the All Other category includes
revenue from the operation of the Companys highway 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, as adjusted, which the Company defines as
net income (loss) plus interest expense, income tax expense (benefit), depreciation, depletion and
amortization, less interest income, and adjusted for minority interest. EBITDA, as adjusted, from
continuing operations is defined as income from continuing operations plus interest expense, income
tax expense (benefit), depreciation, depletion and amortization, less interest income, and adjusted
for minority interest.
Operating segment results for continuing operations for the three months ended June 30, 2006
and segment assets as of June 30, 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate |
|
|
|
|
Coal |
|
All |
|
and |
|
|
|
|
Operations |
|
Other |
|
Eliminations |
|
Consolidated |
Revenues |
|
$ |
488,975 |
|
|
$ |
15,339 |
|
|
$ |
(8,633 |
) |
|
$ |
495,681 |
|
Depreciation, depletion, and amortization |
|
|
32,072 |
|
|
|
1,435 |
|
|
|
700 |
|
|
|
34,207 |
|
EBITDA |
|
|
92,998 |
|
|
|
2,209 |
|
|
|
(18,581 |
) |
|
|
76,626 |
|
Capital expenditures |
|
|
32,430 |
|
|
|
60 |
|
|
|
71 |
|
|
|
32,561 |
|
Total assets |
|
|
1,098,569 |
|
|
|
90,418 |
|
|
|
(135,495 |
) |
|
|
1,053,492 |
|
17
Operating segment results for continuing operations for the six months ended June 30,
2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate |
|
|
|
|
Coal |
|
All |
|
and |
|
|
|
|
Operations |
|
Other |
|
Eliminations |
|
Consolidated |
Revenues |
|
$ |
961,514 |
|
|
$ |
34,825 |
|
|
$ |
(18,348 |
) |
|
$ |
977,991 |
|
Depreciation, depletion, and amortization |
|
|
63,132 |
|
|
|
3,414 |
|
|
|
1,295 |
|
|
|
67,841 |
|
EBITDA |
|
|
187,711 |
|
|
|
4,894 |
|
|
|
(35,424 |
) |
|
|
157,181 |
|
Capital expenditures |
|
|
76,872 |
|
|
|
6,025 |
|
|
|
1,103 |
|
|
|
84,000 |
|
Total assets |
|
|
1,098,569 |
|
|
|
90,418 |
|
|
|
(135,495 |
) |
|
|
1,053,492 |
|
Operating segment results for continuing operations for the three months ended June 30, 2005
and segment assets as of June 30, 2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate |
|
|
|
|
Coal |
|
All |
|
and |
|
|
|
|
Operations |
|
Other |
|
Eliminations |
|
Consolidated |
Revenues |
|
$ |
414,660 |
|
|
$ |
10,517 |
|
|
$ |
(7,541 |
) |
|
$ |
417,636 |
|
Depreciation, depletion, and amortization |
|
|
14,344 |
|
|
|
369 |
|
|
|
362 |
|
|
|
15,075 |
|
EBITDA, as adjusted |
|
|
70,502 |
|
|
|
1,112 |
|
|
|
(14,867 |
) |
|
|
56,747 |
|
Capital expenditures |
|
|
35,924 |
|
|
|
40 |
|
|
|
235 |
|
|
|
36,199 |
|
Total assets |
|
|
505,097 |
|
|
|
72,329 |
|
|
|
30,806 |
|
|
|
608,232 |
|
Operating segment results for continuing operations for the six months ended June 30, 2005
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate |
|
|
|
|
Coal |
|
All |
|
and |
|
|
|
|
Operations |
|
Other |
|
Eliminations |
|
Consolidated |
Revenues |
|
$ |
722,116 |
|
|
$ |
20,229 |
|
|
$ |
(12,554 |
) |
|
$ |
729,791 |
|
Depreciation, depletion, and amortization |
|
|
27,494 |
|
|
|
788 |
|
|
|
963 |
|
|
|
29,245 |
|
EBITDA, as adjusted |
|
|
116,377 |
|
|
|
2,341 |
|
|
|
(61,864 |
) |
|
|
56,854 |
|
Capital expenditures |
|
|
65,458 |
|
|
|
322 |
|
|
|
431 |
|
|
|
66,211 |
|
Total assets |
|
|
505,097 |
|
|
|
72,329 |
|
|
|
30,806 |
|
|
|
608,232 |
|
18
Reconciliation of total segment EBITDA, as adjusted, to income from continuing operations follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Total segment EBITDA, as adjusted, for
2005 for continuing operations |
|
$ |
76,626 |
|
|
$ |
56,747 |
|
|
$ |
157,181 |
|
|
$ |
56,854 |
|
Interest expense |
|
|
(10,786 |
) |
|
|
(6,647 |
) |
|
|
(21,063 |
) |
|
|
(12,764 |
) |
Interest income |
|
|
171 |
|
|
|
191 |
|
|
|
358 |
|
|
|
478 |
|
Income tax expense from continuing operations |
|
|
(8,676 |
) |
|
|
(9,089 |
) |
|
|
(18,296 |
) |
|
|
(11,599 |
) |
Depreciation, depletion and amortization from
continuing operations |
|
|
(34,207 |
) |
|
|
(15,075 |
) |
|
|
(67,841 |
) |
|
|
(29,245 |
) |
Minority interest in income from continuing
operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,918 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
23,128 |
|
|
$ |
26,127 |
|
|
$ |
50,339 |
|
|
$ |
806 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company markets produced, processed and purchased coal to customers in the United States
and in international markets. Export revenues totaled $171,914 and $358,449 or approximately 35%
and 37% of total revenues for the three and six months ended June 30, 2006, respectively. Export
revenues were $204,638 and $344,771 or approximately 49% and 47%, respectively, of total revenues
for the three and six months ended June 30, 2005.
(10) Commitment 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 Companys combined 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 outstanding as of
June 30, 2006 is $74,070. The amount of surety bonds currently outstanding related to the Companys
reclamation obligations is presented in note 5 to the condensed consolidated financial statements.
The Company has provided guarantees for equipment financing obtained by certain of its contract
mining operators totaling approximately $792. The estimated fair value of these guarantees is not
significant.
(b) Litigation
The Company is involved in various legal proceedings from time to time in the normal course of
business. In managements opinion, the Company is not currently involved in any legal proceeding
which individually or in the aggregate could have a material effect on the financial condition,
results of operations and/or cash flows of the Company.
19
(11) Discontinued Operations
On April 14, 2005, the Company sold the assets of its Colorado mining subsidiary, National
King Coal LLC, and related trucking subsidiary, Gallup Transportation and Transloading Company, LLC
(collectively, NKC), to an unrelated third party for cash in the amount of $4,400, plus an amount
in cash equal to the fair market value of NKCs coal inventory, and the assumption by the buyer of
certain liabilities of NKC. The Company recorded a gain on the sale of NKC of $704 for the quarter
and six months ended June 30, 2005. The results of operations of NKC for all periods have been
reported in discontinued operations. National King Coal LLC was previously reported in the Coal
Operations segment and Gallup Transportation and Transloading Company, LLC were previously reported
in the All Other segment (note 9).
The following statement of operations data reflects the activity for the discontinued
operation for the three months and six months ended June 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2005 |
|
|
2005 |
|
Total revenues |
|
$ |
906 |
|
|
$ |
4,523 |
|
Total costs and expenses |
|
|
1,251 |
|
|
|
5,607 |
|
Gain on sale of discontinued operations |
|
|
704 |
|
|
|
704 |
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
359 |
|
|
|
(380 |
) |
Miscellaneous income |
|
|
0 |
|
|
|
1 |
|
Income tax benefit (expense) from discontinued
operations |
|
|
93 |
|
|
|
(93 |
) |
Minority interest in income (loss) from
discontinued operations |
|
|
0 |
|
|
|
(72 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations |
|
$ |
266 |
|
|
$ |
(214 |
) |
|
|
|
|
|
|
|
(12) Income Taxes
The condensed consolidated statements of operations for the six months ended June 30, 2005
include activity both prior to and after the Internal Restructuring and initial public offering.
Accordingly, the total income tax provision for the three and six months ended June, 30 2005 is the
sum of the provisions for the pre- and post-restructuring periods.
Prior to February 12, 2005, the minority interest owners and ANR Fund IX Holdings, L.P. owned
interests in ANR Holdings, a limited liability company and pass-through entity for income tax
purposes. As a pass-through entity, ANR Holdings provides information returns reflecting the
allocated income (loss) to the minority interest owners and ANR Fund IX Holdings, L.P based upon
their respective ownership percentage and certain special allocations as provided by the limited
liability company agreement and the Internal Revenue Code. The income tax consequences of the
income (loss) allocated to these owners for the period from January 1, 2005 to February 11, 2005 is
not reflected in the financial statements. For the 2005 period, only the income tax expense
associated with Alpha NR Holding, Inc., a taxable entity, is included. The primary source of the
income tax impact is derived from the allocated income (loss) from ANR Holdings, Alpha Natural
Resources, LLC and its operating subsidiaries, all of which are pass-through entities for tax
purposes. Subsequent to the Internal Restructuring and initial public offering, all of the income
of ANR Holdings is taxed to Alpha Natural Resources, Inc.
A tax provision of $8,676 was recorded for the three months ended June 30, 2006 on pre-tax
income of $31,804, which equates to an effective tax rate of 27.3%. This rate is lower than the
federal statutory rate of 35% due primarily to the tax benefits associated with percentage
depletion and the extraterritorial income exclusion, partially offset by state income taxes, change
in the valuation allowance, and the portion of the stock-based compensation charge associated with
the issuance of common stock to management in connection with the Internal Restructuring and
initial public offering which is not deductible for tax purposes.
20
A tax provision of $11,599 was recorded for the six months ended June 30, 2005 on pre-tax
income from continuing operations of $15,323, which equates to an effective tax rate of 75.7%.
This rate is higher than the federal statutory rate of 35% due primarily to the majority of the
stock-based compensation charge associated with the issuance of common stock to management in
connection with the Internal Restructuring and IPO not being deductible for tax purposes. The
increase in expected income tax expense related to the stock-based compensation charge is offset in
part by the tax benefits associated with percentage depletion, the extraterritorial income
exclusion, and taxes not being provided for on the minority interest and pass-through entity
owners respective shares for the period prior to the restructuring. A tax provision of $18,296
was recorded for the six months ended June 30, 2006 on pre-tax
income of $68,635 which equates to
an effective tax rate of 26.7%. This rate is lower than the federal statutory rate of 35% due
primarily to the tax benefits associated with percentage depletion and the extraterritorial income
exclusion, partially offset by state income taxes, change in the valuation allowance, and the
portion of the stock-based compensation charge associated with the issuance of common stock to
management in connection with the Internal Restructuring and initial public offering which is not
deductible for tax purposes.
The income tax provision from continuing operations and discontinued operations for the three and
six months ended June 30, 2005 was as follows:.
|
|
|
|
|
|
|
|
|
|
|
Three months |
|
|
Six months |
|
|
|
ended |
|
|
ended |
|
|
|
2005 |
|
|
2005 |
|
Continuing operations |
|
$ |
9,089 |
|
|
$ |
11,599 |
|
Discontinued operations |
|
|
93 |
|
|
|
(93 |
) |
|
|
|
|
|
|
|
|
|
$ |
9,182 |
|
|
$ |
11,506 |
|
|
|
|
|
|
|
|
A reconciliation of the statutory federal income tax expense at 35% to income from continuing
operations before income taxes and minority interest, and the actual income tax expense is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Federal statutory income tax expense |
|
$ |
11,131 |
|
|
$ |
12,325 |
|
|
$ |
24,023 |
|
|
$ |
5,362 |
|
Increases (reductions) in taxes due to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage depletion allowance |
|
|
(5,077 |
) |
|
|
(4,895 |
) |
|
|
(9,941 |
) |
|
|
(6,563 |
) |
Extraterritorial income exclusion |
|
|
(469 |
) |
|
|
(521 |
) |
|
|
(882 |
) |
|
|
(705 |
) |
Deduction for domestic production activities |
|
|
(101 |
) |
|
|
(202 |
) |
|
|
(266 |
) |
|
|
(279 |
) |
State taxes, net of federal tax impact |
|
|
806 |
|
|
|
757 |
|
|
|
1,771 |
|
|
|
1,056 |
|
Stock-based compensation |
|
|
1,199 |
|
|
|
1,300 |
|
|
|
2,229 |
|
|
|
13,354 |
|
Change in valuation allowance |
|
|
986 |
|
|
|
268 |
|
|
|
989 |
|
|
|
397 |
|
Taxes not provided for minority interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,001 |
) |
Taxes not provided for pass-through entity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(133 |
) |
Other, net |
|
|
201 |
|
|
|
57 |
|
|
|
373 |
|
|
|
111 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual income tax expense |
|
$ |
8,676 |
|
|
$ |
9,089 |
|
|
$ |
18,296 |
|
|
$ |
11,599 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
In assessing the realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of future taxable
income during the period in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future taxable income and
tax planning strategies in making this assessment. Based upon the level of historical taxable
income and projections for future taxable income over the periods in which the future deductible
temporary differences will reverse, management believes it is more likely than not that the Company
will realize the benefits of the deferred tax assets, net of the valuation allowance of $104,971,
at June 30, 2006.
During
the second quarter, a net deferred tax asset of $4,838 (gross asset of $15,295 less
valuation allowance of $10,457) was recorded as a result of the Progress acquisition.
(13) Progress Acquisition
On May 1, 2006, the Company completed the acquisition of certain coal mining operations in
eastern Kentucky from Progress Fuels Corp, a subsidiary of Progress Energy for $28,273, including a
preliminary adjustment for working capital. The purchase price is subject to a post-closing
adjustment based on actual working capital levels. The Progress acquisition consisted of the
purchase of the outstanding capital stock of White Diamond May Coal Co. and Progress Land Corp. and
the assets of Kentucky May Coal Co., Inc. The operations acquired are adjacent to Alphas
Enterprise business unit and has been integrated with Enterprise.
(14) Accumulated Other Comprehensive Income
The component of accumulated other comprehensive income as of June 30, 2006 represents the unrealized loss on interest
rate swaps, which are accounted for as cash flow hedges, in the amount of $525.
(15) New Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109 (FIN 48),
which clarifies the accounting for uncertainty in tax positions. FIN 48 requires that the Company
recognize in its financial statements the impact of a tax position if it is more likely
than not the position will be sustained on audit, based on the technical merits of the position.
The provisions of FIN 48 are effective as of the beginning of Alphas 2007 fiscal year, with the
cumulative effect of the change in accounting principle recorded as an adjustment to opening
retained earnings. The Company is currently evaluating the impact of adopting FIN 48 on its
financial statements.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis in conjunction with our financial statements
and related notes included elsewhere in this report. The combined historical financial information
discussed below for all periods prior to the completion of our Internal Restructuring on February
11, 2005, is for ANR Fund IX Holdings, L.P. and Alpha NR Holding, Inc. and subsidiaries, which
prior to the completion of our Internal Restructuring were the owners of a majority of the
membership interests of ANR Holdings, and for all periods after our Internal Restructuring is for
Alpha Natural Resources, Inc., the owner of 100% of the membership interests of ANR Holdings after
our Internal Restructuring.
Cautionary Note Regarding Forward Looking Statements
22
This report includes statements of our expectations, intentions, plans and beliefs that
constitute forward-looking statements within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934 and are intended to come within the
safe harbor protection provided by those sections. These statements, which involve risks and
uncertainties, relate to analyses and other information that are based on forecasts of future
results and estimates of amounts not yet determinable and may also relate to our future prospects,
developments and business strategies. We have used the words anticipate, believe, could,,
estimate, expect, intend, may, plan, predict, project, should and similar terms and
phrases, including references to assumptions, in this report to identify forward-looking
statements. These forward-looking statements are made based on expectations and beliefs concerning
future events affecting us and are subject to uncertainties and factors relating to our operations
and business environment, all of which are difficult to predict and many of which are beyond our
control, that could cause our actual results to differ materially from those matters expressed in
or implied by these forward-looking statements.
The following factors are among those that may cause actual results to differ materially from
our forward-looking statements:
|
|
|
market demand for coal, electricity and steel; |
|
|
|
|
future economic or capital market conditions; |
|
|
|
|
weather conditions or catastrophic weather-related damage; |
|
|
|
|
our production capabilities; |
|
|
|
|
the consummation of financing, acquisition or disposition transactions and the effect thereof on our business; |
|
|
|
|
our ability to successfully integrate the operations we acquired in the Nicewonder and
Progress acquisitions with our existing operations, and to successfully operate the highway
construction business we acquired in the Nicewonder acquisition, as well as our ability to
successfully integrate operations we may acquire in the future; |
|
|
|
|
our plans and objectives for future operations and expansion or consolidation; |
|
|
|
|
our relationships with, and other conditions affecting, our customers; |
|
|
|
|
timing of changes in customer coal inventories; |
|
|
|
|
long-term coal supply arrangements; |
|
|
|
|
inherent risks of coal mining beyond our control; |
|
|
|
|
environmental laws, including those directly affecting our coal mining and production,
and those affecting our customers coal usage; |
|
|
|
|
competition in coal markets; |
|
|
|
|
railroad, barge, truck and other transportation performance and costs; |
|
|
|
|
availability of mining and processing equipment and parts; |
|
|
|
|
our assumptions concerning economically recoverable coal reserve estimates; |
|
|
|
|
availability of skilled employees and other employee workforce factors; |
|
|
|
|
regulatory and court decisions; |
|
|
|
|
future legislation and changes in regulations, governmental policies or taxes; |
|
|
|
|
changes in postretirement benefit obligations; |
23
|
|
|
our liquidity, results of operations and financial condition; and |
|
|
|
|
other factors, including the other factors discussed in Overview Coal Pricing Trends
and Uncertainties and Outlook below, and the factors discussed in Part I, Item 1A Risk
Factors section of our annual report on Form 10-K for the year ended December 31, 2005. |
When considering these forward-looking statements, you should keep in mind the cautionary
statements in this report and the documents incorporated by reference. We do not undertake any
responsibility to release publicly any revisions to these forward-looking statements to take into
account events or circumstances that occur after the date of this report. Additionally, we do not
undertake any responsibility to update you on the occurrence of any unanticipated events which may
cause actual results to differ from those expressed or implied by the forward-looking statements
contained in this report.
Overview
We produce, process and sell steam and metallurgical coal from eight regional business units,
which, as of July 31, 2006, are supported by 39 active underground mines, 28 active surface
mines and 12 preparation plants located throughout Virginia, West Virginia, Kentucky, and
Pennsylvania. We also sell coal produced by others through third party purchase contracts or in the
over-the-counter market, the majority of which we process and/or blend with coal produced from our
mines prior to resale, providing us with a higher overall margin for the blended product than if we
had sold the coals separately. For the three months ended June 30, 2006 and six months ended June
30, 2006, sales of steam coal were 4.9 and 9.2 million tons, respectively, which accounted for
approximately 66% and 63%, respectively, of our coal sales volume during each of these periods.
For the three months ended June 30, 2006 and six months ended June 30, 2006, sales of metallurgical
coal, which generally sells at a premium over steam coal, were 2.6 and 5.3 million tons,
respectively, which accounted for approximately 34% and 37%, respectively, of our coal sales volume
during each of these periods. Our sales of steam coal during the first half of 2006 were made
primarily to large utilities and industrial customers in the Eastern region of the United States,
and our sales of metallurgical coal during the period were made primarily to steel companies in the
Northeastern and Midwestern regions of the United States and in several countries in Europe, Asia
and South America. Approximately 37% of our coal sales revenue including freight and handling in
the first six months of 2006 was derived from sales made outside the United States, primarily in
Canada, Italy, Romania, India, Brazil and Turkey.
In addition, we generate other revenues from highway construction, equipment and parts sales,
equipment repair income, rentals, royalties, commissions, coal handling, terminal and processing
fees, and coal and environmental analysis fees. We also record revenue for freight and handling
charges incurred in delivering coal to our customers, which we treat as being reimbursed by our
customers. However, these freight and handling revenues are offset by equivalent freight and
handling costs and do not contribute to our profitability.
Our business is seasonal, with operating results varying from quarter to quarter. We generally
experience lower sales and hence build coal inventory during the winter months primarily due to the
freezing of lakes that we use to transport coal to some of our customers. In the first quarter of
this year, the lakes opened for shipments earlier than normal due to milder weather, which lessened
the impact of this lake effect on our operations in the first quarter of this year.
Our primary expenses are wages and benefits, supply costs, repair and maintenance
expenditures, cost of purchased coal, royalties, freight and handling costs, and taxes incurred in
selling our coal. Historically, our cost of coal sales per ton is lower for sales of our produced
and processed coal than for sales of purchased coal that we do not process prior to resale.
We have one reportable segment, Coal Operations, which includes all of our revenues and costs
from coal production and sales, freight and handling, rentals, commissions and coal handling and
processing operations and coal recovery incidental to our highway construction operations. These
revenues and costs included in our Coal Operations segment are reported by us in our coal revenues
and cost of coal sales, except for the revenues and costs from rentals, commissions, and coal
handling, processing operations and highway construction, which we report in our other revenues and
cost of other revenues, respectively.
In the course of preparing the second quarter financial statements, the Company and its
independent auditors identified certain forward purchase and forward sale contracts that are
considered derivative instruments under SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities (SFAS No. 133) that do not qualify under the normal purchase and normal
sales exception. Transactions that do not qualify for this exception are required to be marked to
market.
24
Accordingly, the Company has reviewed these contracts to assess the impact, if any, that
mark-to-market adjustments would have had on previously issued financial statements. Upon
completion of that review, the Company concluded that previously issued financial statements were
not materially misstated.
At the beginning of the second quarter of 2006, the Company recorded adjustments to
mark-to-market all its open contracts for coal sales and purchase in the over-the-counter
market (OTC) and certain third party purchase and sales contracts. These adjustments resulted in
an increase in coal sales revenue of $3.1 million and a decrease in cost of coal sales of $0.6 million, resulting
in a net after-tax increase to net income in the amount of $2.7 million in the quarter. The Company has
assessed the impact of these adjustments and does not believe these amounts are material to any
previously issued financial statements or to its expected full year results for 2006.
During the second quarter ended June 30, 2006, the Company recorded as coal sales revenue
mark-to-market gains on open OTC coal sales contracts in the amount of $2.9 million and mark-to-market
losses on open OTC coal purchase contracts as cost of coal sales in the amount of $2.1 million, resulting
in an after-tax net impact of $0.5 million on earnings for the quarter.
At June 30, 2006, the Company had unrealized gains (losses) on open sales and purchases
contracts in the amount of $5.9 million and ($1.6 million), respectively. These open sales and purchases are
recorded in prepaid expenses and other current assets and accrued expenses and other current
liabilities, respectively.
Coal Pricing Trends and Uncertainties. During the three months and six months ended June 30, 2006
when compared to the corresponding periods in 2005, prices for our coal increased 8% and 13%,
respectively, due to a combination of conditions in the United States and internationally,
including an improving U.S. economy, strong growth in the steel sector, limited availability of high-quality coal from competing producers in Central
Appalachia, capacity constraints of U.S. nuclear-powered electricity generators, and increased
international demand for U.S. coal. This strong coal pricing environment has contributed to our
growth in revenues during the three months and six months ended June 30, 2006.
However, there has been a slight softening of the spot coal market
caused by a mild winter, increased production and some railroad improvements.
While our outlook on coal pricing remains positive as noted below under Outlook, future coal prices are subject to
factors beyond our control and we cannot predict whether and for how long this strong coal pricing
environment will continue. As of July 14, 2006, approximately 3%, 40% and 67% of our planned
production for 2006, 2007 and 2008 respectively, including the operations we acquired in the
Progress acquisition, was uncommitted and was not yet priced.
During the first half of 2006, we continued to experience increased costs for purchased coal
which have risen with coal prices generally, and increased operating costs for employee wages, and
salaries and benefits, diesel fuel, and trucking. We also experienced some disruptions in railroad
service during the first six months of 2006, which caused delays in delivering products to
customers, lowered sales volume, and increased our internal coal handling costs.
We continued to experience a tight market for supplies of mining and processing equipment and
parts during this quarter, due to increased demand by coal producers attempting to increase
production in response to the strong market demand for coal. Although we are attempting to obtain
adequate supplies of mining and processing equipment and parts to meet our production forecasts,
continued limited availability of equipment and parts could prevent us from meeting those
forecasts. The supply of mining and processing equipment and parts is subject to factors beyond
our control and we cannot predict whether and for how long this supply market will remain limited.
We are also experiencing a tight market for skilled mining employees, due to increased demand
by coal producers attempting to increase production in response to the strong market demand for
coal, and demographic changes as existing miners in Appalachia retire at a faster rate than new
miners are added to the Appalachian mining workforce. Coal mining is an experience-oriented
industry as to labor skill sets. It takes considerable time for new miners to achieve the
productivity rate historically exhibited by the experienced miners. Although we have initiated
training programs to create new skilled miners and raise the skill levels of existing miners,
continued limited availability of skilled miners could prevent us from being able to meet our
production and sales forecasts. The supply of skilled mining employees is subject to factors
beyond our control and we cannot predict whether and for how long this employee market will remain
limited.
25
Reconciliation of Non-GAAP Measures
The following unaudited table reconciles EBITDA and EBITDA, as adjusted, to net income, the
mostly directly comparable GAAP measure.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Net income |
|
$ |
23,128 |
|
|
$ |
26,393 |
|
|
$ |
50,339 |
|
|
$ |
592 |
|
Interest expense |
|
|
10,786 |
|
|
|
6,647 |
|
|
|
21,063 |
|
|
|
12,764 |
|
Interest income |
|
|
(171 |
) |
|
|
(191 |
) |
|
|
(358 |
) |
|
|
(478 |
) |
Income tax expense |
|
|
8,676 |
|
|
|
9,182 |
|
|
|
18,296 |
|
|
|
11,506 |
|
Depreciation, depletion and amortization |
|
|
34,207 |
|
|
|
15,048 |
|
|
|
67,841 |
|
|
|
29,528 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA (1) |
|
|
76,626 |
|
|
|
57,079 |
|
|
|
157,181 |
|
|
|
53,912 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,846 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA, as adjusted (1) |
|
$ |
76,626 |
|
|
$ |
57,079 |
|
|
$ |
157,181 |
|
|
$ |
56,758 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
EBITDA is defined as net income plus interest expense, income tax expense (benefit),
depreciation, depletion, and amortization, less interest income. EBITDA, as adjusted,
includes EBITDA plus minority interest. EBITDA and EBITDA, as adjusted, are used by management to
measure operating performance, and management also believes they are useful indicators of our
ability to meet debt service and capital expenditure requirements. Because EBITDA and EBITDA, as
adjusted, are not calculated identically by all companies, our calculation may not be comparable to
similarly titled measures of other companies. In addition, the amounts presented for EBITDA and
EBITDA, as adjusted, differ from the amounts calculated under the definition of EBITDA used in our
debt covenants. The definition of EBITDA used in our debt covenants is further adjusted for certain
cash and non-cash charges and is used to determine compliance with financial covenants and our
ability to engage in certain activities such as incurring debt and making certain payments.
Adjusted EBITDA as it is used and defined in our debt covenants is described and reconciled to net
income (loss) in Analysis of Material Debt Covenants below. |
Results of Operations
Three months Ended June 30, 2006 Compared to the Three months Ended June 30, 2005
Summary
For the quarter ended June 30, 2006, we recorded revenues of $ 495.7 million compared to
$417.6 million for the quarter ended June 30, 2005, an increase of $78.0 million. Net income
decreased from $26.4 million ($0.43 per diluted share) in the second quarter of 2005 to $23.1
million ($0.36 per diluted share) for the second quarter of 2006. EBITDA, as adjusted, in 2005 and
as reconciled to our net income in the table above, was $76.6 million and $57.1 in the second
quarter 2006 and 2005 respectively, including the non-cash portion of our stock-based compensation
charges of $6.1 million and $3.4 million in the second quarter of 2006 and 2005, respectively.
We sold 7.5 million tons of coal during the second quarter of 2006, 0.8 million more than the
comparable period in 2005. Our Callaway business unit contributed 1.0 million tons for the
quarter. Coal margin, which we define as coal revenues less cost of coal sales, divided by coal
revenues, increased from 19.4% in 2005 to 20.9% in 2006. Coal margin per ton was $12.20 in the
second quarter 2006, a 15.6% increase from the second quarter 2005. Coal margin per ton is
calculated as coal sales realization (sales price) per ton less cost of coal sales per ton.
26
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months Ended |
|
|
Increase |
|
|
|
June 30, |
|
|
(Decrease) |
|
|
|
2006 |
|
|
2005 |
|
|
$ or Tons |
|
|
% |
|
|
|
(in thousands, except per ton data) |
|
Coal revenues |
|
$ |
436,529 |
|
|
$ |
364,070 |
|
|
$ |
72,459 |
|
|
|
20 |
% |
Freight and handling revenues |
|
|
50,935 |
|
|
|
48,239 |
|
|
|
2,696 |
|
|
|
6 |
% |
Other revenues |
|
|
8,217 |
|
|
|
5,327 |
|
|
|
2,890 |
|
|
|
54 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
495,681 |
|
|
$ |
417,636 |
|
|
$ |
78,045 |
|
|
|
19 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tons Sold: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steam |
|
|
4,893 |
|
|
|
3,906 |
|
|
|
987 |
|
|
|
25 |
% |
Metallurgical |
|
|
2,567 |
|
|
|
2,784 |
|
|
|
(217 |
) |
|
|
(8 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
7,460 |
|
|
|
6,690 |
|
|
|
770 |
|
|
|
12 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coal sales realization per ton: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steam |
|
$ |
50.16 |
|
|
$ |
40.97 |
|
|
$ |
9.19 |
|
|
|
22 |
% |
Metallurgical |
|
|
74.44 |
|
|
|
73.29 |
|
|
|
1.15 |
|
|
|
2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
58.52 |
|
|
$ |
54.42 |
|
|
$ |
4.10 |
|
|
|
8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Coal Revenues. Coal revenues increased by $72.5 million (20%) for the quarter ended June 30, 2006
over the comparable period of 2005 mainly driven by an 8% increase in coal sales realization per
ton from $54.42 per ton in the second quarter of 2005 to $58.52 per ton in the second quarter of
2006. The mark-to-market adjustment for forward sales contracts on
the OTC market increased revenue by $5.9 million or $0.79 per ton.
Our metallurgical coal (met
coal) realization per ton increased from $73.29 per ton in the second quarter of 2005 to $74.44 per
ton in the second quarter of 2006, or 2%, and steam coal realization per ton increased from $40.97
to $50.16 or 22%, for the reasons discussed in the section titled Coal Pricing Trends and
Uncertainties above.
The mark-to-market adjustment for forward sales contracts on the OTC market increased revenue by $5.9 million or $1.20 per ton for steam coal.
Met coal sales accounted for 34% of our coal sales volume in the second quarter of 2006
compared with 42% in the second quarter of 2005. Total tons sold during the second quarter of 2006
were 7.5 million, including 2.6 million tons of met coal and 4.9 million of steam coal. Sales
volume for the second quarter of 2005 was 6.7 million tons of which 2.8 million tons were met coal
and 3.9 million were steam coal.
Freight and Handling Revenues. Freight and handling revenues increased to $50.9 million for the
three months ended June 30, 2006, an increase of $2.7 million compared with the three months ended
June 30, 2005 due to an increase of 0.9 million tons of domestic steam coal shipments, which
accounts for approximately $2 million of the increase. The balance is attributable to higher
freight rates partially offset by a decrease in export shipments. However, these revenues are
offset by equivalent costs and do not contribute to our profitability.
Other Revenues. Other revenues increased by $2.9 million mainly due to $6.2 million of road
construction revenues in the current period, partially offset by a decrease in revenues from our
Maxxim Rebuild operation ($1.9 million) and revenues from coal processing fees ($1.9 million). We
expect that other revenues generated by Maxxim Rebuild and coal processing fees during the rest of
2006 will also be below last years levels. Maxxim Rebuild has concentrated its efforts on Company
operations in 2006. In addition, a contract for coal processing terminated at the end of 2005.
Costs and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Increase |
|
|
|
June 30, |
|
|
(Decrease) |
|
|
|
2006 |
|
|
2005 |
|
|
$ |
|
|
% |
|
|
|
(in thousands, except per ton data) |
|
|
|
|
|
Cost of coal sales (exclusive of items shown separately below) |
|
$ |
345,505 |
|
|
$ |
293,493 |
|
|
$ |
52,012 |
|
|
|
18 |
% |
Freight and handling costs |
|
|
50,935 |
|
|
|
48,239 |
|
|
|
2,696 |
|
|
|
6 |
% |
Cost of other revenues |
|
|
5,445 |
|
|
|
4,319 |
|
|
|
1,126 |
|
|
|
26 |
% |
Depreciation, depletion and amortization |
|
|
34,207 |
|
|
|
15,075 |
|
|
|
19,132 |
|
|
|
127 |
% |
Selling, general and administrative expenses (exclusive of
depreciation and amortization shown separately above and including
stock-based compensation
expense in the amount of $5,311 in 2006 and $3,381 in 2005) |
|
|
18,583 |
|
|
|
14,870 |
|
|
|
3,713 |
|
|
|
25 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Increase |
|
|
|
June 30, |
|
|
(Decrease) |
|
|
|
2006 |
|
|
2005 |
|
|
$ |
|
|
% |
|
|
|
(in thousands, except per ton data) |
|
|
|
|
|
Total costs and expenses |
|
$ |
454,675 |
|
|
$ |
375,996 |
|
|
$ |
78,679 |
|
|
|
21 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of coal sales per ton: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
mines |
|
$ |
42.63 |
|
|
$ |
36.65 |
|
|
$ |
5.98 |
|
|
|
16 |
% |
Contract mines (including
purchased and
processed) |
|
|
53.40 |
|
|
|
53.12 |
|
|
|
0.28 |
|
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total produced and
processed |
|
|
44.39 |
|
|
|
40.40 |
|
|
|
3.99 |
|
|
|
10 |
% |
Purchased and sold without
processing |
|
|
57.82 |
|
|
|
56.46 |
|
|
|
1.36 |
|
|
|
2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of coal sales per ton |
|
$ |
46.32 |
|
|
$ |
43.87 |
|
|
$ |
2.45 |
|
|
|
6 |
% |
|
|
|
|
|
|
|
|
|
|
| |
|
Cost of Coal Sales: Our cost of coal sales increased by $52.0 million, from $293.5 million, or
$43.87 per ton in the second quarter 2005 to $345.5 million, or $46.32 per ton, in the second
quarter of 2006.
The mark-to-market adjustment for forward purchase contracts on the OTC market increased cost of sales by $1.6 million or
$0.22 per ton.
Approximately $34.2 million
of this quarters amount was associated with our Callaway operations which were acquired in October
2005. Our cost of coal sales per ton for our produced and processed coal was $44.39 per ton in the
three months ended June 30, 2006 as compared to $40.40 per ton in the comparable period in 2005.
This $3.99 per ton increase is due to increased costs for mine supplies and repairs (including
higher costs for diesel fuel and steel related supplies), higher trucking costs and increased
variable sales-related costs such as royalties and severance taxes, offset by a decrease in volume
from contract mines. The cost of sales per ton of our purchased coal was $57.82 per ton in the
second quarter 2006 and $56.46 per ton for the corresponding period of 2005.
The mark-to-market adjustment for forward purchase contracts on the OTC market increased cost of purchased coal by $1.6 million or
$1.47 per ton.
Of these purchased tons, approximately 55% was
blended with our produced and processed tons prior to resale.
Freight and Handling Costs. Freight and handling costs increased to $50.9 million for the three
months ended June 30, 2006, an increase of $2.7 million compared with the three months ended June
30, 2005 due to an increase of 0.9 million tons of domestic steam coal shipments, which accounts
for approximately $2.0 million of the increase. The balance is attributable to higher freight
rates offset by lower export volume.
Cost of Other Revenues. Our cost of other revenues increased by 26% or $1.1 million in the second
quarter of 2006 when compared with the second quarter 2005 due to higher road construction costs
partially offset by lower expenses at our subsidiary, Maxxim Rebuild Company, and lower coal
processing expenses. The margin (other revenues less cost of other revenues) on other revenues
increased by $1.8 million compared with the second quarter of 2005 due mainly to our road
construction businesses. This margin does not include related charges for depreciation and
amortization.
Depreciation, Depletion and Amortization. DD&A increased $19.1 million or 127%, to $34.2 million
for the three months ended June 30, 2006 as compared with the same period in 2005 due mainly to the
Nicewonder acquisition. DD&A per ton of coal sold increased from $2.25 per ton for the three
months ended June 30, 2005 to $4.59 per ton in the same period of 2006.
Selling, General and Administrative Expenses. These expenses increased by $3.7 million to
$18.6 million in the second quarter of 2006 from $14.9 million in the second quarter 2005.
Excluding our stock-based compensation charge of $5.3 million incurred in the second quarter of
2006 and $3.4 million in the second quarter of 2005, these costs increased in the three months
ended June 30, 2006 by $1.8 million from the second quarter of last year mainly due to increases in
professional fees and personnel and facilities costs to support our staffing requirements as a
public company, offset by a decrease in incentive bonus expense. As a percentage of revenue
excluding our stock based compensation charges, these costs were 2.7% and 2.8% for the second
quarter of 2006 and 2005 respectively.
Interest Expense. Interest expense increased $4.1 million to $10.8 million during the second
quarter of 2006 compared to the same period in 2005. The increase in interest expense is
attributable to the additional debt we incurred to finance the Nicewonder acquisition and higher
interest rates on our variable rate debt.
Interest Income. Interest income decreased marginally in the three months ended June 30, 2006 from
the three months ended June 30, 2005. This decrease was attributable to less interest earned on a
note due from a coal supplier as a result of repayments on the note.
Income Tax Expense: Our provision for income taxes related to continuing operations decreased by
$0.4 million from $9.1 million in the prior years second quarter to $8.7 million in this years
second quarter. The effective tax rate of 27.3% for the second quarter of 2006 is higher than the
25.8% effective tax rate for the second quarter of 2005 primarily due
to differences in the percentage depletion deduction and change in the valuation allowance.
28
Six months Ended June 30, 2006 Compared to the Six months Ended June 30, 2005
Summary
For the six months ended June 30, 2006, our total revenues were $978.0 million, compared to
$729.8 million for the six months ended June 30, 2005, an increase of $248.2 million. Net income
increased from $0.6 million ($0.01 per diluted share) in the 2005 period to $50.3 million ($0.79
per diluted share) for the 2006 period. Included in net income for the six months ended June 30,
2006 and June 30, 2005 was a stock-based compensation expense in the amount of $9.9 million ($7.3
million after-tax) and $39.8 million ($38.0 million after-tax). EBITDA, as adjusted for 2005 and
as reconciled to our net income in the table above, was $157.2 million in the first half of 2006,
including the non-cash portion of the stock-based compensation charge in the amount of $9.9
million. EBITDA was $100.4 million more than the same period in 2005 which included the non-cash
portion of stock-based compensation charges in the amount of $32.3 million.
We sold 14.6 million tons of coal during the first half of 2006, 2.4 million more than the
comparable period in 2005. Our Callaway business unit contributed 1.9 million tons for the period.
Coal margin increased from 18.4% in 2005 to 21.4 % in 2006. Coal margin per ton was $12.66 in the
six months ended June 30, 2006, a 31.7% increase from the first half of 2005.
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months Ended |
|
|
Increase |
|
|
|
June 30, |
|
|
(Decrease) |
|
|
|
2006 |
|
|
2005 |
|
|
$ or Tons |
|
|
% |
|
|
|
(in thousands, except per ton data) |
|
Coal revenues |
|
$ |
860,903 |
|
|
$ |
637,204 |
|
|
$ |
223,699 |
|
|
|
35 |
% |
Freight and handling revenues |
|
|
97,327 |
|
|
|
79,991 |
|
|
|
17,336 |
|
|
|
22 |
% |
Other revenues |
|
|
19,761 |
|
|
|
12,596 |
|
|
|
7,165 |
|
|
|
57 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
977,991 |
|
|
$ |
729,791 |
|
|
$ |
248,200 |
|
|
|
34 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tons Sold: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steam |
|
|
9,247 |
|
|
|
7,111 |
|
|
|
2,136 |
|
|
|
30 |
% |
Metallurgical |
|
|
5,336 |
|
|
|
5,112 |
|
|
|
224 |
|
|
|
4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
14,583 |
|
|
|
12,223 |
|
|
|
2,360 |
|
|
|
19 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coal sales realization per ton: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steam |
|
$ |
49.62 |
|
|
$ |
39.01 |
|
|
$ |
10.61 |
|
|
|
27 |
% |
Metallurgical |
|
|
75.36 |
|
|
|
70.37 |
|
|
|
4.99 |
|
|
|
7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
59.04 |
|
|
$ |
52.13 |
|
|
$ |
6.91 |
|
|
|
13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Coal Revenues. Coal revenues increased by $223.7 million, or 35% during the six months ended June
30, 2006 over the comparable period of 2005 driven by an increase in sales volume as well as an
increase in the sales realization per ton.
The mark-to-market adjustment for forward sales contracts on the OTC market increased revenue
by $5.9 million or $0.41 per ton.
Our met coal realization per ton increased from $70.37 per ton in the six months ended
June 30, 2005, to $75.36 per ton in the 2006 six month period, or 7%, and steam coal realization
per ton increased from $39.01 to $49.62, or 27%.
The mark-to-market adjustment for forward sales contracts on the OTC market increased revenue
by $5.9 million or $0.64 per ton for steam coal.
Met coal sales accounted for 37% of our coal sales volume in the six
months ended June 30, 2006 compared to 42% in the year ago period. Total tons sold during the
first half of 2006 were 14.6 million, including 5.3 million tons of met coal and 9.3 million of
steam coal. Sales for the comparable period last year were 12.2 million tons of which 5.1 million
were met coal and 7.1 million were steam coal.
Freight and Handling Revenues. Freight and handling revenues increased to $97.3 million for the
six months ended June 30, 2006, an increase of $17.3 million compared with the six months ended
June 30, 2005 due to an increase of 2.1 million tons of domestic steam coal shipments which
accounted for approximately $3 million of the increase with the balance attributable to higher
freight rates.
29
These increases were partially offset by a 0.4 million ton decrease in overseas export shipments.
These revenues are offset by equivalent costs and do not contribute to our profitability.
Other Revenues. Other revenues increased by $7.2 million during the first half of this year from
the corresponding period last year mainly due to $14.3 million of road construction revenues and an
increase in sales commissions of $1.0 million, partially offset by decreases in revenues from our
Maxxim Rebuild operations ($4.2 million) and revenues from coal processing fees ($4.3 million).
Maxxim Rebuild has concentrated its efforts on Company operations in 2006. In addition, a contract
for coal processing terminated at the end of 2005.
Costs and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
|
Increase |
|
|
|
June 30, |
|
|
(Decrease) |
|
|
|
2006 |
|
|
2005 |
|
|
$ |
|
|
% |
|
|
|
(in thousands, except per ton data) |
|
Cost of coal sales (exclusive of items shown separately below) |
|
$ |
676,391 |
|
|
$ |
519,777 |
|
|
$ |
156,614 |
|
|
|
30 |
% |
Freight and handling costs |
|
|
97,327 |
|
|
|
79,991 |
|
|
|
17,336 |
|
|
|
22 |
% |
Cost of other revenues |
|
|
13,396 |
|
|
|
10,384 |
|
|
|
3,012 |
|
|
|
29 |
% |
Depreciation, depletion and amortization |
|
|
67,841 |
|
|
|
29,245 |
|
|
|
38,596 |
|
|
|
132 |
% |
Selling, general and administrative expenses (exclusive of
depreciation and amortization shown separately above and including
stock-based compensation expense in the amount of $9,144 in 2006
and $39,788 in 2005) |
|
|
35,392 |
|
|
|
62,776 |
|
|
|
(27,384 |
) |
|
|
(44 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
$ |
890,347 |
|
|
$ |
702,173 |
|
|
$ |
188,174 |
|
|
|
27 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of coal sales per ton: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company mines |
|
$ |
41.57 |
|
|
$ |
35.65 |
|
|
$ |
5.92 |
|
|
|
17 |
% |
Contract mines (including purchased and processed) |
|
|
53.18 |
|
|
|
50.14 |
|
|
|
3.04 |
|
|
|
6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total produced and processed |
|
|
43.48 |
|
|
|
38.78 |
|
|
|
4.70 |
|
|
|
12 |
% |
Purchased and sold without processing |
|
|
62.27 |
|
|
|
58.09 |
|
|
|
4.18 |
|
|
|
7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of coal sales per ton |
|
$ |
46.38 |
|
|
$ |
42.52 |
|
|
$ |
3.86 |
|
|
|
9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Coal Sales: Our cost of coal sales increased by $156.6 million or $3.86 per ton, from
$519.8 million, or $42.52 per ton, in the six months ended June 30, 2005 to $676.4 million, or
$46.38 per ton, in the six months ended June 30, 2006. The mark-to-market adjustment for forward purchase
contracts on the OTC market increased cost of sales by $1.6 million
or $0.10 per ton. Approximately $64.2 million of this increase was associated with our
Callaway operations. Our cost of sales per ton of our produced and processed coal was $43.48 per
ton in the six months ended June 30, 2006 as compared to $38.78 per ton in the comparable period in
2005. This increase is attributable to increased costs for mine supplies and repairs (including
higher costs for diesel fuel and steel-related supplies) higher trucking costs, and increased
variable sales-related costs, such as royalties and severance taxes. Also, our cost for contract
miner services and coal purchased and processed at our facilities increased 6% in the current
period as compared to the prior year period. The cost of sales per ton of our purchased coal was
$62.27 per ton in the first half of 2006 and $58.09 per ton for the corresponding period of 2005.
The mark-to-market adjustment for forward purchase contracts on the OTC market increased cost of purchased coal by $1.6 million
or $0.69 per ton. This $4.18 per ton increase in costs is due to the general increase in coal prices since the first half of last year and the
change in the mix of coal qualities purchased. Of these purchased tons approximately 59% was
blended with our produced and processed coal prior to resale.
Freight and Handling Costs. Freight and handling costs increased to $97.3 million for the six
months ended June 30, 2006, an increase of $17.3 million compared with the six months ended June
30, 2005 due to an increase of 2.1 million tons of domestic steam coal shipments which accounted
for approximately $3 million of the increase with the balance attributable to higher freight rates.
These increases were partially offset by a 0.4 million ton decrease in overseas export shipments.
Cost of Other Revenues. Our cost of other revenues increased by 29% or $3.0 million in the first
half of 2006 when compared to the similar period in 2005 due to higher road construction costs
partially offset by lower expenses at our subsidiary, Maxxim Rebuild
30
Company and lower coal processing expenses. The margin (other revenues less cost of other revenues)
on other revenues increased by $4.2 million in the first half of 2006 when compared to the first
six months of 2005 due mainly to our road construction projects. This margin does not include
related charges for depreciation and amortization.
Depreciation, Depletion and Amortization. DD&A increased $38.6 million, or 132%, to $67.8 million
for the six months ended June 30, 2006 as compared with the same period in 2005 due mainly to
capital additions and the Nicewonder acquisition. DD&A per ton of coal sold increased from $2.39
per ton for the six months ended June 30, 2005 to $4.65 per ton in the same period of 2006.
Selling, General and Administrative Expenses. These expenses decreased by $27.4 million to
$35.4 million during the first six months of 2006 over the corresponding period last year.
Excluding our stock-based compensation charge of $9.1 million incurred in the first half of 2006
and $39.8 million in 2005, these costs increased in the six months ended June 30, 2006 by $3.3
million from the comparable period last year. The cost increase was mainly due to increases in
professional fees and personnel and facilities costs to support our staffing requirements as a
public company. As a percentage of revenue, these costs (excluding our stock-based compensation
charge) were 2.7% and 3.1% for the first six month of 2006 and 2005 respectively.
Interest Expense. Interest expense increased $8.3 million to $21.1 million during the six months
ended June 30, 2006 compared with the same period in 2005. The increase in interest expense is
attributable to the additional debt we incurred to finance the Nicewonder acquisition and higher
interest rates on our variable rate debt.
Interest Income. Interest income decreased by $0.1 million in the six months ended June 30, 2006
over the six months ended June 30, 2005. This decrease was attributable to less interest earned on
a note due from a coal supplier as a result of repayments on the note.
Income Tax Expense: Our provision for income taxes related to continuing operations increased by
$6.7 million from $11.6 million in the prior years first half to $18.3 million in this years
first six months. Because the condensed consolidated statements of operations for the six months
ended June 30, 2005 include activity both prior to and after the Internal Restructuring and IPO,
the total income tax provision in the prior period is the sum of the provisions for the pre- and
post-restructuring periods.
Prior to February 12, 2005, the minority interest owners and ANR Fund IX Holdings, L.P. owned
interests in ANR Holdings, a limited liability company and pass-through entity for income tax
purposes. As a pass-through entity, ANR Holdings provides information returns reflecting the
allocated income (loss) to the minority interest owners and ANR Fund IX Holdings, L.P based upon
their respective ownership percentage and certain special allocations as provided by the limited
liability company agreement and the Internal Revenue Code. The income tax consequences of the
income (loss) allocated to these owners for the period from January 1, 2005 to February 11, 2005 is
not reflected in the financial statements. For these periods, only the income tax expense
associated with Alpha NR Holding, Inc., a taxable entity, is included. The primary source of the
income tax impact is derived from the allocated income (loss) from ANR Holdings, Alpha Natural
Resources, LLC and its operating subsidiaries, all of which are pass-through entities for tax
purposes. Subsequent to the Internal Restructuring and IPO, all of the income of ANR Holdings is
taxed to Alpha Natural Resources, Inc.
The effective tax rate of 75.7% for the first half of 2005 is greater than the federal statutory
rate of 35% due primarily to the majority of the stock-based compensation charge associated with
the issuance of common stock to management in connection with the Internal Restructuring and IPO
not being deductible for tax purposes. The increase in income tax expense related to the
stock-based compensation charge is offset in part by the tax benefits associated with percentage
depletion, the extraterritorial income exclusion, and taxes not being provided for on the minority
interest and pass-through entity owners respective shares for the period prior to the Internal
Restructuring.
Our effective tax rate of 26.7% for the first half of 2006 is significantly lower compared to the
effective tax rate of 75.7% for the first half of 2005 primarily due to a greater significant
stock-based compensation charge in 2005 which was not deductible for tax purposes offset by excess percentage depletion deduction.
Liquidity and Capital Resources
Our primary liquidity and capital resource requirements are to finance the cost of our coal
production and purchases, to make capital expenditures, pay income taxes, and to service our debt
and reclamation obligations. Our primary sources of liquidity are cash flows from sales of our
produced and purchased coal, other income and borrowings under our senior credit facility.
31
At June 30, 2006, our available liquidity was $175.7 million, including cash of $4.8 million
and $170.9 million available under our credit facility. Our total indebtedness was $464.4 million
at June 30, 2006 a decrease of $21.4 million from the year ended December 31, 2005.
Our cash capital spending for the six months ended June 30, 2006 was $84.0 million, and we
currently project cash capital spending for the full year of 2006 of no more than $150 million.
These forecasted expenditures will be used to develop new mines and replace or add equipment. We
believe that cash generated from our operations and borrowings under our credit facility will be
sufficient to meet our working capital requirements, anticipated capital expenditures and debt
service requirements for at least the next twelve months.
Cash Flows
Net cash provided by operations in the first six months of 2006 was $100.4 million, an
increase of $101.8 million from the $1.4 million of net cash used by operations during the first
six months of 2005. This $101.8 million increase in cash provided by operations is an increase in
net income of $49.7 million, an increase in non-cash charges of $18.9 million and a decrease in
cash required for working capital of $33.2 million.
Net cash used by investing activities was $109.1 million during the first half of 2006, $44.3
million more than the first half of 2005 mainly due to increased capital expenditures for new mines
and equipment in the amount of $17.5 million and the Progress acquisition of $28.3 million.
Net cash used in financing activities was $26.1 million in the six months ended June 30, 2006
compared with cash provided by financing activities of $69.0 million in the six months ended June
30, 2005. In the six months ended June 30, 2005, we completed our previously discussed Internal
Restructuring and IPO. The proceeds from the IPO were used to repay shareholders notes issued as
part of the Internal Restructuring. During the six months ended
June 30, 2006, we made payments on
notes payable in the amount of $50.3 million, borrowed, net of repayments, $28.6 million of
long-term debt and paid $2.4 million in distributions to former members of ANR Holding, LLC.
The
combination of cash used by investing and financing activities exceeded cash generated by operations in the
six months ended June 30, 2006 leading to a decrease in cash and cash equivalents in the amount of
$34.8 million.
Credit Facility and Long-term Debt
As of June 30, 2006 our total long-term indebtedness, including capital lease obligations,
consisted of the following (in thousands):
|
|
|
|
|
|
|
June 30, |
|
|
|
2006 |
|
10% Senior notes due 2012 |
|
$ |
175,000 |
|
Term Loan |
|
|
248,750 |
|
Revolving credit facility |
|
|
30,000 |
|
Capital
lease obligations |
|
|
1,843 |
|
Total long-term debt |
|
|
455,593 |
|
Less current portion |
|
|
3,224 |
|
|
|
|
|
Long-term debt, net of current portion |
|
$ |
452,369 |
|
|
|
|
|
Our credit facility (including our term loan) and the indenture governing the senior notes
each impose certain restrictions on our subsidiaries, including restrictions on our subsidiaries
ability to: incur debt; grant liens; enter into agreements with negative pledge clauses; provide
guarantees in respect of obligations of any other person; pay dividends and make other
distributions; make loans, investments, advances and acquisitions; sell assets; make redemptions
and repurchases of capital stock; make capital expenditures; prepay, redeem or repurchase debt;
liquidate or dissolve; engage in mergers or consolidations; engage in affiliate transactions;
change
32
businesses; change our fiscal year; amend certain debt and other material agreements; issue
and sell capital stock of subsidiaries; engage in sale and leaseback transactions; and restrict
distributions from subsidiaries. In addition, the credit facility provides that we must meet or
exceed certain interest coverage ratios and must not exceed certain leverage ratios.
Borrowings under our credit facility will be subject to mandatory prepayment (1) with 100% of
the net cash proceeds received from asset sales or other dispositions of property by ANR Holdings
and its subsidiaries (including insurance and other condemnation proceedings), subject to certain
exceptions and reinvestment provisions, (2) with 100% of the net cash proceeds received by ANR
Holdings and its subsidiaries from the issuance of debt securities or other incurrence of debt,
excluding certain indebtedness, and (3) 50% (or 25%, if our leverage ratio is less than or equal to
2.00 to 1.00 but greater than 1.00, or 0% if our leverage ratio is less than or equal to 1.00) of
the net cash proceeds of equity issued by ANR Holdings and its subsidiaries.
Analysis of Material Debt Covenants
We were in compliance with all covenants under our credit facility and the indenture governing our
senior notes as of June 30, 2006. Under our credit facility, we are required to furnish quarterly financial statements
to the lenders within 45 days after the end of each of the first three fiscal quarters of each
year. As a result of the delay in filing this report, we
requested and received a waiver from our lenders under our credit facility of the
second-quarter 2006 reporting deadline and related provisions while we completed our filing
obligations.
The financial covenants in our credit facility require, among other things, that:
|
|
|
Alpha NR Holding Inc. must maintain a leverage ratio, defined as the ratio of
consolidated adjusted debt (consolidated debt less unrestricted cash and cash equivalents)
to Adjusted EBITDA (as defined in the new credit agreement), of not more than 4.00 at
December 31, 2005, March 31, June 30, September 30 and December 31, 2006, 3.75 at March 31,
June 30, September 30 and December 31, 2007 and 3.50 at March 31, 2008 and each quarter end
thereafter with Adjusted EBITDA being computed using the most recent four quarters; and |
|
|
|
|
Alpha NR Holding Inc. must maintain an interest coverage ratio, defined as the ratio of
Adjusted EBITDA, to cash interest expense, of 2.50 or greater on the last day of any fiscal
quarter. |
Based upon Adjusted EBITDA (as defined in our credit agreement), Alpha NR Holding Inc.s
leverage ratio and interest coverage ratio for the twelve months ended June 30, 2006 were 1.64
(maximum of 3.50) and 8.16 (minimum of 2.50), respectively. Adjusted EBITDA, as defined in the
credit agreement, is used to determine compliance with many of the covenants under the credit
facility. The breach of covenants in the credit facility that are tied to ratios based on Adjusted
EBITDA could result in a default under the credit facility and the lenders could elect to declare
all amounts borrowed due and payable. Any acceleration would also result in a default under our
indenture.
Adjusted EBITDA is defined as EBITDA further adjusted to exclude non-recurring items, non-cash
items and other adjustments permitted in calculating covenant compliance under our credit facility,
as shown in the table below. We believe that the inclusion of supplementary adjustments to EBITDA
applied in presenting Adjusted EBITDA is appropriate to provide additional information to investors
to demonstrate compliance with our financial covenants.
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Three Months |
|
|
Three Months |
|
|
Three Months |
|
|
Twelve Months |
|
|
|
Ended |
|
|
Ended |
|
|
Ended |
|
|
Ended |
|
|
Ended |
|
|
|
September 30, |
|
|
December 31, |
|
|
March 31, |
|
|
June 30, |
|
|
June 30, |
|
|
|
2005 |
|
|
2005 |
|
|
2006 |
|
|
2006 |
|
|
2006 |
|
|
|
(in thousands) |
|
Net income |
|
$ |
8,210 |
|
|
$ |
12,413 |
|
|
$ |
27,212 |
|
|
$ |
23,128 |
|
|
$ |
70,963 |
|
Interest expense, net of interest income |
|
|
6,439 |
|
|
|
10,155 |
|
|
|
10,089 |
|
|
|
10,615 |
|
|
|
37,298 |
|
Income tax expense |
|
|
3,542 |
|
|
|
3,812 |
|
|
|
9,620 |
|
|
|
8,676 |
|
|
|
25,650 |
|
Depreciation, depletion and
amortization expenses |
|
|
16,277 |
|
|
|
27,600 |
|
|
|
33,634 |
|
|
|
34,207 |
|
|
|
111,718 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
|
34,468 |
|
|
|
53,980 |
|
|
|
80,555 |
|
|
|
76,626 |
|
|
|
245,629 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation charge(1) |
|
|
3,381 |
|
|
|
3,350 |
|
|
|
3,833 |
|
|
|
6,112 |
|
|
|
16,676 |
|
Other EBITDA Charges (1) |
|
|
520 |
|
|
|
930 |
|
|
|
1,213 |
|
|
|
1,451 |
|
|
|
4,114 |
|
Callaway EBITDA before integration (1) |
|
|
18,581 |
|
|
|
4,832 |
|
|
|
|
|
|
|
|
|
|
|
23,413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
56,950 |
|
|
$ |
63,092 |
|
|
$ |
85,601 |
|
|
$ |
84,189 |
|
|
$ |
289,832 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage ratio(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.64 |
|
Interest coverage ratio(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.16 |
|
|
|
|
(1) |
|
We are required to adjust EBITDA under our credit facility for the stock-based
compensation charge, the EBITDA related to our Callaway operations before integration into
Alphas system, and other minor EBITDA charges such as secondary offering costs, accretion
expense, and amortization of deferred gains. |
|
(2) |
|
Leverage ratio is defined in our credit facility as total debt divided by Adjusted EBITDA. |
|
(3) |
|
Interest coverage ratio is defined in our credit facility as Adjusted EBITDA divided by cash
interest expense. |
Other
As a regular part of our business, we review opportunities for, and engage in discussions and
negotiations concerning, the acquisition of coal mining assets and interests in coal mining
companies, and acquisitions of, or combinations with, coal mining companies. When we believe that
these opportunities are consistent with our growth plans and our acquisition criteria, we will make
bids or proposals and/or enter into letters of intent and other similar agreements, which may be
binding or nonbinding, that are customarily subject to a variety of conditions and usually permit
us to terminate the discussions and any related agreement if, among other things, we are not
satisfied with the results of our due diligence investigation. Any acquisition opportunities we
pursue could materially affect our liquidity and capital resources and may require us to incur
indebtedness, seek equity capital or both. There can be no assurance that additional financing will
be available on terms acceptable to us, or at all.
Outlook
While our business is subject to the general risks of the coal industry and specific individual
risks, we believe that the outlook for coal markets remains positive
worldwide, despite a slight softening of the spot coal market caused by a mild winter, increased production and some
railroad improvements, assuming continued growth in the U.S., China, Pacific Rim, Europe and other
industrialized economies that are increasing coal demand for electricity generation and
steelmaking. Published indices show improved year-over-year coal prices in most U.S. and global
coal markets, and worldwide coal supply/demand fundamentals remain tight due to high market demand,
transportation constraints and production difficulties in most countries. Metallurgical coal is
generally selling at a significant premium to steam coal, and we expect that pricing relationship
to continue based on the same assumptions made above.
Approximately 97%, 60% and 33% of our planned production in 2006, 2007 and 2008 respectively,
including production from the operations we acquired in the Progress
Acquisition, are committed as of July 14 , 2006.
The availability of skilled miners and supervisors and the cost to attract and retain those people
is an issue we are addressing. While this issue has not materially impacted our business or our
ability to attain the financial targets we have set, we have initiated training
34
programs to attract new people into the mining industry and raise the skill levels of our current
workers. This remains an area of concern particularly as related to individual productivity.
We anticipate continued challenges with railroad service throughout the remainder of this year. We
are working with our customers and the railroads in an effort to address these issues in a timely
manner.
We plan to focus on organic growth by continuing to develop our existing reserves. In addition, we
also plan to evaluate attractively priced acquisitions that create potential synergies with our
existing operations.
Critical Accounting Estimates and Assumptions
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States requires management to make estimates and assumptions that affect reported
amounts. These estimates and assumptions are based on information available as of the date of the
financial statements. Accounting measurements at interim dates inherently involve greater reliance
on estimates than at year-end. The results of operations for the quarter and year-to-date periods
ended June 30, 2006 are not necessarily indicative of results that can be expected for the full
year. Please refer to the section entitled Critical Accounting Estimates and Assumptions of
Managements Discussion and Analysis of Financial Condition and Results of Operations in our
annual report on Form 10-K for the year ended December 31, 2005 for a discussion of our critical
accounting estimates and assumptions.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
In addition to risks inherent in operations, we are exposed to market risks. The following
discussion provides additional detail regarding our exposure to the risks of changing coal and
diesel fuel prices, interest rates and customer credit.
Commodity Price Risk
We are exposed to market price risk in the normal course of selling coal. As of July 14,
2006, approximately 3%, 40% and 67% of our estimated 2006, 2007 and 2008 planned production,
respectively, including the operations we acquired in the Progress acquisition, was uncommitted. As
compared to prior years, we have increased the proportion of our planned future production in 2006,
2007 and 2008 for which we have contracts to sell coal, which has the effect of lessening our
market price risk. We use significant quantities of diesel fuel in our operations and are also
exposed to risk in the market price for diesel fuel. We are currently exploring the possibility in
the future of using one or more different types of hedging instruments in order to lessen our
market price risk for diesel fuel.
We
purchase coal in the over-the-counter market (OTC) market and directly from third parties to
supplement and blend with our produced and processed coal in order to provide coal
of the quality and
quantity to meet certain of our customers requirements. We also
sell coal in the OTC market to fix the price of uncommitted future production from our mines. Certain of these purchase and sale contracts meet the
definition of a derivative instrument. Any derivative instruments
that we hold are held for purposes
other than trading. Our risk management policy prohibits the use of
coal derivatives for
speculative purpose. The use of purchase and sales contracts that are considered derivative
instruments could materially affect our results of operations as a result of the requirement to
mark them to market at the end of each reporting period. However, we believe that use of these
instruments will not have a material adverse effect on our financial
position or operations because
these transactions account for only a small portion of the total coal
tonnage we sell.
These
OTC market transactions give rise to commodity price risk, which represents the potential loss that can
be caused by an adverse change in the price of coal. Outstanding purchase and sales contracts at
June 30, 2006 that are considered derivative instruments are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase Price |
|
|
Tons |
|
|
|
|
|
|
Mark-To-Market |
|
Purchase Contracts |
|
Range |
|
|
Outstanding |
|
|
Delivery Period |
|
|
Adjustment (In Millions) |
|
|
|
$ |
33.50 |
|
|
|
27,740 |
|
|
|
07/01/06-12/31/07 |
|
|
$ |
.4 |
|
|
|
$ |
49.50-$56.00 |
|
|
|
937,477 |
|
|
|
07/01/06-12/31/07 |
|
|
$ |
(2.0 |
) |
|
|
|
|
|
|
|
965,217 |
|
|
|
|
|
|
$ |
(1.6 |
) |
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling Price |
|
|
Tons |
|
|
|
|
|
|
Mark-To-Market |
|
Sales Contracts |
|
Range |
|
|
Outstanding |
|
|
Delivery Period |
|
|
Adjustment (In Millions) |
|
|
|
$ |
50.00-$55.00 |
|
|
|
268,620 |
|
|
|
07/01/06-12/31/07 |
|
|
$ |
0.9 |
|
|
|
$ |
55.00-$60.00 |
|
|
|
660,567 |
|
|
|
07/01/06-12/31/07 |
|
|
$ |
5.0 |
|
|
|
|
|
|
|
|
929,187 |
|
|
|
|
|
|
$ |
5.9 |
|
Interest Rate Risk
All of our borrowings under our revolving credit facility are at a variable rate, so we are
exposed to rising interest rates in the United States. As of June 30, 2006, we have $248.8 million
term loan outstanding with a variable interest rate based upon the 3-month London IntrBank Offered
Rate (LIBOR). To lessen our exposure to rising interest rates, effective May 22, 2006 we enter
into a pay-fixed, receive variable interest rate swap on the notional amount of $233.1 million for
a period of approximately six and one-half years. In effect, this swap converted the variable
interest rates on a portion of our debt to a fixed interest rate of 5.59% plus the applicable margin
defined in the debt agreement (1.75%, at June 30, 2006) for a portion of our term loan. A one percentage point increase in
interest rates would result in an annualized increase in interest expense of approximately $0.5
million based on our variable rate borrowings as of June 30, 2006 in excess of the notional amount
of the interest rate swap of $233.1 million at June 30, 2006.
Our concentration of credit risk is substantially with electric utilities, producers of steel
and foreign customers. Our policy is to independently evaluate a customers creditworthiness prior
to entering into transactions and to periodically monitor the credit extended.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures. Under the supervision and with the participation
of our management, including our Chief Executive Officer and our Chief Financial Officer, we
evaluated the effectiveness of our disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, as of the
end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer
and Chief Financial Officer concluded that our disclosure controls and procedures were effective,
as of the end of the period covered by this report, in ensuring that material information relating
to Alpha Natural Resources, Inc., required to be disclosed in reports that it files or submits
under the Securities Exchange Act of 1934, is recorded, processed, summarized and reported within
the requisite time periods and is accumulated and communicated to our management, including our
Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions
regarding disclosure.
Changes in internal control over financial reporting. In connection with our Section 404
compliance project, during the fourth quarter of fiscal 2005 we began measures designed to improve
our internal control over financial reporting in the following areas: documentation of controls and
procedures; segregation of duties; timely reconciliation of accounts; methods of accounting for
fixed assets; the structure of our general ledger; security systems and testing of our disaster
recovery plan for our information technology systems; and the level of experience in public company
accounting and periodic reporting matters among our financial and accounting staff. During the
first and second quarters of 2006 we continued to make changes in our internal control over
financial reporting and expect to continue to do so from time to time during the period prior to
December 31, 2006 in connection with our Section 404 compliance project.
As a part of our review, which we undertook as part of our second quarter period-end close procedures, of our
accounting for certain third-party coal purchases and sales that we had previously treated as
falling within the normal purchases and normal sales exception under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, we reviewed our accounting policies and practices
related to these third-party coal transactions, particularly in the OTC market. We identified
certain forward purchase and forward sale contracts that do not qualify under the normal purchases
and normal sales exception and we corrected our accounting policies and practices for these
transactions and strengthened the related controls to ensure that for our unaudited interim
financial statements as of and for
36
the period ended June 30, 2006 and in the future, all such transactions that meet the definition of
a derivative will be either marked-to-market or accounted for as a hedge in accordance with SFAS
No. 133.
Except as described above, during the second quarter of fiscal year 2006, there have been no
changes in our internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.
Limitations of the effectiveness of internal control. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of
the internal control system are met. Because of the inherent limitations of any internal control
system, no evaluation of controls can provide absolute assurance that all control issues, if any,
within a company have been detected. Notwithstanding these limitations, our disclosure controls and
procedures are designed to provide reasonable assurance of achieving their objectives. Our Chief
Executive Officer and Chief Financial Officer have concluded that our disclosure controls and
procedures are, in fact, effective at the reasonable assurance level as of the end of the period
covered by this report.
37
PART II
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider
the factors discussed in Part I, Item 1A Risk Factors in our Annual Report on form 10-K for the
year ended December 31, 2005, together with the cautionary statement under the caption Cautionary
Note Regarding Forward Looking Statements in Managements Discussion and Analysis of Financial
Condition and Results of Operations of this report. These described risks are no the only risks
facing our Company. Additional risks and uncertainties not currently known to us or that we
currently deem to be immaterial also may materially adversely affect our business, financial
condition and/or operating results.
Our objectives are to identity and quantify commercial and financial risks in order to
establish a consistent framework for identifying sources of exposure. It is our policy to manage
significant exposure so that volatility in interest rates will not adversely impact the Companys
financial performance. To achieve these objectives, we have engaged in hedging transactions
related to underlying commercial or financial exposures of the Company and its subsidiaries. On
May 9, 2006, we entered into an interest rate swap on a notional amount of $233.1 million. In
effect, this swap converted the variable interest rates based on the London InterBank Offered Rate
(LIBOR) to a fixed interest rate.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of Alpha Natural Resources, Inc. was held on May 17, 2006
at the Marriott MeadowView Conference Resort & Convention Center located at 1901 MeadowView
Parkway, Kingsport, Tennessee.
At the Annual Meeting, the holders of the registrants common stock elected the following
nominees for director for a one-year term expiring at the annual meeting in 2007 and until their
respective successors are elected and qualified:
|
|
|
|
|
|
|
|
|
Nominee |
|
Total Votes For |
|
Total Votes Withheld |
E. Linn Draper, Jr. |
|
|
51,984,708 |
|
|
|
5,384,867 |
|
|
|
|
|
|
|
|
|
|
Glenn A. Eisenberg |
|
|
52,160,978 |
|
|
|
5,208,597 |
|
|
|
|
|
|
|
|
|
|
John W. Fox, Jr. |
|
|
52,175,250 |
|
|
|
5,194,325 |
|
|
|
|
|
|
|
|
|
|
Fritz R. Kundrun |
|
|
51,892,157 |
|
|
|
5,447,418 |
|
|
|
|
|
|
|
|
|
|
Hans J. Mende |
|
|
37,957,218 |
|
|
|
19,412,357 |
|
|
|
|
|
|
|
|
|
|
Michael J. Quillen |
|
|
52,844,572 |
|
|
|
4,525,003 |
|
|
|
|
|
|
|
|
|
|
Ted G. Wood |
|
|
52,955,453 |
|
|
|
4,414,122 |
|
In addition, the holders of the registrants common stock ratified the appointment of KPMG LLP
to be our independent auditors for the fiscal year ending December 31, 2006:
|
|
|
|
|
Vote totals: |
|
For: |
|
|
56,818,442 |
|
Against: |
|
|
531,199 |
|
Abstained: |
|
|
19,934 |
|
Item 6. Exhibits
See the Exhibit Index following the signature page of this quarterly report
38
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
|
|
|
ALPHA NATURAL RESOURCES, INC. |
|
|
|
|
|
|
|
|
|
|
|
By:
Name:
|
|
/s/ David C. Stuebe
David C. Stuebe
|
|
|
|
|
Title:
|
|
Vice President and Chief Financial Officer |
|
|
Date: August 18, 2006
39
10-Q EXHIBIT INDEX
|
|
|
Exhibit No |
|
Description of Exhibit |
3.1
|
|
Restated Certificate of Incorporation of Alpha Natural Resources, Inc. (Incorporated by reference to
Exhibit 3.1 to the Annual Report on Form 10-K of Alpha Natural Resources, Inc. (File No. 1-32423) filed
on March 30, 2005). |
|
|
|
3.2
|
|
Amended and Restated Bylaws of Alpha Natural Resources, Inc. (Incorporated by reference to Exhibit 3.2 to
the Annual Report on Form 10-K of Alpha Natural Resources, Inc. (File No. 1-32423) filed on March 30,
2005). |
|
|
|
4.1*
|
|
Fifth Supplemental Indenture dated as of May 1, 2006, among Alpha
Natural Resources, LLC, Alpha Natural Resources Capital Corp., the
Guarantors party thereto, the Guaranteeing Subsidiary party thereto
and Wells
Fargo Bank, N.A. as Trustee
|
|
|
|
10.1
|
|
Form of Director Deferred Compensation Agreement for Alpha Natural Resources, Inc. 2005 Long-Term
Incentive Plan (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of Alpha
Natural Resources, Inc. (File No. 1-32423) filed on August 3, 2006). |
|
|
|
31(a)*
|
|
Certification Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant
to § 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
31(b)*
|
|
Certification Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant
to § 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32(a)*
|
|
Certification Pursuant to 18 U.S.C. § 1350, As Adopted Pursuant to § 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32(b)*
|
|
Certification Pursuant to 18 U.S.C. § 1350, As Adopted Pursuant to § 906 of the Sarbanes-Oxley Act of 2002 |
40