SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
(Mark
One)
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þ
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
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For
the fiscal year ended December 31,
2007
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OR
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¨
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
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For
the transition period from
to
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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
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification Number)
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One
Alpha Place, P.O. Box 2345, Abingdon, Virginia
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24212
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant's
telephone number, including area code:
(276) 619-4410
Securities
registered pursuant to Section 12(b) of the Act:
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Title
of Each Class
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Name
of Each Exchange on Which Registered
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Common
stock, $0.01 par value
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New
York Stock Exchange
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Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark whether the registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act. Yes þ No ¨
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes ¨ No þ
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, and (2) has been subject to such
filing requirements for the past 90 days. Yes þ No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. þ
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer (as defined in Exchange Act
Rule 12b-2).
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þ Large
accelerated filer
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¨ Accelerated
filer
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¨ Non-accelerated
filer
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Indicate
by check mark whether the registrant is a shell company (as defined in Exchange
Act Rule 12b-2). Yes ¨ No þ
The
aggregate market value of the Common Stock held by non-affiliates of the
registrant on June 29, 2007, was approximately $1,362,111,527 based on the
last sales price reported that date on the New York Stock Exchange of $20.79 per
share. In determining this figure, the registrant has assumed that all of its
directors and executive officers are affiliates. Such assumptions should not be
deemed to be conclusive for any other purpose.
Common
Stock, $0.01 par value, outstanding as of February
22, 2008 – 66,077,847 shares.
DOCUMENTS
INCORPORATED BY REFERENCE
Part III
incorporates certain information by reference from the registrant's definitive
proxy statement for the 2008 annual meeting of stockholders (the “Proxy
Statement”), which will be filed no later than 120 days after the close of
the registrant's fiscal year ended December 31, 2007.
CAUTIONARY
NOTE REGARDING FORWARD LOOKING STATEMENTS
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:
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worldwide
market demand for coal, electricity and
steel;
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future
economic or capital market
conditions;
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inherent
risks of coal mining beyond our
control;
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environmental
laws, including those directly affecting our coal mining and production,
and those affecting our customers' coal
usage;
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regulatory
and court decisions;
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competition
in coal markets;
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the
geological characteristics of Central and Northern Appalachian coal
reserves;
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·
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availability
of skilled employees and other employee workforce
factors;
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weather
conditions or catastrophic weather-related
damage;
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·
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our
production capabilities;
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·
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the
consummation of financing, acquisition or disposition transactions and the
effect thereof on our business;
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·
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our
ability to successfully integrate the operations we have acquired and/or
developed with our existing operations, as well as our ability to
successfully integrate operations we may acquire and/or develop in the
future;
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·
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our
plans and objectives for future operations and expansion or
consolidation;
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our
relationships with, and other conditions affecting, our
customers;
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·
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timing
of changes in customer coal
inventories;
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·
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changes
in, renewal of and acquiring new long-term coal supply
arrangements;
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·
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railroad,
barge, truck and other transportation performance and
costs;
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availability
of mining and processing equipment and
parts;
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·
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our
assumptions concerning economically recoverable coal reserve
estimates;
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·
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our
ability to mine properties due to defects in title on leasehold
interest;
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future
legislation and changes in regulations, governmental policies or
taxes;
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·
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changes
in postretirement benefit
obligations;
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·
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our
liquidity, results of operations and financial
condition;
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·
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decline
in coal prices;
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·
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forward
sales and purchase contracts not accounted for as a hedge and are being
marked to market;
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indemnification
of certain obligations not being
met;
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continued
funding of the road construction
business;
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disruption
in coal supplies;
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the
ability to comply with new safety and health
regulations;
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unfavorable
government intervention in, or nationalization of, foreign
investments;
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our
third-party suppliers may not deliver coal we purchase;
and
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·
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other
factors, including the other factors discussed in Item 1A, “Risk
Factors” of this report.
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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.
2007
ANNUAL REPORT ON FORM 10-K
PART I
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Item 1.
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Overview
We are a
leading Appalachian coal supplier. We produce, process and sell steam and
metallurgical coal from eight regional business units, which, as of December 31,
2007, are supported by 32 active underground mines, 26 active surface mines and
11 preparation plants located throughout Virginia, West Virginia, Kentucky, and
Pennsylvania, as well as a road construction business in West Virginia and
Virginia that recovers coal. We are also actively involved in the purchase and
resale of coal mined by others, the majority of which we blend with coal
produced from our mines, allowing us to realize a higher overall margin for the
blended product than we would be able to achieve selling these coals
separately.
Steam
coal, which is primarily purchased by large utilities and industrial customers
as fuel for electricity generation, accounted for approximately 62% of our 2007
coal sales volume. The majority of our steam coal sales volume in 2007 consisted
of high Btu (above 12,500 Btu content per pound), low sulfur (sulfur content of
1.5% or less) coal, which typically sells at a premium to lower-Btu,
higher-sulfur steam coal. Metallurgical coal, which is used primarily to make
coke, a key component in the steel making process, accounted for approximately
38% of our 2007 coal sales volume. Metallurgical coal generally sells at a
premium over steam coal because of its higher quality and its value in the
steelmaking process as the raw material for coke. We believe that the use of the
coal we sell will grow as demand for power and steel increases.
During
2007, we sold a total of 28.5 million tons of steam and metallurgical coal
and generated coal revenues of $1,639.2 million, EBITDA of
$233.8 million and net income of $27.7 million. We define and
reconcile EBITDA and explain its importance in Note 3 under “Selected
Financial Data.” Our coal sales during 2007 consisted of 24.4 million tons of
produced and processed coal, including 1.7 million tons purchased from
third parties and processed at our processing plants or loading facilities prior
to resale, and 4.1 million tons of purchased coal that we resold without
processing. Approximately 64% of the purchased coal in 2007 was blended with
coal produced from our mines prior to resale. Approximately 38% of our sales
revenue in 2007 was derived from sales made outside the United States, primarily
in Canada, Egypt, Belgium, Italy, Hungary, and Brazil.
As of
December 31, 2007, we owned or leased 617.5 million tons of proven and probable
coal reserves. Of our total proven and probable reserves, approximately 82% are
low sulfur reserves, with approximately 57% having sulfur content below 1%.
Approximately 89% of our total proven and probable reserves have a high Btu
content which creates more energy per unit when burned compared to coals with
lower Btu content. We believe that our total proven and probable reserves will
support current production levels for more than 20 years.
As
discussed in Note 24 to our financial statements, we have one reportable
segment -- Coal Operations -- which consists of our coal extracting,
processing and marketing operations, as well as our purchased coal sales
function and certain other coal-related activities, including our recovery of
coal incidental to our road construction operations. Our equipment and part
sales and equipment repairs operations, terminal services, coal analysis
services, leasing of mineral rights, and the non-coal recovery portion of
our road construction operations described below under “-- Other
Operations” are not included in our Coal Operations segment.
History
In 2002,
ANR Holdings, LLC (“ANR Holdings”) was formed by First Reserve Fund IX,
L.P. and ANR Fund IX Holdings, L.P. (referred to as the “First Reserve
Stockholders” or collectively with their affiliates, “First Reserve”) and our
management to serve as the top-tier holding company of the Alpha Natural
Resources organization. On February 11, 2005, Alpha Natural Resources, Inc.
succeeded to the business of ANR Holdings in a series of transactions that we
refer to collectively as the “Internal Restructuring,” and on February 18,
2005, Alpha Natural Resources, Inc. completed an initial public offering of its
common stock. When we use the terms “Alpha,” “we,” “our,” “the Company” and
similar terms in this report, we mean (1) prior to our Internal
Restructuring, ANR Fund IX Holdings, L.P. and Alpha NR Holding, Inc. (a
subsidiary of First Reserve Fund IX, L.P. prior to our Internal
Restructuring) and subsidiaries on a combined basis and (2) after our
Internal Restructuring, Alpha Natural Resources, Inc. and its consolidated
subsidiaries. Alpha Natural Resources, Inc. was formed under the laws of the
State of Delaware on November 29, 2004.
On
December 13, 2002, the First Reserve Stockholders, who then owned 100% of
the membership interests of ANR Holdings, acquired the majority of the Virginia
coal operations of Pittston Coal Company (our “Predecessor”), a subsidiary of
the Brink's Company (formerly known as The Pittston Company), through
wholly-owned subsidiaries of ANR Holdings for $62.9 million.
On
January 31, 2003, wholly owned subsidiaries of ANR Holdings acquired
Coastal Coal Company, LLC for $67.8 million, and on March 11, 2003,
ANR Holdings and its subsidiaries acquired the U.S. coal production and
marketing operations of American Metals and Coal International, Inc. (“AMCI”)
for $121.3 million. Of the consideration for the U.S. AMCI
acquisition, $69.0 million was provided in the form of an approximate 44%
membership interest in ANR Holdings issued to the owners of AMCI, which together
with the issuances of an approximate 1% membership interest to Madison Capital
Funding, LLC and Alpha Coal Management reduced the First Reserve Stockholders
membership interest in ANR Holdings to approximately 55%.
On
November 17, 2003, we acquired the assets of Mears Enterprises, Inc.
(“Mears”) for $38.0 million.
On
April 1, 2004, we acquired substantially all of the assets of Moravian Run
Reclamation Co., Inc. for five thousand dollars in cash and the assumption by us
of certain liabilities, including four active surface mines and two additional
surface mines under development, operating in close proximity to and serving
many of the same customers as our AMFIRE business unit located in
Pennsylvania.
On
May 10, 2004, we acquired a coal preparation plant and railroad loading
facility located in Portage, Pennsylvania and related equipment and coal
inventory from Cooney Bros. Coal Company for $2.5 million in cash and an
adjacent coal refuse disposal site from a Cooney family trust for
$0.3 million in cash.
On
October 13, 2004, our AMFIRE business unit entered into a coal mining lease
with Pristine Resources, Inc., a subsidiary of International Steel Group Inc.,
for the right to deep mine a substantial area of the Upper Freeport Seam in
Pennsylvania.
On
February 11, 2005, we succeeded to the business and became the indirect
parent entity of ANR Holdings in connection with the Internal Restructuring and,
on February 18, 2005, we completed an initial public offering of our common
stock (the “IPO”).
On
April 14, 2005, we sold the assets of our 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 $4.4 million, plus an amount in cash equal to the
fair market value of NKC's coal inventory, and the assumption by the buyer of
certain liabilities of NKC.
On
October 26, 2005, we acquired the Nicewonder Coal Group's coal reserves and
operations in southern West Virginia and southwestern Virginia (“Nicewonder
Acquisition”). The Nicewonder Acquisition, consisted of the purchase of the
outstanding capital stock of White Flame Energy, Inc., Twin Star Mining, Inc.
and Nicewonder Contracting, Inc., the equity interests of Powers Shop, LLC and
Buchanan Energy, LLC and substantially all of the assets of Mate Creek Energy of
W. Va., Inc. and Virginia Energy Company, and the business of Premium Energy,
Inc. by merger. We paid an aggregate purchase price of $328.2 million in
the Nicewonder Acquisition. The operations we acquired from the Nicewonder
Coal Group constitute our eighth business unit, Callaway Natural
Resources.
On May 1,
2006, we acquired certain coal mining operations in eastern Kentucky from
Progress Fuels Corp, a subsidiary of Progress Energy (“Progress Acquisition”)
for $28.8 million, including adjustments for working capital. The Progress
Acquisition consisted of the purchase of the outstanding capital stock of
Diamond May Coal Co. and Progress Land Corp. and the assets of Kentucky May Coal
Co., Inc. The operations acquired are adjacent to our Enterprise business unit
and have been integrated with Enterprise.
On
December 28, 2006, our subsidiary, Palladian Lime, LLC (“Palladian”) acquired a
94% ownership interest in Gallatin Materials LLC (“Gallatin”), a start-up lime
manufacturing business in Verona, Kentucky. The consideration for
acquisition consisted of (i) cash capital contributions of $10.3 million, (ii) a
committed subordinated debt facility of up to $8.8 million provided to Gallatin
by Palladian, of which $3.8 million was funded as of December 31, 2007 and (iii)
a letter of credit procured for Gallatin’s benefit under our current senior
credit facility in the amount of $2.6 million to cover project cost
overruns. The first of two planned rotary pre-heater lime kilns is expected
to be in production in the first quarter 2008 and will produce lime to be sold
primarily to coal-burning utilities as a scrubbing agent for removing sulfur
dioxide from flue gas, helping them to meet increasingly stringent air quality
standards under the federal Clean Air Act. The lime will also be sold to steel
producers for use as flux in electric arc and basic oxygen furnaces. The
minority owners were granted restricted member interests in Gallatin, which vest
based on performance criteria approximately three years from the closing date
and which, if earned in their entirety, would reduce our ownership to 77.5%.
Approximately $22.3 million was spent on capital expenditures by Gallatin during
2007. As of December 31, 2007, Gallatin borrowed $18.5 million for
project financing.
On June
29, 2007, we paid $43.9 million for the acquisition of certain coal mining
assets in western West Virginia from Arch Coal, Inc. known as Mingo
Logan. The Mingo Logan purchase consists of coal reserves, one active
deep mine and a load-out and processing plant, which is managed by our Callaway
business unit.
Mining
Methods
We
produce coal using two mining methods: underground room and pillar mining using
continuous mining equipment, and surface mining.
Underground Mining.
Underground mines in the United States are typically operated using one of two
different methods: room and pillar mining or longwall mining. In 2007,
approximately 56% of our coal production volume from mines operated by our
subsidiaries' employees and contractors came from underground mining operations
using the room and pillar method with continuous mining equipment. In room and
pillar mining, rooms are cut into the coal bed leaving a series of pillars, or
columns of coal, to help support the mine roof and control the flow of air.
Continuous mining equipment is used to cut the coal from the mining face.
Generally, openings are driven 20 feet wide, and the pillars are generally
rectangular in shape, measuring 35-50 feet wide by 35-80 feet long. As
mining advances, a grid-like pattern of entries and pillars is formed. Shuttle
cars or continuous haulage units are used to transport coal from the continuous
miner to the conveyor belt for transport to the surface. When mining advances to
the end of a panel, retreat mining may begin. In retreat mining, coal is mined
from the pillars that were created in advancing the panel, allowing the roof to
cave. When retreat mining is completed to the mouth of the panel, the mined
panel is abandoned. The room and pillar method is often used to mine smaller
coal blocks or thin or non-contiguous seams, and resource recovery ranges from
30% to 70%, with higher recovery rates applicable where retreat mining is
combined with room and pillar mining.
The other
underground mining method commonly used in the United States is the longwall
mining method, which we do not currently use at any of our mines. In longwall
mining, a rotating drum is trammed mechanically across the face of coal, and a
hydraulic system supports the roof of the mine while it advances through the
coal. Chain conveyors then move the loosened coal to an underground mine
conveyor system for delivery to the surface. Our Central Appalachian reserves
often include non-contiguous seams of coal that can be extracted at a lower cost
using continuous mining as opposed to the more capital intensive longwall
method.
Surface Mining. Surface
mining is used when coal is found close to the surface. In 2007, approximately
44% of our coal production volume from mines operated by our subsidiaries'
employees and contractors came from surface mines. This method involves the
removal of overburden (earth and rock covering the coal) with heavy earthmoving
equipment and explosives, loading out the coal, replacing the overburden and
topsoil after the coal has been excavated and reestablishing vegetation and
plant life and making other improvements that have local community and
environmental benefit. Overburden is typically removed at our mines using large,
hydraulic operated excavators, rubber-tired diesel loaders and dozers. Resource
recovery for surface mining is typically 90% or more.
Coal
Characteristics
In
general, coal of all geological compositions is characterized by end use as
either steam coal or metallurgical coal. Heat value, sulfur and ash content, and
volatility, in the case of metallurgical coal, are the most important variables
in the profitable marketing and transportation of coal. These characteristics
determine the best end use of a particular type of coal. We mine, process,
market and transport bituminous coal, characteristics of which are described
below.
Heat Value. The heat value of
coal is commonly measured in British thermal units, or “Btus.” A Btu is the
amount of heat needed to raise the temperature of one pound of water by one
degree Fahrenheit. Alpha exclusively mines bituminous coal, a “soft” black coal
with a heat content that ranges from 9,500 to 15,000 Btus per pound. This coal
is located primarily in Appalachia, Arizona, the Midwest, Colorado and Utah and
is the type most commonly used for electric power generation in the United
States. Bituminous coal is also used for metallurgical and industrial steam
purposes. Of our estimated 617.5 million tons of proven and probable
reserves, approximately 89% has a heat content above 12,500 Btus per
pound.
Sulfur Content. Sulfur
content can vary from seam to seam and sometimes within each seam. When coal is
burned, it produces sulfur dioxide, the amount of which varies depending on the
chemical composition and the concentration of sulfur in the coal. Low sulfur
coals are coals which have a sulfur content of 1.5% or less. Approximately 82%
of our proven and probable reserves are low sulfur coal.
High
sulfur coal can be burned in plants equipped with sulfur-reduction technology,
such as scrubbers, which can reduce sulfur dioxide emissions by 50% to 90%.
Plants without scrubbers can burn high sulfur coal by blending it with lower
sulfur coal or by purchasing emission allowances on the open market, allowing
the user to emit a predetermined amount of sulfur dioxide. Some older coal-fired
plants have been retrofitted with scrubbers, although most have shifted to lower
sulfur coals as their principal strategy for complying with Phase II of the
Clean Air Act's Acid Rain regulations. We expect that any new coal-fired
generation plant built in the United States will use clean coal-burning
technology.
Ash & Moisture
Content. Ash is the inorganic residue remaining after the combustion of
coal. As with sulfur content, ash content varies from seam to seam. Ash content
is an important characteristic of coal because electric generating plants must
handle and dispose of ash following combustion. The absence of ash is also
important to the process by which metallurgical coal is transformed into coke
for use in steel production. Moisture content of coal varies by the type of
coal, the region where it is mined and the location of coal within a seam. In
general, high moisture content decreases the heat value and increases the weight
of the coal, thereby making it more expensive to transport. Moisture content in
coal, as sold, can range from approximately 5% to 30% of the coal's
weight.
Coking Characteristics. The
coking characteristics of metallurgical coal are typically measured by the
coal's fluidity, ARNU and volatility. Fluidity and ARNU tests measure the
expansion and contraction of coal when it is heated under laboratory conditions
to determine the strength of coke that could be produced from a given coal.
Typically, higher numbers on these tests indicate higher coke strength.
Volatility refers to the loss in mass, less moisture, when coal is heated in the
absence of air. The volatility of metallurgical coal determines the percentage
of feed coal that actually becomes coke, known as coke yield. Coal with a lower
volatility produces a higher coke yield and is more highly valued than coal with
a higher volatility, all other metallurgical characteristics being
equal.
Mining
Operations
We
currently have eight regional business units, operating in Virginia, West
Virginia, Pennsylvania, and Kentucky. As of December 31, 2007, these
business units include 11 preparation plants, each of which receive, blend,
process and ship coal that is produced from one or more of our 58 active mines
(some of which are operated by third parties under contracts with us), using two
mining methods, underground room and pillar and surface mining. Our underground
mines generally consist of one or more single or dual continuous miner sections
which are made up of the continuous miner, shuttle cars or continuous haulage,
roof bolters, and various ancillary equipment. Our surface mines are a
combination of mountain top removal, contour, highwall miner, and auger
operations using truck/loader - excavator equipment fleets along with large
production tractors. Most of our preparation plants are modern heavy media
plants that generally have both coarse and fine coal cleaning circuits. We
employ preventive maintenance and rebuild programs to ensure that our equipment
is modern and well-maintained. During 2007, most of our preparation plants also
processed coal that we purchased from third party producers before reselling it
to our customers. Within each regional business unit, mines have been developed
at strategic locations in close proximity to our preparation plants and rail
shipping facilities. Coal is transported from our regional business units to
customers by means of railroads, trucks, barge lines, and ocean-going vessels
from terminal facilities.
The
following table provides location and summary information regarding our eight
regional business units and the preparation plants and active mines associated
with these business units as of December 31, 2007:
Regional
Business Units
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Number
and Type of
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||||||||||||||||
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Mines
as of
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||||||||||||||||
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December
31, 2007
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||||||||||||||||
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Preparation
plant(s) as of
|
Under-
|
2007
Production
of Saleable Tons
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Regional
Business Unit
|
Location
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December
31, 2007
|
ground
|
Surface
|
Total
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Railroad
|
(in
000's)(1)
|
|||||||||
|
Paramont
|
Virginia
|
Toms
Creek
|
6
|
4
|
10
|
NS
|
5,112
|
|||||||||
|
Dickenson-Russell
|
Virginia
|
McClure
River and Moss#3
|
4
|
1
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5
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CSX,
NS
|
2,143
|
|||||||||
|
Kingwood
|
West
Virginia
|
Whitetail
|
2
|
--
|
2
|
CSX
|
1,630
|
|||||||||
|
Brooks
Run North
|
West
Virginia
|
Erbacon
|
2
|
1
|
3
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CSX
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2,149
|
|||||||||
|
Brooks
Run South
|
West
Virginia
|
Litwar
and Kepler
|
11
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--
|
11
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NS
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2,841
|
|||||||||
|
AMFIRE
|
Pennsylvania
|
Clymer
and Portage
|
5
|
14
|
19
|
NS
|
3,157
|
|||||||||
|
Enterprise
|
Kentucky
|
Roxana
|
1
|
3
|
4
|
CSX
|
2,768
|
|||||||||
|
Callaway
|
West
Virginia/ Virginia
|
Black
Bear
|
1
|
3
|
4
|
NS
|
4,403
|
|||||||||
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Total
|
32
|
26
|
58
|
24,203
|
||||||||||||
| (1 | ) |
Includes
coal purchased from third-party producers that was processed at our
subsidiaries' preparation plants in
2007.
|
CSX Railroad = CSX
Norfolk Southern Railroad =
NS
The coal production
and processing capacity of our mines and processing plants is influenced by a
number of factors including reserve availability, labor availability, and
environmental permit timing and preparation plant capacity.
The following
provides a brief description of our business units as of December 31,
2007.
Virginia
/ Kentucky Operations
Paramont. Our Paramont
business unit produces coal from six underground mines using continuous miners
and the room and pillar mining method. Three of the underground mines are
operated by independent contractors. The coal from these mining operations is
transported by truck to the Toms Creek preparation plant operated by Paramont,
or the McClure River or Moss #3 preparation plants operated by
Dickenson-Russell. At the preparation plant, the coal is cleaned, blended and
loaded onto rail for shipment to customers. Paramont also operates four
truck/loader surface mines. One of these surface mines is operated by
independent contractors. The coal produced by the surface mines is transported
to one of our preparation plants or raw coal loading docks where it is blended
and loaded onto rail for shipment to customers. During 2007, Paramont purchased
approximately 126,000 tons of coal from third parties that was blended with
Paramont's coal and shipped to our customers. As of December 31, 2007, the
Paramont business unit was operating at a capacity to ship approximately five
and one half million tons per year.
Dickenson-Russell. Our
Dickenson-Russell business unit produces coal from four underground mines using
continuous miners and the room and pillar mining method. The coal is transported
by truck to the McClure River or Moss #3 preparation plants operated by
Dickenson-Russell or the Toms Creek preparation plant operated by Paramont where
it is cleaned, blended and loaded on rail or truck for shipment to customers.
The Dickenson-Russell business unit also operates a fine coal recovery dredge
operation where fine coals that were previously discarded by the coal cleaning
process are recovered, cleaned, and blended with other coals for sale. During
2007, Dickenson-Russell purchased approximately 70,000 tons of coal from third
parties that was blended with Dickenson-Russell's coal and shipped to our
customers. As of December 31, 2007, the Dickenson-Russell business unit was
operating at a capacity to ship approximately two million tons per
year.
Enterprise. Our Enterprise
business unit produces coal from one underground mine, using continuous miners
and the room and pillar mining method. The underground mine is staffed and
operated by Enterprise employees. The coal from this underground mine is
transported by truck to the Roxana coal preparation plant operated by Enterprise
where it is cleaned, blended and loaded onto rail for shipment to customers.
Enterprise also has three truck/loader surface mines, two of which are operated
by independent contractors. The coal produced by the surface mine is transported
to the Roxana preparation plant and Pioneer load-out facility where it is
blended and loaded onto rail for shipment to customers. During 2007, Enterprise
purchased approximately 118,000 tons of coal from third parties that was blended
with Enterprise's coal and shipped to our customers. As of December 31, 2007,
the Enterprise business unit was operating at a capacity to ship approximately
three million tons per year. The Progress Acquisition was included in the
Enterprise operations beginning May 2006.
West
Virginia Operations
Kingwood. Our Kingwood
business unit produces coal from two underground mines using continuous miners
and the room and pillar mining method. One mine is staffed and operated by our
Kingwood employees and one is operated by an independent contractor. The coal is
belted to the Whitetail preparation plant operated by Kingwood where it is
cleaned and loaded onto rail or truck for shipment to customers. During
2007, Kingwood purchased approximately 156,000 tons of coal from third parties
that was blended with Kingwood's coal and shipped to our customers. As of
December 31, 2007, the Kingwood business unit was operating at a capacity to
ship approximately one and one-half million tons per year.
Brooks Run North. Our Brooks Run North
business unit produces coal from two underground mines using continuous miners
and the room and pillar mining method. The Brooks Run North operation is staffed
and operated by Brooks Run North employees. The coal is transported by truck to
the Erbacon preparation plant operated by Brooks Run North where it is cleaned,
blended and loaded onto rail for shipment to customers. The Brooks Run North
business unit has one surface mine operated by Brooks Run North
employees. As of December 31, 2007, the Brooks Run North business
unit was operating at a capacity to ship approximately two million tons per
year.
Brooks Run South. Our Brooks Run South
business unit produces coal from eleven underground mines using continuous
miners and the room and pillar mining method. Three of the underground mines are
operated by our employees, and the others are operated by independent
contractors. The coal is transported by truck or rail to the Litwar and Kepler
preparation plants operated by Brooks Run South or the Moss #3 plant
operated by Dickenson-Russell, where it is cleaned, blended and loaded onto rail
for shipment to customers. During 2007, the Brooks Run South business
unit purchased approximately 942,000 tons of coal from third parties that was
blended with other coals and shipped to our customers. As of December 31, 2007,
the Brooks Run South business unit was operating at a capacity to ship
approximately three and one-quarter million tons per year.
Callaway. Our Callaway business unit
produces coal from three surface mining operations operated by our Callaway
employees and one underground mine operated by our subsidiary Cobra Natural
Resources, LLC (Cobra) using continuous miners and the room and pillar mining
method. Callaway also recovers coal from the road construction
business operated by our subsidiary Nicewonder Contracting, Inc. (NCI).
Coal from the three surface mines and NCI is transported by truck to the Black
Bear preparation plant or the Ben Creek or Mate Creek loadouts operated by Cobra
or the Virginia Energy loadout operated by Callaway where the coal is cleaned,
blended, and loaded onto rail for shipment to customers. Coal from the
underground mine is belted to the Black Bear preparation plant where it is
cleaned and then loaded into railcars at the Ben Creek loadout for shipment to
our customers. Callaway purchased approximately 138,000 tons of coal from third
parties in 2007. As of December 31, 2007, the Callaway business unit
was operating at a capacity to ship approximately five million tons per year,
including coal recovered by NCI as part of its road construction
business.
Pennsylvania
Operations
AMFIRE. Our AMFIRE business
unit produces coal from five underground mines using continuous miners and the
room and pillar mining method. All of the underground mining operations at
AMFIRE are staffed and operated by AMFIRE employees. The underground coal is
delivered directly by truck to the customer, or to the Clymer or Portage coal
preparation plants or raw coal loading docks where it is cleaned, blended and
loaded onto rail or truck for shipment to customers. AMFIRE also operates
fourteen truck/loader surface mines, eight of which are operated by independent
contractors. The surface mined coal is delivered directly by truck to the
customer or transported to the Clymer or Portage coal preparation plants or raw
coal loading docks where it is blended and loaded onto rail or truck for
shipment to customers. During 2007, AMFIRE purchased approximately 75,000 tons
of coal from third parties that was blended with AMFIRE's coal and shipped to
our customers. As of December 31, 2007, the AMFIRE business unit was operating
at a capacity to ship approximately three and one-quarter million tons per
year.
Marketing,
Sales and Customer Contracts
Our
marketing and sales force, which is principally based in Abingdon, Virginia,
included 41 employees as of December 31, 2007, and consists of sales managers,
distribution/traffic managers and administrative personnel. In addition to
selling coal produced in our eight regional business units, we are also actively
involved in the purchase and resale of coal mined by others, the majority of
which we blend with coal produced from our mines. We have coal supply
commitments with a wide range of electric utilities, steel manufacturers,
industrial customers and energy traders and brokers. Our overall sales
philosophy is to focus first on the customer's individual needs and
specifications, as opposed to simply selling our production inventory. By
offering coal of both steam and metallurgical grades to provide specific
qualities of heat content, sulfur and ash, and other characteristics relevant to
our customers, we are able to serve a diverse customer base. This diversity
allows us to adjust to changing market conditions and provides us with the
ability to sustain high sales volumes and sales prices for our coal. Many of our
larger customers are well-established public utilities and steel
manufacturers who have been customers of ours or our Predecessor and
acquired companies for decades.
We sold a
total of 28.5 million tons of coal in 2007, consisting of 24.4 million tons of
produced and processed coal and 4.1 million tons of purchased coal that we
resold without processing. Of our total purchased coal sales of 5.8 million tons
in 2007, approximately 3.7 million tons were blended prior to resale, meaning
the coal was mixed with coal produced from our mines prior to resale, which
generally allows us to realize a higher overall margin for the blended product
than we would be able to achieve selling these coals separately. Approximately
1.7 million tons of our 2007 purchased coal sales were processed by us, meaning
we washed, crushed or blended the coal at one of our preparation plants or
loading facilities prior to resale. We sold a total of 29.1 million tons of coal
in 2006, consisting of 24.7 million tons of produced and processed coal and 4.4
million tons of purchased coal that we resold without processing. Of our total
purchased coal sales of 5.8 million tons in 2006, approximately 3.9 million tons
were blended prior to resale. Approximately 1.4 million tons of our
2006 purchased coal sales were processed by us. We sold a total of 26.7 million
tons of coal in 2005, consisting of 20.6 million tons of produced and processed
coal and 6.1 million tons of purchased coal that we resold without processing.
Of our total purchased coal sales of 7.6 million tons in 2005, approximately 5.0
million tons were blended prior to resale. Approximately 1.5 million tons of our
2005 purchased coal sales were processed by us. The breakdown of tons
sold by market served for 2007, 2006 and 2005 is set forth in the table
below:
|
Steam
Coal Sales (1)
|
Metallurgical
Coal Sales
|
|||||||||
|
Year
|
Tons
|
%
of Total Sales
|
Tons
|
%
of Total Sales
|
||||||
|
(In
millions, except percentages)
|
||||||||||
|
2007
|
17.5
|
62
|
%
|
11.0
|
38
|
%
|
||||
|
2006
|
19.1
|
66
|
%
|
10.0
|
34
|
%
|
||||
|
2005
|
16.7
|
62
|
%
|
10.0
|
38
|
%
|
||||
| (1 | ) |
Steam
coal sales include sales to utility and industrial customers. Sales of
steam coal to industrial customers, who we define as consumers of steam
coal who do not generate electricity for sale to third parties, accounted
for approximately 3%, 4% and 3% of total sales in 2007, 2006 and 2005,
respectively.
|
| (2 | ) |
Our
sales of steam coal during 2007, 2006 and 2005 were made primarily to
large utilities and industrial customers in the Eastern region of the
United States, and our sales of metallurgical coal during those years were
made primarily to steel companies in the Northeastern and Midwestern
regions of the United States and in countries in Europe, Asia and South
America.
|
We sold
coal to over 100 different customers in 2007. Our top ten customers in 2007
accounted for approximately 42% of 2007 revenues and our largest customer during
2007 accounted for approximately 8% of 2007 revenues. The following table
provides information regarding our exports (including to Canada) in 2007, 2006
and 2005 by revenues and tons sold:
|
Year
|
Export
Tons Sold
|
Export
Tons Sold as a Percentage of Total Coal Sales
|
Export
Sale Revenues (1)
|
Export
Sales Revenue as a Percentage of Total Revenues
|
||||||
|
(In
millions, except percentages)
|
||||||||||
|
2007
|
7.8
|
27
|
%
|
$
|
705.4
|
38
|
%
|
|||
|
2006
|
7.2
|
25
|
%
|
$
|
668.8
|
35
|
%
|
|||
|
2005
|
8.4
|
31
|
%
|
$
|
737.1
|
45
|
%
|
|||
| (1 | ) |
Export
sale revenues in 2007, 2006 and 2005 include approximately $1.2 million,
$0.7 million and $0.6 million, respectively, in equipment export sales
from our Maxxim Rebuild business. All other export sale revenues are coal
revenues and freight and handling
revenues.
|
Our
export shipments during 2007, 2006 and 2005 serviced customers in 14, 18 and 16
countries, respectively, across North America, Europe, South America, Asia and
Africa. Canada was our largest export market in 2007, with sales to Canada
accounting for approximately 15% of export revenues and 6% of total revenues.
Canada was our largest export market in 2006 and 2005, with sales to Canada
accounting for approximately 17% and 15% of export revenues, respectively, and
6% and 7% of total revenues, respectively. All of our sales are made
in U.S. dollars, which reduces foreign currency risk. A portion of our sales are
subject to seasonal fluctuation, with sales to certain customers being curtailed
during the winter months due to the freezing of lakes that we use to transport
coal to those customers.
As is
customary in the coal industry, when market conditions are appropriate and
particularly in the steam coal market, we enter into long-term contracts
(exceeding one year in duration) with many of our customers. These arrangements
allow customers to secure a supply for their future needs and provide us with
greater predictability of sales volume and sales prices. A significant majority
of our steam coal sales are shipped under long-term contracts. The majority of
the metallurgical coal sales contracts we entered into during 2005 and 2006 were
long-term contracts. During 2007, approximately 81% and 44% of our steam and
metallurgical coal sales volume, respectively, was delivered pursuant to
long-term contracts and during 2006, approximately 63% and 45% of our steam and
metallurgical coal sales volume, respectively, was delivered pursuant to
long-term contracts.
At
December 31, 2007, 95% of our planned 2008 production was committed and
priced and less than 1% was committed and unpriced, with approximately 1.2
million tons uncommitted. Committed steam coal prices for 2008 average $48.64
per ton and met coal prices average $81.27 per ton. At December 31,
2007, we had commitments to purchase 3.5 million tons of coal during
2008.
The terms
of our contracts result from bidding and negotiations with customers.
Consequently, the terms of these contracts typically vary significantly in many
respects, including price adjustment features, provisions permitting
renegotiation or modification of coal sale prices, coal quality requirements,
quantity parameters, flexibility and adjustment mechanisms, permitted sources of
supply, treatment of environmental constraints, options to extend and force
majeure, suspension, termination and assignment provisions, and provisions
regarding the allocation between the parties of the cost of complying with
future governmental regulations.
Distribution
We employ
transportation specialists who negotiate freight and terminal agreements with
various providers, including railroads, trucks, barge lines, and terminal
facilities. Transportation specialists also coordinate with customers, mining
facilities and transportation providers to establish shipping schedules that
meet the customer's needs. Our produced and processed coal is loaded from our
eleven preparation plants and in certain cases directly from our mines. The coal
we purchase is loaded in some cases directly from mines and preparation plants
operated by third parties or from an export terminal. Virtually all of our coal
is transported from the mine to our preparation plants by truck or rail, and
then from the preparation plant to the customer by means of railroads, trucks,
barge lines and ocean-going vessels from terminal facilities. Rail shipments
constituted approximately 59% of total shipments of coal volume produced and
processed coal from our mines to the preparation plant to the customer in 2007.
The balance was shipped from our preparation plants, loadout facilities or mines
via truck. In 2007, approximately 5% of our coal sales were delivered to our
customers through transport on the Great Lakes, approximately 16% was moved
through the Norfolk Southern export facility at Norfolk, Virginia, approximately
6% was moved through the coal export terminal at Newport News, Virginia operated
by Dominion Terminal Associates, and less than 1% was moved through the export
terminals at Baltimore, Maryland and New Orleans, LA. We own a 32.5% interest in
the coal export terminal at Newport News, Virginia operated by Dominion Terminal
Associates. See “Other Operations.”
Competition
With
respect to our U.S. customers, we compete with numerous coal producers in
the Appalachian region and with a large number of western coal producers in the
markets that we serve. Competition from coal with lower production costs shipped
east from western coal mines has resulted in increased competition for coal
sales in the Appalachian region. We face limited competition from imports for
our domestic customers. As of September 2007, 3% of total U.S. coal
consumption in 2007 was imported. Excess industry capacity, which has occurred
in the past, tends to result in reduced prices for our coal. The most important
factors on which we compete are delivered coal price, coal quality and
characteristics, transportation costs from the mine to the customer and the
reliability of supply. Demand for coal and the prices that we will be able to
obtain for our coal are closely linked to coal consumption patterns of the
domestic electric generation industry, which has accounted for approximately 93%
of 2007 domestic coal consumption as of September 2007. These coal consumption
patterns are influenced by factors beyond our control, including the demand for
electricity, which is significantly dependent upon summer and winter
temperatures in the United States, environmental and other government
regulations, technological developments and the location, availability, quality
and price of competing fuels for power such as natural gas, nuclear, fuel oil
and alternative energy sources such as hydroelectric power. Demand for our low
sulfur coal and the prices that we will be able to obtain for it will also be
affected by the price and availability of high sulfur coal, which can be
marketed in tandem with emissions allowances in order to meet Clean Air Act
requirements.
Demand
for our metallurgical coal and the prices that we will be able to obtain for
metallurgical coal will depend to a large extent on the demand for U.S. and
international steel, which is influenced by factors beyond our control,
including overall economic activity and the availability and relative cost of
substitute materials. In the export metallurgical market, during 2007 and 2006,
we largely competed with producers from Australia, Canada, and other
international producers of metallurgical coal.
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
addition to competition for coal sales in the United States and internationally,
we compete with other coal producers, particularly in the Appalachian region,
for the services of experienced coal industry employees at all levels of our
mining operations.
Other
Operations
We have
other operations and activities in addition to our normal coal production,
processing and sales business, including:
Road Construction Business.
NCI operates a road construction business under a contract with the State of
West Virginia Department of Transportation. Pursuant to the contract, NCI is
building approximately 11 miles of rough grade road in West Virginia over the
next two to three years and, in exchange, NCI will be compensated by West
Virginia based on the number of cubic yards of material excavated and/or filled
to create a road bed, as well as for certain other cost components. As the road
is constructed any coal recovered is sold by NCI as part of its coal
operations. The Company also has other minor road construction
projects in conjunction with other surface mining operations.
Maxxim Rebuild. We own Maxxim
Rebuild Co., LLC, a mining equipment company with facilities in Kentucky and
Virginia. This business largely consists of repairing and reselling equipment
and parts used in surface mining and in supporting preparation plant operations.
Maxxim Rebuild had revenues of $29.2 million for 2007, of which
approximately 87% was generated by services provided to our other subsidiaries
and approximately 13% was generated by sales to external customers, including
$1.2 million to export customers.
Dominion Terminal Associates.
Through our subsidiary Alpha Terminal Company, LLC, we hold a 32.5% interest in
Dominion Terminal Associates, a 22 million-ton annual capacity coal export
terminal located in Newport News, Virginia. The terminal, constructed in 1982,
provides the advantages of unloading/transloading equipment with ground storage
capability, providing producers with the ability to custom blend export products
without disrupting mining operations. During 2007, we shipped a total of 1.8
million tons of coal to our customers through the terminal. We make periodic
cash payments in respect of the terminal for operating expenses, which are
partially offset by payments we receive for transportation incentive payments
and for renting our unused storage space in the terminal to third parties. Our
cash payments for expenses for the terminal in 2007 were $4.1 million,
partially offset by payments received in 2007 of $2.7 million. The terminal
is held in a partnership with subsidiaries of three other companies, Dominion
Energy (20%), Arch Coal (17.5%) and Peabody Energy (30%). We and our
other interested partners were pursuing an investment of approximately $35.0 for
the construction of a new import facility at the terminal. During
2007, the previously indicated demand by electric utilities for import coals
shifted, with the result that there is insufficient demand to warrant the
project. Consequently, the project has been deferred.
Gallatin Materials LLC. On December 28,
2006, our subsidiary, Palladian Lime, LLC (“Palladian”) acquired a 94% ownership
interest in Gallatin Materials LLC (“Gallatin”), a start-up lime manufacturing
business in Verona, Kentucky by assuming liabilities in the amount of $3.6
million consisting of a note payable in the amount of $1.8 million and
accounts payable and accrued expenses in the amount of $1.7 million. The
liabilities assumed were allocated to fair value of assets acquired consisting
mainly of intangible assets. In addition, Palladin agreed to and
made (i) cash capital contributions of $10.3 million, of which $3.3 million
was funded as of December 31, 2006, (ii) a committed subordinated debt
facility of up to $8.8 million provided to Gallatin by Palladian, of which $3.8
million was funded as of December 31, 2007 and (iii) a letter of credit procured
for Gallatin’s benefit under our current senior credit facility in the amount of
$2.6 million to cover project cost overruns. The first of two planned rotary
pre-heater lime kilns is expected to be in production in the first quarter 2008
and will produce lime to be sold primarily to coal-burning utilities as a
scrubbing agent for removing sulfur dioxide from flue gas, helping them to meet
increasingly stringent air quality standards under the federal Clean Air Act.
The lime will also be sold to steel producers for use as flux in electric arc
and basic oxygen furnaces. The minority owners were granted restricted member
interests in Gallatin, which vest based on performance criteria approximately
three years from the closing date and which, if earned in their entirety, would
reduce our ownership to 77.5%. Approximately $22.3 million was spent on capital
expenditures by Gallatin during 2007. As of December 31, 2007,
Gallatin borrowed $18.5 million for project financing.
Gallatin will
produce two basic qualities of lime. High calcium lime is used by both the steel
industry as a fluxing agent in both electric arc and basic oxygen furnaces and
the utility industry as a scrubbing agent for flue gas
desulphurization. Gallatin’s medium magnesium lime is only used by
the steel industry as a fluxing agent.
Miscellaneous. We engage in
the sale of certain non-strategic assets such as timber, gas and oil rights as
well as the leasing and sale of non-strategic surface properties and reserves.
We also provide coal and environmental analysis services.
Employee
and Labor Relations
Approximately
96% of our coal production in 2007 came from mines operated by union-free
employees, and as of December 31, 2007, over 94% of 3,640 employees were
union-free. We believe our employee relations are good, and there have been no
material work stoppages at any of our properties in the past ten
years.
Environmental
and Other Regulatory Matters
Federal,
state and local authorities regulate the U.S. coal mining industry with
respect to matters such as employee health and safety, permitting and licensing
requirements, air quality standards, water pollution, plant and wildlife
protection, the reclamation and restoration of mining properties after mining
has been completed, the discharge of materials into the environment, surface
subsidence from underground mining, and the effects of mining on groundwater
quality and quantities. These requirements have had, and will
continue to have, a significant effect on our production costs and our
competitive position. More stringent future requirements may impose
substantial increases in equipment and operating costs to us and delays,
interruptions, or a termination of operations, the extent of which cannot be
predicted. We intend to respond to any such future regulatory requirements at
the appropriate time by implementing necessary modifications to facilities or
operating procedures. Future requirements, such as those related to greenhouse
gas emissions, may also cause coal to become a less attractive fuel source,
thereby reducing coal's share of the market for fuels used to generate
electricity. Any such requirements may adversely affect our mining operations,
cost structure, revenues, or the ability of our customers to use
coal.
We strive
to conduct our mining operations in compliance with all applicable federal,
state, and local laws and regulations. However, because of extensive and
comprehensive regulatory requirements along with changing interpretations of
these requirements, violations occur from time to time. Since our
inception in 2002, none of the assessed violations or associated monetary
penalties has been material to our operations. Nonetheless, we expect that
future liability under or compliance with environmental, health and safety
requirements could have a material effect on our operations or competitive
position. Under some circumstances, substantial fines and penalties, including
revocation or suspension of mining permits, could be imposed under the laws
described below. Monetary sanctions and, in severe circumstances, criminal
sanctions could be imposed for failure to comply with these laws.
As of
December 31, 2007, we had accrued $91.2 million for reclamation liabilities
and mine closures, including $8.2 million of current
liabilities.
Climate Change. One major
by-product of burning coal is carbon dioxide, which is considered a greenhouse
gas and is a major source of concern with respect to global warming.
Considerable and increasing government attention in the United States and other
countries is being paid to reducing greenhouse gas emissions, including
emissions from coal-fired power plants. Congress is actively considering
legislation to reduce greenhouse gas emissions in the United States, and there
are a number of state and regional initiatives underway. Efforts to
reduce greenhouse gas emissions could adversely affect the price and demand for
coal.
The
United States has not ratified the Kyoto Protocol to the 1992 Framework
Convention on Global Climate Change (the “Protocol”), which became effective for
many countries in 2005 and establishes a binding set of emission targets for
greenhouse gases. However, the United States is actively participating in
various international initiatives to reduce greenhouse gas emissions, including
negotiations for a new international climate treaty to replace the Protocol.
Under the current schedule, the new treaty would be agreed to in late
2009.
In
addition to possible future U.S. treaty obligations, regulation of
greenhouse gases in the United States could occur pursuant to federal
legislation, regulatory changes under the Clean Air Act, state initiatives, or
otherwise. At the federal level, Congress is actively considering numerous
climate change bills, including bills that would establish nationwide
cap-and-trade programs to reduce greenhouse gas emissions. Most
prominently, in 2007 the Lieberman-Warner America's Climate Security Act passed
the Senate Environment and Public Works Committee," and this bill or similar
legislation is expected to be taken up by the full Senate during
2008.
To date,
the U.S. Environmental Protection Agency (“EPA”) has not regulated carbon
dioxide emissions. In 2007, however, the U.S. Supreme Court ruled in
Massachusetts v. Environmental
Protection Agency that the Clean Air Act gives EPA the authority to
regulate vehicle tailpipe emissions of greenhouse gases and that EPA had not yet
articulated a reasonable basis for not issuing such regulation. A
similar lawsuit, currently pending before the U.S. Court of Appeals for the
District of Columbia Circuit, challenges EPA’s failure in 2006 to regulate
carbon dioxide in its new source performance standards covering power plants and
industrial boilers. These lawsuits could result in the issuance of a
court order requiring the EPA to set emission limitations for carbon dioxide
from stationary sources such as power plants.
State and
regional climate change initiatives may take effect before federal action. Ten
Northeastern states (Connecticut, Delaware, Maine, Maryland, Massachusetts, New
Hampshire, New Jersey, New York, Rhode Island, and Vermont) have entered the
Regional Greenhouse Gas Initiative (“RGGI”) Agreement, calling for a ten percent
reduction of carbon dioxide emissions by 2018, with state programs to be
launched by January 1, 2009. Participating states are developing their state
rules pursuant to a model rule issued by RGGI. Another group of Northeastern
states (Connecticut, Delaware, Maine, New Hampshire, New Jersey, New York, and
Vermont), joined by New York City, have brought a court action seeking to
declare carbon dioxide emissions from power plants to be a public
nuisance. A decision is pending before the U.S. Court of Appeals for
the Second Circuit. Climate change developments are also taking place on the
west coast. In September 2006, California adopted greenhouse gas legislation
that prohibits long-term base-load generation from having a greenhouse gas
emissions rate greater than that of a combined cycle natural gas generator and
that allows for long-term deals with generators that sequester carbon emissions.
In January 2007, the California Public Utility Commission adopted regulations
implementing the new legislation and establishing the greenhouse gas emission
standard at 1,100 pounds of carbon dioxide per megawatt-hour. In
February 2007, Arizona, California, New Mexico, Oregon and Washington, later
joined by Montana, Utah, and two Canadian provinces, announced the Western
Regional Climate Action Initiative to develop a regional target to reduce
greenhouse gas emissions and to devise a market-based program to meet the
target.
Implementation
of these or any other climate change standards or initiatives will likely
require additional controls on coal-fired power plants and industrial boilers
and may even cause some users of our coal to switch from coal to a lower carbon
fuel or more generally reduce the demand for coal-fired electricity generation.
This could result in an indeterminate decrease in price and demand for coal
nationally.
Mining Permits and Approvals.
Numerous governmental permits or approvals are required for mining
operations. The permitting process requires us to present data to
federal, state or local authorities pertaining to the effects or impacts that
any of our proposed production, processing of coal, or other activities may have
upon the environment. The authorization, permitting and/or implementation
requirements imposed by the permits or authorizations may be costly, time and
resource consuming, and may delay commencement or continuation of our
operations. Also, past or ongoing violations of federal and state mining laws
could provide a basis to revoke existing permits and/or deny or cause delay in
the issuance of additional permits if an officer, director or a stockholder with
a 10% or greater interest in an affiliated entity has violated federal or state
mining laws or if that person is in a position to control another entity that
has outstanding permit violations.
Typically,
our necessary permit applications are submitted several months, or even years,
before we plan to begin mining a new area. Although some permits or
authorizations may take six months or longer to obtain, in the past we have
generally obtained our mining permits without significant delay. However, as
there have been a growing number of court challenges filed against agency
decisions to issue coal mining permits, we cannot be sure that difficulty in
obtaining timely permits in the future will not occur.
Surface Mining Control and
Reclamation Act. The Surface Mining
Control and Reclamation Act of 1977 (“SMCRA”), which is administered by the
Office of Surface Mining Reclamation and Enforcement (“OSM”), establishes
mining, environmental protection and reclamation standards for all aspects of
surface mining as well as many aspects of deep mining. Mine operators must
obtain SMCRA permits and permit renewals from the OSM, or from the applicable
state agency if the state agency has obtained primacy. States in which we have
active mining operations have achieved primacy.
SMCRA
permit provisions and performance standards include a complex set of
requirements which include, but are not limited to the
following: reclamation performance bonds, coal prospecting; mine plan
development; topsoil removal, storage and replacement; selective handling of
overburden materials; mine pit backfilling and grading; disposal of excess
spoil; protection of the hydrologic balance; subsidence control for underground
mines; surface drainage control; mine drainage and mine discharge control and
treatment; post mining land use development; re-vegetation: compliance with many
other major environmental statutes, including the Clean Air Act; Clean Water
Act; Resource Conservation and Recovery Act (“RCRA”) and Comprehensive
Environmental Response, Compensation and Liability Act (“CERCLA” or
“Superfund”). Also, the Abandoned Mine Land Fund, which was created
by SMCRA, requires a fee on all coal produced. In 2007 and 2006, we recorded
$5.0 million of expenses for this reclamation tax each year.
Surety Bonds. Mine operators
are often required by federal and/or state laws to assure, usually through the
use of surety bonds, payment of certain long-term obligations including, but not
limited to, mine closure or reclamation costs, federal and state workers'
compensation costs, coal leases and other miscellaneous obligations. We have a
committed bonding facility with Travelers Casualty and Surety Company of
America, pursuant to which Travelers has agreed, subject to certain conditions,
to issue surety bonds on our behalf in a maximum amount of $150.0 million.
We also have a committed bonding facility with the Chubb Group of Insurance
Companies, pursuant to which Chubb has agreed, subject to certain conditions, to
issue surety bonds on our behalf in a maximum amount of $50.0 million. In 2007,
we added a third facility with Safeco Insurance Company of America whereas they
have agreed, subject to certain conditions, to issue surety bonds on our behalf
in a maximum amount of $35.0 million. As of December 31, 2007, we have
posted an aggregate of $142.5 million in reclamation bonds and
$10.2 million of other types of bonds under these facilities.
Clean Air Act. The Clean Air
Act and comparable state laws that regulate air emissions affect coal mining
operations both directly and indirectly. Direct impacts on coal mining and
processing operations include Clean Air Act permitting requirements and/or
emission control requirements relating to particulate matter which may include
controlling fugitive dust. The Clean Air Act indirectly affects coal mining
operations by extensively regulating the emissions of fine particulate matter
measuring 2.5 micrometers in diameter or smaller, sulfur dioxide, nitrogen
oxides, mercury and other compounds emitted by coal-fired power plants. As many
of these regulatory programs are still under development or are subject to
judicial challenge, it is not always possible to determine their impact on coal
demand nation wide. In addition to the greenhouse gas issues
discussed above, the air emissions programs that may affect our operations,
directly or indirectly, include, but are not limited to, the
following:
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Acid Rain.
Title IV of the Clean Air Act required a two-phase reduction of
sulfur dioxide emissions by electric utilities. Phase II became
effective in 2000 and applies to all coal-fired power plants generating
greater than 25 Megawatts. Generally, the affected electricity generators
have sought to meet these requirements by switching to lower sulfur fuels,
installing pollution control devices, reducing electricity generating
levels or purchasing sulfur dioxide emission allowances. Because the Acid
Rain program is a mature program, we believe that the impact of this
regulation has been factored into the demand for coal nationally.
Accordingly, we do not believe that the Acid Rain program standing alone
will continue to impact the demand for coal
nationally.
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Fine Particulate
Matter. The Clean Air Act requires EPA to set standards, referred
to as National Ambient Air Quality Standards (“NAAQS”), for certain
pollutants. Areas that are not in compliance (referred to as
“non-attainment areas”) with these standards must take steps to reduce
emissions levels. For example, NAAQS currently exist for particulate
matter with an aerodynamic diameter less than or equal to 10 microns, or
PM10, and for fine particulate matter with an aerodynamic diameter less
than or equal to 2.5 microns, or PM2.5. EPA designated all or part of 225
counties in 20 states as well as the District of Columbia as
non-attainment areas with respect to the PM2.5 NAAQS. Individual states
must identify the sources of emissions and develop emission reduction
plans. These plans may be state-specific or regional in scope. Under the
Clean Air Act, individual states have up to twelve years from the date of
designation to secure emissions reductions from sources contributing to
the problem. Meeting the new PM2.5 standard may require reductions of
nitrogen oxide and sulfur dioxide emissions that are separate and distinct
from the reductions that may be required under any other program. Future
regulation and enforcement of the new PM2.5 standard will affect many
power plants, especially coal-fired plants and all plants in
“non-attainment” areas. The combination of these actions may impact demand
for coal nationally, but we are unable to predict the magnitude of the
impact.
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Ozone. EPA has recently
proposed a range of reductions to the existing ozone NAAQS. In 2008, EPA
plans to promulgate a revised ozone NAAQS. If the ozone NAAQS is reduced,
significant additional emissions control expenditures may be required at
coal-fired power plants to meet the revised ozone NAAQS. Nitrogen oxides,
which are a by-product of coal combustion, are classified as an ozone
precursor. Accordingly, we expect that there may be additional emissions
control requirements necessary on new and expanded coal-fired power plants
and industrial boilers in the years ahead. The combination of
these actions may impact demand for coal nationally, but we are unable to
predict the magnitude of the
impact.
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NOx SIP Call. In 1998,
EPA established the NOx SIP Call program to reduce the transport of ozone
on prevailing winds from the Midwest and South to states in the Northeast,
which said they could not meet federal air quality standards because of
migrating pollution. The program was designed to reduce nitrous oxide
emissions by one million tons per year in 22 eastern states and the
District of Columbia, which were required to submit revised State
Implementation Plans (“SIPs”) in 2005. Coal fired power plants installed
and continue to install additional control measures, such as selective
catalytic reduction devices, in order to comply with the NOx SIP Call.
Since affected companies have already invested in the controls necessary
to comply with this rule, we believe that the impact of the NOx SIP Call
has been factored in to the demand for coal
nationally.
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Clean Air Interstate
Rule. In 2005, EPA issued the Clean Air Interstate Rule
(“CAIR”) requiring power plants in 29 eastern states and the District
of Columbia to reduce emission levels of sulfur dioxide and nitrogen
oxide. CAIR requires states to regulate power plants under a cap and trade
program similar to the system now in effect for acid deposition control.
When fully implemented, CAIR is expected to reduce regional sulfur dioxide
emissions by over 70% and nitrogen oxides emissions by over 60% from 2003
levels. CAIR may require many coal-fired electricity generation plants to
install additional pollution control equipment, such as wet scrubbers,
which could decrease the demand for low sulfur coal at these plants and
thereby potentially reduce market prices for low sulfur coal. CAIR may
impact demand for coal nationally, but we are unable to predict the
magnitude of the impact.
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Clean Air Mercury Rule.
In 2005, EPA issued the Clean Air Mercury Rule to to establish mercury
emissions limits from new and existing coal-fired power plants and create
a market-based cap-and-trade program that is expected to reduce nationwide
utility emissions of mercury in two phases. In February 2008, a federal
court of appeals vacated the Clean Air Mercury Rule as insufficiently
stringent. EPA’s response to the court’s decision and other
federal and state limitations on mercury emissions from power plants may
adversely affect the demand for coal. In 2006, also EPA proposed a federal
plan to directly regulate mercury emissions from coal-fired power plants
where certain states have not provided their own plans. The combination of
these actions may impact demand for coal nationally, but we are unable to
predict the magnitude of the
impact.
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Regional Haze. EPA has
initiated a regional haze program designed to protect and to improve
visibility at and around national parks, national wilderness areas and
international parks. Each state affected by this EPA program was required
to submit to EPA by December 17, 2007, a Regional Haze SIP to achieve the
goals of the program. Few states met the December deadline, but most
affected states are planning on submitting their Regional Haze SIP by the
first quarter of 2008. The program may require coal-fired power plants to
install additional control measures designed to limit haze-causing
emissions, such as sulfur dioxide, nitrogen oxides, volatile organic
chemicals and particulate matter. The regional haze program may impact
demand for coal nationally, but we are unable to predict the magnitude of
the impact.
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New Source Review. A
number of pending regulatory changes and court actions will affect the
scope of EPA’s new source review program, which under certain
circumstances requires existing coal-fired power plants to install the
more stringent air emissions control equipment required of new
plants. The changes to the new source review program may impact
demand for coal nationally, but as the final form of the requirements
after their revision is not known, we are unable to predict the magnitude
of the impact.
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State Initiatives. The
Clean Air Act generally authorizes states to issue air emissions
regulations more stringent than the federal regulations. In
addition to the federal programs, several states have proposed or adopted
legislation or regulations limiting air emissions, such as sulfur dioxide,
nitrogen oxide, and mercury, from coal-fired power plants.
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Clean Water Act. The Clean
Water Act and comparable state laws that regulate waste water discharges and
certain dredge and fill activities waters of the United States (“Jurisdictional
Waters”) may affect coal mining operations both directly and indirectly. The
Clean Water Act requirements that may directly or indirectly affect our
operations include, but are not limited to, the following:
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Wastewater Discharges.
Section 402 of the Clean Water Act establishes in-stream water
quality criteria and treatment standards for wastewater discharge through
the National Pollutant Discharge Elimination System (“NPDES”). Many of our
operations are required to obtain NPDES permits, and regular monitoring
and compliance with reporting requirements and performance standards are
preconditions for the issuance and renewal of NPDES permits. The
imposition of future restrictions on the discharge of certain pollutants
into waters of the United States could affect the permitting process,
increase the costs and difficulty of obtaining and complying with NPDES
permits and could adversely affect our coal production. Any
more stringent discharge limits placed on ash handling facilities or other
operations at coal-fired power plants also could adversely affect the
price and demand for coal.
In
2007, the USEPA filed a lawsuit against a major coal company for alleged
violations of the Clean Water Act that lead to a settlement in which the
company recently agreed to pay a $20 million penalty. As a
result of this lawsuit it is anticipated that the NPDES compliance of all
coal companies will come under greater scrutiny.
The Clean Water Act also empowers states to
develop and enforce “in stream” water quality standards, establish “total
maximum daily load” limitations for stream segments designated as
impaired, and adopt anti-degradation restrictions for high quality
waters. Under each of these programs, our discharges and those
of coal-fired power plants could be subject to substantially more
stringent discharge limits. In particular, some of our
operations currently discharge effluents into stream segments that have
been designated as impaired and the adoption of new TMDL related effluent
limitations for our coal mines could require more costly water treatment
and could adversely affect our coal
production.
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Dredge and Fill
Permits. Certain of our activities involving road building,
placement of excess material, and mine development require a Section 404
dredge and fill permit from the Army Corps of Engineers (“COE”) and a
Section 401 certification or its equivalent from the state in which the
mining activities are proposed. In recent years, the Section
404 permitting process has faced various challenges, and is subject to
ongoing challenges, in the courts. These challenges have
resulted in increased costs and delays in the permitting process. Pending
decisions to active challenges could cause additional increases in the
costs, time and difficulty associated with obtaining and complying with
the permits, and could, as a result, adversely affect our coal
production.
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Mine Safety and Health.
Stringent health and safety standards have been in effect since Congress enacted
the Coal Mine Health and Safety Act of 1969. The Federal Mine Safety and Health
Act of 1977 significantly expanded the enforcement of safety and health
standards and imposed safety and health standards on all aspects of mining
operations. In addition to federal regulatory programs, all of the states in
which we operate also have state programs for mine safety and health regulation
and enforcement. Collectively, federal and state safety and health regulation in
the coal mining industry is perhaps the most comprehensive and pervasive system
for protection of employee health and safety affecting any segment of
U.S. industry. In reaction to the recent mine accidents in West Virginia,
state and federal legislatures and regulatory authorities have increased
scrutiny of mine safety matters and passed more stringent laws governing mining.
For example, in 2006, Congress enacted the Mine Improvement and New Emergency
Response Act (“MINER Act”), which imposed additional burdens on coal operators,
including (i) obligations related to (a) the development of new emergency
response plans that address post-accident communications, tracking of miners,
breathable air, lifelines, training and communication with local emergency
response personnel, (b) establishing additional requirements for mine rescue
teams, and (c) promptly notifying federal authorities in the event of a certain
events, (ii) increased penalties for violations of the applicable federal laws
and regulations, and (iii) the requirement that new standards be implemented
regarding the manner in which closed areas of underground mines are sealed, and
(iv) other matters. Various states also have enacted their own new laws and
regulations addressing many of these same subjects. While existing and proposed
regulations have a significant effect on our operating costs, our
U.S. competitors are subject to the same degree of regulation.
Under the
Black Lung Benefits Revenue Act of 1977 and the Black Lung Benefits Reform Act
of 1977, as amended in 1981, each coal mine operator must secure payment of
federal black lung benefits to claimants who are current and former employees
and to a trust fund for the payment of benefits and medical expenses to
claimants who last worked in the coal industry prior to July 1, 1973. The
trust fund is funded by an excise tax on production of up to $1.10 per ton
for deep-mined coal and up to $0.55 per ton for surface- mined coal,
neither amount to exceed 4.4% of the gross sales price. The excise tax does not
apply to coal shipped outside the United States. In 2007, we recorded
$13.3 million of expense related to this excise tax.
Coal Industry Retiree Health Benefit
Act of 1992. Unlike many companies in the coal business, we do not have
any liability under the Coal Industry Retiree Health Benefit Act of 1992 (the
“Coal Act”), which requires the payment of substantial sums to provide lifetime
health benefits to union-represented miners (and their dependents) who retired
before 1992, because liabilities under the Coal Act that had been imposed on our
Predecessor or acquired companies were retained by the sellers and, if
applicable, their parent companies, in the applicable acquisition agreements. We
should not be liable for these liabilities retained by the sellers unless they
and, if applicable, their parent companies, fail to satisfy their obligations
with respect to Coal Act claims and retained liabilities covered by the
acquisition agreements.
Endangered Species Act. The
federal Endangered Species Act (“ESA”) and counterpart state legislation protect
species threatened with possible extinction. A number of species indigenous to
the areas in which we operate are protected under the ESA and compliance with
ESA requirements could have the effect of prohibiting or delaying us from
obtaining mining permits and may include restrictions on timber harvesting, road
building and other mining or agricultural activities in areas containing the
affected species or their habitats. However, based on the species that have been
identified to date and the current application of applicable laws and
regulations, we do not believe there are any species protected under the ESA
that would materially and adversely affect our ability to obtain permits and
mine coal from our properties in accordance with current mining plans. The U. S.
Fish and Wildlife Service is working closely with OSM and State regulatory
agencies to insure that species subject to the ESA are protected from
mining-related impacts. Should more stringent ESA protective measures be
applied, then we could experience increased operating costs or difficulty in
obtaining future mining permits.
Resource Conservation and Recovery
Act (“RCRA”). Currently, certain coal mine wastes, such as overburden and
coal cleaning wastes, are exempted from RCRA. However, if mining
operations are subjected to RCRA in the future, compliance with RCRA
requirements could affect coal mining operations by establishing additional
requirements for the treatment, storage, and disposal of wastes generated by
coal mining activities.
EPA has
determined that national non-hazardous waste regulations under RCRA Subtitle D
are needed for coal combustion wastes disposed in surface impoundments and
landfills and used as mine-fill, and OSM is currently developing these
regulations. The agency also concluded that beneficial uses of these wastes,
other than for mine-filling, pose no significant risk and no additional national
regulations are needed. As long as this exemption remains in effect, it is not
anticipated that regulation of coal combustion waste will have any material
effect on the amount of coal used by electricity generators. Most state
hazardous waste laws also exempt coal combustion waste, and instead treat it as
either a solid waste or a special waste. Any costs associated with handling or
disposal of hazardous wastes would increase our customers' operating costs and
potentially reduce their ability to purchase coal. In addition, contamination
caused by the past disposal of ash can lead to material liability.
Federal and State Superfund
Statutes. Superfund and similar state laws may affect coal mining and
hard rock operations by creating liability for investigation and remediation in
response to releases of hazardous substances into the environment and for
damages to natural resources. Under Superfund, joint and several liabilities may
be imposed on waste generators, site owners or operators and others regardless
of fault. In addition, although unlikely due to the stringent nature of the
current SMCRA regulations, mining operations may have reporting obligations
under the Emergency Planning and Community Right to Know Act and the Superfund
Amendments and Reauthorization Act. The Company has received no
Superfund-related notices for any of its operations.
Davis-Bacon
Act. The State of West Virginia adopted in major part the
Davis-Bacon Act of 1931. Due to our road construction business with
the State of West Virginia, we may be required to pay wages that comply with the
Davis-Bacon Act. Generally, the Davis-Bacon Act stipulates that every
contract in excess of $2,000, to which the United States or the District of
Columbia is a party, for construction, alteration, and/or repair, including
painting and decorating, of public buildings or public works of the United
States or the District of Columbia within the geographical limits of the States
of the Union or the District of Columbia, and which requires or involves the
employment of mechanics and/or laborers shall contain a provision stating the
minimum wages to be paid various classes of laborers and mechanics which shall
be based upon the wages that will be determined by the Secretary of Labor to be
prevailing for the corresponding classes of laborers and mechanics employed on
projects of a character similar to the contract work in the city, town, village,
or other civil subdivision of the State in which the work is to be
performed.
In
December 2004, prior to our Nicewonder Acquisition in October 2005, the
Affiliated Construction Trades Foundation brought an action against the West
Virginia Department of Transportation, Division of Highways (“WVDOH”) and
Nicewonder Contracting, Inc. ("NCI"), which became our wholly-owned indirect
subsidiary after the Nicewonder Acquisition, in the United States District Court
in the Southern District of West Virginia. The plaintiff sought a declaration
that the contract between NCI and the State of West Virginia related to NCI's
road construction project was illegal as a violation of applicable West Virginia
and federal competitive bidding and prevailing wage laws. The plaintiff also
sought an injunction prohibiting performance of the contract but has not sought
monetary damages.
On
September 5, 2007, the Court ruled that WVDOH and the Federal Highway
Administration (who is now a party to the suit) could not exempt a contractor,
like NCI, from paying the prevailing wages as required by the Davis-Bacon Act.
Although the Court has not yet decided what remedy it will impose, we expect a
ruling before mid-2008. We anticipate that the most likely remedy is
a directive that the contract be renegotiated for such payment. If that
renegotiation occurs, WVDOH has committed to agree and NCI has a contractual
right to insist, that additional costs resulting from the order will be
reimbursed by WVDOH and as such neither NCI nor the Company believe, at this
time, that they have any monetary expense from this ruling. As of December 31,
2007, the Company recorded a $6.1 million long-term receivable for the recovery
of these costs from WVDOH and a long-term liability for the obligations under
the ruling.
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Item 1A.
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A
substantial or extended decline in coal prices could reduce our revenues and the
value of our coal reserves.
Our
results of operations are substantially dependent upon the prices we receive for
our coal. The prices we receive for coal depend upon factors beyond our control,
including:
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the
supply of and demand for domestic and foreign
coal;
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the
demand for electricity;
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domestic
and foreign demand for steel and the continued financial viability of the
domestic and/or foreign steel
industry;
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interruptions
due to transportation delays;
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domestic
and foreign governmental regulations and
taxes;
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air
emission standards for coal-fired power
plants;
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regulatory,
administrative, and judicial
decisions;
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the
price and availability of alternative fuels, including the effects of
technological developments;
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the
effect of worldwide energy conservation measures;
and
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the
proximity to, capacity of, and cost of transportation and port
facilities.
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Declines
in the prices we receive for our coal could adversely affect our operating
results and our ability to generate the cash flows we require to improve our
productivity and invest in our operations.
Our coal mining
production and delivery is subject to conditions and events beyond our control,
which could result in higher operating expenses and/or decreased production and
sales and adversely affect our operating results.
A
majority of our coal mining operations are conducted in underground mines and
the balance of our operations is at surface mines. The level of our production
at these mines is subject to operating conditions and events beyond our control
that could disrupt operations, affect production and the cost of mining at
particular mines for varying lengths of time and have a significant impact on
our operating results. Adverse operating conditions and events that we or our
Predecessor have experienced in the past include:
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enactments
of new safety regulations or changes in interpretations of current
regulations.
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delays
and difficulties in acquiring, maintaining or renewing necessary permits
or mining or surface rights;
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the
termination of material contracts by state or other governmental
authorities;
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changes
or variations in geologic conditions, such as the thickness of the coal
deposits and the amount of rock embedded in or overlying the coal
deposit;
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mining
and processing equipment failures and unexpected maintenance
problems;
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limited
availability of mining and processing equipment and parts from
suppliers;
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the
proximity to, capacity of, and cost of transportation
facilities;
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adverse
weather and natural disasters, such as heavy rains and
flooding;
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accidental
mine water discharges;
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the
unavailability of qualified labor;
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strikes
and other labor-related interruptions;
and
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unexpected
mine safety accidents, including fires and explosions from methane and
other sources.
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If any of
these conditions or events occur in the future at any of our mines or affect
deliveries of our coal to customers, they may increase our cost of mining and
delay or halt production at particular mines or sales to our customers either
permanently for varying lengths of time, which could adversely affect our
operating results. For example, Hurricanes Katrina and Rita, which struck the
Gulf Coast in August and September 2005, resulted in delayed shipments of our
coal to our customers.
Any
change in coal consumption patterns by steel producers or North American
electric power generators resulting in a decrease in the use of coal by those
consumers could result in lower prices for our coal, which would reduce our
revenues and adversely impact our earnings and the value of our coal
reserves.
Steam
coal accounted for approximately 62% and 66% of our coal sales volume during
2007 and 2006, respectively. The majority of our sales of steam coal for 2007
and 2006 were to U.S. and Canadian electric power generators. The amount of coal
consumed for U.S. and Canadian electric power generation is affected primarily
by the overall demand for electricity, the location, availability, quality and
price of competing fuels for power such as natural gas, nuclear, fuel oil and
alternative energy sources such as hydroelectric power, technological
developments, and environmental and other governmental regulations. We expect
many new power plants will be built to produce electricity during peak periods
of demand, when the demand for electricity rises above the “base load demand,”
or minimum amount of electricity required if consumption occurred at a steady
rate. However, we also expect that many of these new power plants will be fired
by natural gas because they are cheaper to construct than coal-fired plants and
because natural gas is a cleaner burning fuel. In addition, the increasingly
stringent requirements of the Clean Air Act may result in more electric power
generators shifting from coal to natural gas-fired power plants. Any reduction
in the amount of coal consumed by North American electric power generators could
reduce the price of steam coal that we mine and sell, thereby reducing our
revenues and adversely impacting our earnings and the value of our coal
reserves.
We
produce metallurgical coal that is used in both the U.S. and foreign steel
industries. Metallurgical coal accounted for approximately 38% and 34% of our
coal sales volume during 2007 and 2006, respectively. In recent years,
U.S. steel producers have experienced a substantial decline in the prices
received for their products, due at least in part to a heavy volume of foreign
steel imported into the United States. Any deterioration in conditions in the
U.S. steel industry would reduce the demand for our metallurgical coal and
could impact the collectibility of our accounts receivable from U.S. steel
industry customers. In addition, the U.S. steel industry increasingly
relies on electric arc furnaces or pulverized coal processes to make steel.
These processes do not use coke. If this trend continues, the amount of
metallurgical coal that we sell and the prices that we receive for it could
decrease, thereby reducing our revenues and adversely impacting our earnings and
the value of our coal reserves. If the demand and pricing for metallurgical coal
in international markets decreases in the future, the amount of metallurgical
coal that we sell and the prices that we receive for it could decrease, thereby
reducing our revenues and adversely impacting our earnings and the value of our
coal reserves.
Demand
for our coal changes seasonally and could have an adverse effect on the timing
of our cash flows and our ability to service our existing and future
indebtedness.
Our
business is seasonal, with operating results varying from quarter to quarter. We
have historically experienced lower sales during winter months primarily due to
the freezing of lakes that we use to transport coal to some of our customers. As
a result, our first quarter may be negatively impacted. Lower than expected
sales by us during this period could have an adverse affect on the timing of our
cash flows and therefore our ability to service our obligations with respect to
our existing and future indebtedness.
A
decline in demand for metallurgical coal would limit our ability to sell our
high quality steam coal as higher-priced metallurgical coal and could affect the
economic viability of certain of our mines that have higher operating
costs.
Portions
of our coal reserves possess quality characteristics that enable us to mine,
process and market them as either metallurgical coal or high quality steam coal,
depending on the prevailing conditions in the metallurgical and steam coal
markets. We decide whether to mine, process and market these coals as
metallurgical or steam coal based on management's assessment as to which market
is likely to provide us with a higher margin. We consider a number of factors
when making this assessment, including the difference between the current and
anticipated future market prices of steam coal and metallurgical coal, the lower
volume of saleable tons that results from producing a given quantity of reserves
for sale in the metallurgical market instead of the steam market, the increased
costs incurred in producing coal for sale in the metallurgical market instead of
the steam market, the likelihood of being able to secure a longer-term sales
commitment by selling coal into the steam market and our contractual commitments
to deliver different types of coals to our customers. A decline in the
metallurgical market relative to the steam market could cause us to shift coal
from the metallurgical market to the steam market, thereby reducing our revenues
and profitability.
Most of
our metallurgical coal reserves possess quality characteristics that enable us
to mine, process and market them as high quality steam coal. However, some of
our mines operate profitably only if all or a portion of their production is
sold as metallurgical coal to the steel market. If demand for metallurgical coal
declined to the point where we could earn a more attractive return marketing the
coal as steam coal, these mines may not be economically viable and may be
subject to closure. Such closures would lead to accelerated reclamation costs,
as well as reduced revenue and profitability.
Acquisitions that
we have completed since our formation, as well as acquisitions that we may
undertake in the future, involve a number of risks, any of which could cause us
not to realize the anticipated benefits.
Since our
formation and the acquisition of our Predecessor in December 2002, we have
completed six significant acquisitions and several smaller acquisitions and
investments. We continually seek to expand our operations and coal reserves
through acquisitions. If we are unable to successfully integrate the companies,
businesses or properties we are able to acquire, our profitability may decline
and we could experience a material adverse effect on our business, financial
condition or results of operations. Acquisition transactions involve various
inherent risks, including:
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uncertainties
in assessing the value, strengths, and potential profitability of, and
identifying the extent of all weaknesses, risks, contingent and other
liabilities (including environmental or mine safety liabilities) of,
acquisition candidates;
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the
potential loss of key customers, management and employees of an acquired
business;
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the
ability to achieve identified operating and financial synergies
anticipated to result from an
acquisition;
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problems
that could arise from the integration of the acquired business;
and
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unanticipated
changes in business, industry, market, or general economic conditions that
affect the assumptions underlying our rationale for pursuing the
acquisition.
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Any one or
more of these factors could cause us not to realize the benefits anticipated to
result from an acquisition.
Moreover,
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. For instance, in connection with the Nicewonder Acquisition in
October 2005, we issued and subsequently repaid $221.0 million principal
amount of promissory installment notes of one of our indirect, wholly-owned
subsidiaries, we issued 2,180,233 shares of our common stock valued at
approximately $53.2 million, and we entered into a new $525.0 million
credit facility, a portion of the net proceeds of which we used to pay the cash
purchase price and acquisition expenses and the first installment of principal
due on the promissory notes. In addition, future acquisitions could result in
our assuming more long-term liabilities relative to the value of the acquired
assets than we have assumed in our previous acquisitions.
The
inability of the sellers of our Predecessor and acquired companies to fulfill
their indemnification obligations to us under our acquisition agreements could
increase our liabilities and adversely affect our results of operations and
financial position.
In the
acquisition agreements we entered into with the sellers of our Predecessor and
acquired companies, including the acquisition agreements we entered into related
to the Nicewonder and Progress acquisitions, the respective sellers and, in some
of our acquisitions, their parent companies, agreed to retain responsibility for
and indemnify us against damages resulting from certain third-party claims or
other liabilities, such as workers' compensation liabilities, black lung
liabilities, postretirement medical liabilities and certain environmental or
mine safety liabilities. The failure of any seller and, if applicable, its
parent company, to satisfy their obligations with respect to claims and retained
liabilities covered by the acquisition agreements could have an adverse effect
on our results of operations and financial position if claimants successfully
assert that we are liable for those claims and/or retained liabilities. The
obligations of the sellers and, in some instances, their parent companies, to
indemnify us with respect to their retained liabilities will continue for a
substantial period of time, and in some cases indefinitely. The sellers'
indemnification obligations with respect to breaches of their representations
and warranties in the acquisition agreements will terminate upon expiration of
the applicable indemnification period (generally 18-24 months from the
acquisition date for most representations and warranties, and from two to five
years from the acquisition date for environmental representations and
warranties), are subject to deductible amounts and will not cover damages in
excess of the applicable coverage limit. The assertion of third-party claims
after the expiration of the applicable indemnification period or in excess of
the applicable coverage limit, or the failure of any seller to satisfy its
indemnification obligations with respect to breaches of its representations and
warranties, could have an adverse effect on our results of operations and
financial position. See “-- If our assumptions regarding our likely future
expenses related to benefits for non-active employees are incorrect, then
expenditures for these benefits could be materially higher than we have
predicted.”
Our
inability to continue or expand the existing road construction and mining
business of the Nicewonder Companies could adversely affect the expected
benefits from the Nicewonder Acquisition.
One of
our subsidiaries acquired the business of Nicewonder Contracting, Inc. (“NCI”)
pursuant to the Nicewonder acquisition. NCI operates a road construction
business under a contract with the State of West Virginia. Pursuant to the
contract, NCI is building approximately 11 miles of rough grade highway in
West Virginia over the next two to three years and, in exchange, NCI will be
compensated by West Virginia based on the number of cubic yards of material
excavated and/or filled to create a road bed, as well as for certain other cost
components. In the course of the road construction, NCI will recover any coal
encountered and sell the coal to its customers, subject to certain costs,
including coal loading, transportation, coal royalty payments and applicable
taxes and fees.
The State
of West Virginia has only approved funding for a portion of this
road construction. If West Virginia does not fund the remaining sections of
the highway project, it would adversely affect NCI's earnings. Even if West
Virginia funds the remainder of this project through the next two to three
years, we are uncertain whether the state will fund any similar projects in the
future. In addition, we had no experience conducting and completing road
projects prior to the Nicewonder Acquisition and we will continue to rely on the
expertise of the NCI employees to operate the project, and will rely on such
employees to operate any other road projects we may undertake.
The
Affiliated Construction Trades Foundation brought an action against the West
Virginia Department of Transportation, Division of Highways (“WVDOH”) and our
wholly-owned indirect subsidiary Nicewonder Contracting, Inc. ("NCI") in the
United States District Court in the Southern District of West Virginia. The
plaintiff sought a declaration that the contract between NCI and the State of
West Virginia related to NCI's road construction project was illegal as a
violation of applicable West Virginia and federal competitive bidding and
prevailing wage laws. The plaintiff also sought an injunction prohibiting
performance of the contract but has not sought monetary damages.
On
September 5, 2007, the Court ruled that WVDOH and the Federal Highway
Administration (who is now a party to the suit) could not exempt a contractor,
like NCI, from paying the prevailing wages as required by the Davis-Bacon Act.
Although the Court has not yet decided what remedy it will impose, we expect a
ruling before mid-2008. We anticipate that the most likely remedy is a
directive that the contract be renegotiated for such payment. If that
renegotiation occurs, WVDOH has committed to agree and NCI has a contractual
right to insist, that additional costs resulting from the order will be
reimbursed by WVDOH and as such neither NCI nor the Company believe, at this
time, that they will have any monetary expense from this ruling. As of December
31, 2007, the Company recorded a $6.1 million long-term receivable for the
recovery of these costs from WVDOH and a long-term liability for the obligations
under the ruling.
If the
plaintiffs are successful, the litigation could make the road construction
project considerably less advantageous to NCI or restrict or prohibit NCI from
completing the project.
The
loss of, or significant reduction in, purchases by our largest customers could
adversely affect our revenues and profitability.
Our
largest customer during 2007 accounted for approximately 8% of our total
revenues. We derived approximately 42% of our 2007 total revenues from sales to
our ten largest customers. These customers may not continue to purchase coal
from us under our current coal supply agreements, or at all. If these customers
were to significantly reduce their purchases of coal from us or if we were
unable to sell coal to them on terms as favorable to us as the terms under our
current agreements, our revenues and profitability could suffer
materially.
Changes
in purchasing patterns in the coal industry may make it difficult for us to
extend existing supply contracts or enter into new long-term supply contracts
with customers, which could adversely affect the capability and profitability of
our operations.
We sell a
significant portion of our coal under long-term coal supply agreements, which
are contracts with a term greater than 12 months. The execution of a
satisfactory long-term coal supply agreement is frequently the basis on which we
undertake the development of coal reserves required to be supplied under the
contract. We believe that approximately 67% of our 2007 sales volume was sold
under long-term coal supply agreements. At December 31, 2007, our long-term coal
supply agreements had remaining terms of up to 10 years and an average
remaining term of approximately two years. When our current contracts with
customers expire or are otherwise renegotiated, our customers may decide to
purchase fewer tons of coal than in the past or on different terms, including
pricing terms less favorable to us. As of December 31, 2007, approximately 5%
and 67%, respectively, of our planned production for 2008 and 2009 was
uncommitted. We may not be able to enter into coal supply agreements to sell
this production on terms, including pricing terms, as favorable to us as our
existing agreements. For additional information relating to our long-term coal
supply contracts, see “Business -- Marketing, Sales and Customer
Contracts.”
As
electric utilities continue to adjust to frequently changing regulations,
including the Acid Rain regulations of the Clean Air Act, the Clean Air Mercury
Rule, the Clean Air Interstate Rule and the possible deregulation of their
industry, they are becoming increasingly less willing to enter into long-term
coal supply contracts and instead are purchasing higher percentages of coal
under short-term supply contracts. The industry shift away from long-term supply
contracts could adversely affect us and the level of our revenues. For example,
fewer electric utilities will have a contractual obligation to purchase coal
from us, thereby increasing the risk that we will not have a market for our
production. The prices we receive in the spot market may be less than the
contractual price an electric utility is willing to pay for a committed supply.
Furthermore, spot market prices tend to be more volatile than contractual
prices, which could result in decreased revenues.
Certain
provisions in our long-term supply contracts may reduce the protection these
contracts provide us during adverse economic conditions or may result in
economic penalties upon our failure to meet specifications.
Price
adjustment, “price reopener” and other similar provisions in long-term supply
contracts may reduce the protection from short-term coal price volatility
traditionally provided by these contracts. Price reopener provisions are
particularly common in international metallurgical coal sales contracts. Some of
our coal supply contracts contain provisions that allow for the price to be
renegotiated at periodic intervals. Price reopener provisions may automatically
set a new price based on the prevailing market price or, in some instances,
require the parties to agree on a new price, sometimes between a pre-set “floor”
and “ceiling.” In some circumstances, failure of the parties to agree on a price
under a price reopener provision can lead to termination of the contract. Any
adjustment or renegotiation leading to a significantly lower contract price
could result in decreased revenues. Accordingly, supply contracts with terms of
one year or more may provide only limited protection during adverse market
conditions.
Coal
supply agreements also typically contain force majeure provisions allowing
temporary suspension of performance by us or the customer during the duration of
specified events beyond the control of the affected party. Most of our coal
supply agreements contain provisions requiring us to deliver coal meeting
quality thresholds for certain characteristics such as Btu, sulfur content, ash
content, grindability and ash fusion temperature. Failure to meet these
specifications could result in economic penalties, including price adjustments,
the rejection of deliveries or termination of the contracts. Moreover, some of
our agreements where the customer bears transportation costs permit the customer
to terminate the contract if the transportation costs borne by them increase
substantially. In addition, some of these contracts allow our customers to
terminate their contracts in the event of changes in regulations affecting our
industry that increase the price of coal beyond specified limits.
Due to
the risks mentioned above with respect to long-term supply contracts, we may not
achieve the revenue or profit we expect to achieve from these sales
commitments.
Disruption
in supplies of coal produced by contractors and other third parties could
temporarily impair our ability to fill customers' orders or increase our
costs.
In
addition to marketing coal that is produced by our subsidiaries' employees, we
utilize contractors to operate some of our mines. Operational difficulties at
contractor-operated mines, changes in demand for contract miners from other coal
producers, and other factors beyond our control could affect the availability,
pricing, and quality of coal produced for us by contractors. For example, during
2005, production at our contractor operations ran approximately 25% behind plan,
primarily due to shortages in the supply of labor. As a result of
this shortfall, we were forced to purchase coal at a higher cost than planned so
we could meet commitments to customers. To meet customer
specifications and increase efficiency in fulfillment of coal contracts, we also
purchase and resell coal produced by third parties from their controlled
reserves. The majority of the coal that we purchase from third parties is
blended with coal produced from our mines prior to resale and we also process
(which includes washing, crushing or blending coal at one of our preparation
plants or loading facilities) a portion of the coal that we purchase from third
parties prior to resale. We sold 5.8 million tons of coal purchased from
third parties during 2007, representing approximately 20% of our total sales
during 2007. We believe that approximately 64% of our purchased coal sales in
2007 were blended with coal produced from our mines prior to resale, and
approximately 6% of our total sales in 2007 consisted of coal purchased from
third parties that we processed before resale. The availability of specified
qualities of this purchased coal may decrease and prices may increase as a
result of, among other things, changes in overall coal supply and demand levels,
consolidation in the coal industry and new laws or regulations. Disruption in
our supply of contractor-produced coal and purchased coal could temporarily
impair our ability to fill our customers' orders or require us to pay higher
prices in order to obtain the required coal from other sources. Any increase in
the prices we pay for contractor-produced coal or purchased coal could increase
our costs and therefore lower our earnings. Although increases in market prices
for coal generally benefit us by allowing us to sell coal at higher prices,
those increases also increase our costs to acquire purchased coal, which lowers
our earnings.
Competition
within the coal industry may adversely affect our ability to sell coal, and
excess production capacity in the industry could put downward pressure on coal
prices.
We
compete with numerous other coal producers in various regions of the United
States for domestic and international sales. During the mid-1970s and early
1980s, increased demand for coal attracted new investors to the coal industry,
spurred the development of new mines and resulted in additional production
capacity throughout the industry, all of which led to increased competition and
lower coal prices. Recent increases in coal prices could encourage the
development of expanded capacity by new or existing coal producers. Any
resulting overcapacity could reduce coal prices and therefore reduce our
revenues.
Coal with
lower production costs shipped east from western coal mines and from offshore
sources has resulted in increased competition for coal sales in the Appalachian
region. In addition, coal companies with larger mines that utilize the long-wall
mining method typically have lower mine operating costs than we do and may be
able to compete more effectively on price, particularly if the current favorable
market weakens. This competition could result in a decrease in our market share
in this region and a decrease in our revenues.
Demand
for our low sulfur coal and the prices that we can obtain for it are also
affected by, among other things, the price of emissions allowances. Decreases in
the prices of these emissions allowances could make low sulfur coal less
attractive to our customers. In addition, more widespread installation by
electric utilities of technology that reduces sulfur emissions (which could be
accelerated by increases in the prices of emissions allowances), may make high
sulfur coal more competitive with our low sulfur coal. This competition could
adversely affect our business and results of operations.
We also
compete in international markets against coal produced in other countries.
Measured by tons sold, exports accounted for approximately 27% of our sales in
2007. The demand for U.S. coal exports is dependent upon a number of
factors outside of our control, including the overall demand for electricity in
foreign markets, currency exchange rates, the demand for foreign-produced steel
both in foreign markets and in the U.S. market (which is dependent in part
on tariff rates on steel), general economic conditions in foreign countries,
technological developments, and environmental and other governmental
regulations. For example, if the value of the U.S. dollar were to rise
against other currencies in the future, our coal would become relatively more
expensive and less competitive in international markets, which could reduce our
foreign sales and negatively impact our revenues and net income. In addition, if
the amount of coal exported from the United States were to decline, this decline
could cause competition among coal producers in the United States to intensify,
potentially resulting in additional downward pressure on domestic coal
prices.
Fluctuations
in transportation costs and the availability or reliability of transportation
could affect the demand for our coal or temporarily impair our ability to supply
coal to our customers.
Transportation
costs represent a significant portion of the total cost of coal for our
customers. Increases in transportation costs, such as those experienced in
recent years could make coal a less competitive source of energy or could make
our coal production less competitive than coal produced from other
sources. On the other hand, significant decreases in transportation
costs could result in increased competition from coal producers in other parts
of the country. For instance, coordination of the many eastern loading
facilities, the large number of small shipments, terrain and labor issues all
combine to make shipments originating in the eastern United States inherently
more expensive on a per-mile basis than shipments originating in the western
United States.
Historically,
high coal transportation rates from the western coal producing areas into
Central Appalachian markets limited the use of western coal in those markets.
More recently, however, lower rail rates from the western coal producing areas
to markets served by eastern U.S. producers have created major competitive
challenges for eastern producers. This increased competition could have a
material adverse effect on our business, financial condition and results of
operations.
We depend
upon railroads, trucks, beltlines, ocean vessels and barges to deliver coal to
our customers. Disruption of these transportation services due to
weather-related problems, mechanical difficulties, strikes, lockouts,
bottlenecks, terrorist attacks, and other events could temporarily impair our
ability to supply coal to our customers, resulting in decreased
shipments. For example, certain shipments of our coal to customers
were delayed by hurricanes in the Gulf Coast in 2005. Decreased
performance levels over longer periods of time could cause our customers to look
to other sources for their coal needs, negatively affecting our revenues and
profitability.
In 2007,
59% of our produced and processed coal volume was transported from the
preparation plant to the customer by rail. In the past, we have experienced a
general deterioration in the reliability of the service provided by rail
carriers, which increased our internal coal handling costs. If there are
continued disruptions of the transportation services provided by the railroad
companies we use and we are unable to find alternative transportation providers
to ship our coal, our business could be adversely affected.
We have
investments in mines, loading facilities, and ports that in most cases are
serviced by a single rail carrier. Our operations that are serviced by a single
rail carrier are particularly at risk to disruptions in the transportation
services provided by that rail carrier, due to the difficulty in arranging
alternative transportation. If a single rail carrier servicing our operations
does not provide sufficient capacity, revenue from these operations and our
return on investment could be adversely impacted. In
addition, our coal is transported from our mines to our loading facilities by
trucks owned and operated by third parties. The states of West
Virginia and Kentucky enforce weight limits on coal trucks on their public
roads. It is possible that other states in which our coal is transported by our
contract carriers could undertake similar actions to increase enforcement
of weight limits. Such stricter enforcement actions could result in
shipment delays and increased costs. An increase in transportation costs could
have an adverse effect on our ability to increase or to maintain production on a
profit-making basis and could therefore adversely affect revenues and
earnings.
Our
business will be adversely affected if we are unable to develop or acquire
additional coal reserves that are economically recoverable.
Our
profitability depends substantially on our ability to mine coal reserves
possessing quality characteristics desired by our customers in a cost-effective
manner. As of December 31, 2007, we owned or leased 617.5 million tons
of proven and probable coal reserves that we believe will support current
production levels for more than 20 years, which is less than the publicly
reported amount of proven and probable coal reserves and reserve lives (based on
current publicly reported production levels) of the other large publicly traded
coal companies. We have not yet applied for the permits required, or developed
the mines necessary, to mine all of our reserves. Permits are becoming
increasingly more difficult and expensive to obtain and the review process
continues to lengthen. In addition, we may not be able to mine all of our
reserves as profitably as we do at our current operations.
Because
our reserves are depleted as we mine our coal, our future success and growth
depend, in part, upon our ability to acquire additional coal reserves that are
economically recoverable. If we are unable to replace or increase our coal
reserves on acceptable terms, our production and revenues will decline as our
reserves are depleted. Exhaustion of reserves at particular mines also may have
an adverse effect on our operating results that is disproportionate to the
percentage of overall production represented by such mines. Our ability to
acquire additional coal reserves through acquisitions in the future also could
be limited by restrictions under our existing or future debt agreements,
competition from other coal companies for attractive properties, or the lack of
suitable acquisition candidates.
We
face numerous uncertainties in estimating our recoverable coal reserves, and
inaccuracies in our estimates could result in decreased profitability from lower
than expected revenues or higher than expected costs.
Forecasts
of our future performance are based on, among other things, estimates of our
recoverable coal reserves. We base our estimates of reserve information on
engineering, economic and geological data assembled and analyzed by our internal
engineers and which is periodically reviewed by third-party consultants. There
are numerous uncertainties inherent in estimating the quantities and qualities
of, and costs to mine, recoverable reserves, including many factors beyond our
control. Estimates of economically recoverable coal reserves and net cash flows
necessarily depend upon a number of variable factors and assumptions, any one of
which may, if incorrect, result in an estimate that varies considerably from
actual results. These factors and assumptions include:
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future
mining technology improvements;
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the
effects of regulation by governmental
agencies;
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geologic
and mining conditions, which may not be fully identified by available
exploration data and may differ from our experiences in areas we currently
mine. As a result, actual coal tonnage recovered from identified reserve
areas or properties, and costs associated with our mining operations, may
vary from estimates. Any inaccuracy in our estimates related to our
reserves could result in decreased profitability from lower than expected
revenues or higher than expected costs; and
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future
coal prices, operating costs, capital expenditures, severance and excise
taxes, royalties and development and reclamation
costs.
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Defects
in title of any leasehold interests in our properties could limit our ability to
mine these properties or result in significant unanticipated costs.
We
conduct a significant part of our mining operations on properties that we lease.
Title to most of our leased properties and mineral rights is not thoroughly
verified until a permit to mine the property is obtained, and in some cases
title with respect to leased properties is not verified at all. Our right to
mine some of our reserves may be materially adversely affected by defects in
title or boundaries. In order to obtain leases or mining contracts to conduct
our mining operations on property where these defects exist, we may in the
future have to incur unanticipated costs or could even lose our right to mine,
which could adversely affect our profitability.
Mining
in Central and Northern Appalachia is more complex and involves more regulatory
constraints than mining in other areas of the United States, which could affect
our mining operations and cost structures in these areas.
The
geological characteristics of Central and Northern Appalachian coal reserves,
such as depth of overburden and coal seam thickness, make them complex and
costly to mine. As mines become depleted, replacement reserves may not be
available when required or, if available, may not be capable of being mined at
costs comparable to those characteristic of the depleting mines. In addition, as
compared to mines in other regions, permitting, licensing and other
environmental and regulatory requirements are more costly and time consuming to
satisfy. These factors could materially adversely affect the mining operations
and cost structures of, and our customers' ability to use coal produced by, our
mines in Central and Northern Appalachia.
Our
work force could become increasingly unionized in the future, which could
adversely affect the stability of our production and reduce our
profitability.
Approximately
96% of our 2007 coal production came from mines operated by union-free
employees. As of December 31, 2007, over 92% of our 3,640 employees are
union-free. However, our subsidiaries' employees have the right at any time
under the National Labor Relations Act to form or affiliate with a union. Any
further unionization of our subsidiaries' employees, or the employees of
third-party contractors who mine coal for us, could adversely affect the
stability of our production and reduce our profitability.
Our
unionized and/or union-free hourly work force could strike in the future,
which could disrupt production and shipments of our coal and increase
costs.
One of
our Virginia subsidiaries has two contracts with the United Mine Workers of
America (“UMWA”) that cover approximately 270 employees. One of our
West Virginia subsidiaries has a Bituminous Coal Operators Association (“BCOA”)
contract with the UMWA covering approximately 22 UMWA
employees. Also, the other West Virginia subsidiary, that is idle,
has a BCOA wage agreement with the UMWA that could be terminated by our
subsidiary or the UMWA with notice but since it is idle, no employees are
affected at this time. However, if the operation becomes active again, these
employees could be affected.
As is the
case with our union-free operations, the UMWA represented employees could
strike, which would adversely affect our production, increase our costs, and
disrupt shipments of coal to our customers.
Our
ability to collect payments from our customers could be impaired if their
creditworthiness deteriorates.
Our
ability to receive payment for coal sold and delivered depends on the continued
creditworthiness of our customers. Our customer base is changing with
deregulation as utilities sell their power plants to their non-regulated
affiliates or third parties that may be less creditworthy, thereby increasing
the risk we bear on payment default. These new power plant owners may have
credit ratings that are below investment grade. In addition, competition with
other coal suppliers could force us to extend credit to customers and on terms
that could increase the risk we bear on payment default.
We have
contracts to supply coal to energy trading and brokering companies under which
those companies sell coal to end users. If the creditworthiness of the energy
trading and brokering companies declines, this would increase the risk that we
may not be able to collect payment for all coal sold and delivered to or on
behalf of these energy trading and brokering companies.
The
government extensively regulates our mining operations, which imposes
significant costs on us, and future regulations could increase those costs or
limit our ability to produce and sell coal.
The coal
mining industry is subject to increasingly strict regulation by federal, state
and local authorities with respect to matters such as:
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employee
health and safety;
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mandated
benefits for retired coal miners;
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mine
permitting and licensing requirements;
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reclamation
and restoration of mining properties after mining is
completed;
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air
quality standards;
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water
pollution;
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plant
and wildlife protection;
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the
discharge of materials into the environment;
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surface
subsidence from underground mining; and
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the
effects of mining on groundwater quality and availability.
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The
costs, liabilities and requirements associated with these regulations may be
costly and time consuming and may delay commencement or continuation of
exploration or production operations. Failure to comply with these regulations
may result in the assessment of administrative, civil and criminal penalties,
the imposition of cleanup and site restoration costs and liens, the issuance of
injunctions to limit or cease operations, the suspension or revocation of
permits and other enforcement measures that could have the effect of limiting
production from our operations. We may also incur costs and liabilities
resulting from claims for damages to property or injury to persons arising from
our operations. If we are pursued for these sanctions, costs and liabilities,
our mining operations and, as a result, our profitability could be adversely
affected.
The
possibility exists that new legislation and/or regulations and orders may be
adopted that may materially adversely affect our mining operations, our cost
structure and/or our customers' ability to use coal. For example, in reaction to
mine accidents during 2005, in West Virginia, state and federal legislatures and
regulatory authorities have increased scrutiny of mine safety matters and passed
more stringent laws governing mining. In 2006, Congress enacted the
MINER Act, which imposed additional burdens on coal operators, including (i)
obligations related to (a) the development of new emergency response plans that
address post-accident communications, tracking of miners, breathable air,
lifelines, training and communication with local emergency response personnel,
(b) insuring the availability of mine rescue teams, and (c) promptly notifying
federal authorities in the event of a certain events,(ii) increased penalties
for violations of the applicable federal laws and regulations, and (iii) the
requirement that new standards be implemented regarding the manner in which
closed areas of underground mines are sealed and (iv) other
matters. In 2007, the implementation of the MINER Act continued
through to the regulatory process. For example, new penalty
regulations with the effect of significantly increasing regular penalty amounts
and special assessment were passed. Further, regulations were
implemented relating to mine seal requirements increasing cost of
compliance. The outlook for 2008 includes a possibility that
additional new federal legislation known as the S-MINER Act could be passed that
would increase the cost structure and materially adversely affect our mining
operations. The legislation would, for example,
require: a) technological advancements and improvements at expedited
rates; b) require mining plan and ventilation changes, as well as affect the
materials used for ventilation purposes; c) impose additional requirements for
compliance with examinations for hazardous conditions; d) impose more stringent
industrial hygiene requirements; e) impose requirements for changing to more
costly belt conveyor materials; f) impose additional requirements for sealing
areas; and g) increase the maximum assessed penalty amounts currently authorized
and penalty payment obligations. Various states also have enacted
their own new laws and regulations addressing many of these same
subjects. In 2007, the State of West Virginia, for example, enacted
legislation that imposes additional burdens on coal operators, including, among
other things, a) the prohibition of the use of belt air unless approval is
obtained; b) imposing additional design requirements for seals; c) mandating
education and certification programs for miners; and d) continuing its advance
for the imposition of additional technological improvements recommended by a
task force. Our
compliance with these or any new mine health and safety regulations could
increase our mining costs. New legislation or administrative regulations (or new
judicial interpretations or administrative enforcement of existing laws and
regulations), including proposals related to the protection of the environment
that would further regulate and tax the coal industry, may also require us or
our customers to change operations significantly or incur increased
costs.
These
regulations, if proposed and enacted in the future, could have a material
adverse effect on our financial condition and results of
operations.
Extensive
environmental regulations affect our customers and could reduce the demand for
coal as a fuel source and cause our sales to decline.
Our
operations and those of our customers are subject to extensive environmental
regulation relating to air emissions, water discharges, generation and disposal
of waste materials, and permitting of operations. These requirements
are a significant part of the costs of our respective businesses, and our costs
relating to environmental matters are increasing as environmental regulation
becomes more stringent.
In
particular, The Clean Air Act and similar state and local laws extensively
regulate the amount of sulfur dioxide, particulate matter, nitrogen oxides, and
other compounds emitted into the air from electric power plants, which are the
largest end-users of our coal. A series of more stringent
requirements are expected to become effective in coming years, including EPA’s
Clean Air Interstate Rule that focuses on sulfur dioxide and nitrogen oxides
from coal-fired power plants, and increased regulation relating to particulate
matter, ozone, haze, mercury and other air pollutants.
One major
by-product of burning coal is carbon dioxide, which is considered a greenhouse
gas and is a major source of concern with respect to global warming. Future
regulation of greenhouse gases in the United States could occur pursuant to
future U.S. treaty obligations, such as the projected new treaty to replace
the Kyoto Protocol, new legislation that for example may establish a carbon tax
or cap-and-trade program, or otherwise. State and regional climate change
initiatives, such as the Regional Greenhouse Gas Initiative of eastern states,
the Western Regional Climate Action Initiative, and recently enacted California
legislation, may take effect before federal action.
Considerable
uncertainty is associated with these air emissions initiatives. The content of
new treaties or legislation is not yet determined, and many of the new
regulatory initiatives remain subject to review by the agencies or the courts.
These more stringent air emissions limitations, however, such regulations will
require significant emissions control expenditures for many coal-fired power
plants and could have the effect of making coal-fired plants unprofitable. Any
switching of fuel sources away from coal, closure of existing coal-fired plants,
or reduced construction of new plants could have a material effect on demand for
and prices received for our coal. The majority of our coal supply agreements
contain provisions that allow a purchaser to terminate its contract if
legislation is passed that either restricts the use or type of coal permissible
at the purchaser's plant or results in specified increases in the cost of coal
or its use to comply with applicable ambient air quality standards. As a result,
these generators may switch to other fuels that generate less of these emissions
or install more effective pollution control equipment, possibly reducing future
demand for coal and the construction of coal-fired power plants.
Also, see
Item 1, “Environmental and Other Regulatory Matters” for a discussion of
environmental issues potentially affecting our operations.
Our
operations may impact the environment or cause exposure to hazardous substances,
and our properties may have environmental contamination, which could result in
material liabilities to us.
Our
operations currently use hazardous materials and generate limited quantities of
hazardous wastes from time to time. Our Predecessor and acquired companies also
utilized certain hazardous materials and generated similar wastes. We may be
subject to claims under federal and state statutes and/or common law doctrines
for toxic torts, natural resource damages and other damages as well as for the
investigation and clean up of soil, surface water, groundwater, and other media.
Such claims may arise, for example, out of current or former conditions at sites
that we own or operate currently, as well as at sites that we or our Predecessor
and acquired companies owned or operated in the past, and at contaminated sites
that have always been owned or operated by third parties. Our liability for such
claims may be joint and several, so that we may be held responsible for more
than our share of the contamination or other damages, or even for the entire
share. We have not been subject to claims arising out of contamination at our
facilities, and are not aware of any such contamination, but may incur such
liabilities in the future.
We
maintain extensive coal slurry impoundments at a number of our mines. Such
impoundments are subject to extensive regulation. Slurry impoundments maintained
by other coal mining operations have been known to fail, causing extensive
damage to the environment and natural resources, as well as liability for
related personal injuries and property damages. Some of our impoundments overlie
mined out areas, which can pose a heightened risk of failure and of damages
arising out of failure. If one of our impoundments were to fail, we could be
subject to substantial claims for the resulting environmental contamination and
associated liability, as well as for fines and penalties.
These and
other similar unforeseen impacts that our operations may have on the
environment, as well as exposures to hazardous substances or wastes associated
with our operations, could result in costs and liabilities that could materially
and adversely affect us.
Also, see
Item 1, “Environmental and Other Regulatory Matters” for discussion related to
“Superfund,” and “RCRA.”
We
may be unable to obtain and renew permits necessary for our operations, which
would reduce our production, cash flow and profitability.
Mining
companies must obtain numerous permits that impose strict regulations on various
environmental and safety matters in connection with coal mining. These include
permits issued by various federal and state agencies and regulatory bodies. The
permitting rules are complex and may change over time, making our ability to
comply with the applicable requirements more difficult or impractical, possibly
precluding the continuance of ongoing operations or the development of future
mining operations. The public, including non-governmental organizations such as
anti-mining groups and individuals, have certain rights by statutes to comment
upon, submit objections to, and otherwise engage in the permitting process,
including bringing citizens’ lawsuits to challenge such permits or mining
activities. Accordingly, required permits may not be issued or
renewed in a timely fashion (or at all), or permits issued or renewed may be
conditioned in a manner that may restrict our ability to efficiently conduct our
mining activities. Such inefficiencies would likely reduce our
production, cash flow, and profitability.
Permits
under Section 404 of the Clean Water Act are required for coal companies to
conduct dredging or filling activities in jurisdictional waters for the purpose
of creating slurry ponds, water impoundments, refuse areas, valley fills or
other mining activities. The Army Corps of Engineers (the “COE”) is empowered to
issue “nationwide” permits for specific categories of filling activity that are
determined to have minimal environmental adverse effects in order to save the
cost and time of issuing individual permits under Section 404. Nationwide
Permit 21 authorizes the disposal of dredge-and-fill material from mining
activities into the waters of the United States. On October 23, 2003,
several citizens groups sued the COE in the U.S. District Court for the
Southern District of West Virginia seeking to invalidate “nationwide” permits
utilized by the COE and the coal industry for permitting most in-stream
disturbances associated with coal mining, including excess spoil valley fills
and refuse impoundments. Although the lower court enjoined the issuance of
Nationwide 21 permits, that decision was overturned by the Fourth Circuit Court
of Appeals, which concluded that the COE complied with the Clean Water Act in
promulgating this permit. Although we had no operations that were immediately
impacted or interrupted, the lower court's decision required us to convert
certain current and planned applications for Nationwide 21 permits to
applications for individual permits. A similar lawsuit was filed on
January 27, 2005 in the U.S. District Court for the Eastern District
of Kentucky and remains pending, and other lawsuits may be filed in other states
where we operate. Although it is not possible to predict the results of the
Kentucky litigation, it could adversely affect our Kentucky
operations.
Due
to political and economic uncertainties in Venezuela, our investment in Excelven
Pty Ltd could be at risk for loss.
In 2004,
we acquired a 24.5% interest in Excelven Pty Ltd, which, through its
subsidiaries, controls the rights to the Las Carmelitas mining venture in
Venezuela and the related Palmarejo export port facility on Lake Maracaibo in
Venezuela. The project is challenged by political risk. In particular, the
Venezuelan government has expressed an interest in increasing government
ownership in Venezuelan natural resources. The project is currently in the
developmental stage. Any future deterioration in the political environment in
Venezuela or the government’s denial of the AoR permit could lead to a potential
impairment adjustment. In addition, such political and economic
uncertainties could also lead to events such as civil
unrest, work stoppages or the nationalization or other expropriation of private
enterprises by the Venezuelan government, which could result in a loss of
all or a portion of our investment in Excelven, which is approximately $4.9
million to date. In 2007, Excelven
made a decision to close the export port facility, and we recorded a charge of
$1.2 million related to our ownership of this venture, reflecting our share of
the equity losses of this entity.
Our
mining operations consume significant quantities of commodities. If commodity
prices increase significantly or rapidly, it could impact our cost of
production.
Coal
mines consume large quantities of commodities such as steel, copper, rubber
products and liquid fuels, such as diesel fuel. Some commodities, such as steel,
are needed to comply with roof control plans required by regulation. The prices
we pay for these products are strongly impacted by the global commodities
market. A rapid or significant increase in cost of some commodities could impact
our mining costs because we have limited ability to negotiate lower prices, and,
in some cases, do not have a ready substitute for these
commodities.
We
have reclamation and mine closure obligations. If the assumptions underlying our
accruals are inaccurate, we could be required to expend greater amounts than
anticipated.
The
Surface Mining Control and Reclamation Act establish operational, reclamation
and closure standards for all aspects of surface mining as well as most aspects
of deep mining. We accrue for the costs of current mine disturbance and of final
mine closure, including the cost of treating mine water discharge where
necessary. Estimates of our total reclamation and mine-closing liabilities are
based upon permit requirements and our experience. The amounts recorded are
dependent upon a number of variables, including the estimated future retirement
costs, estimated proven reserves, assumptions involving profit margins,
inflation rates, and the assumed credit-adjusted risk-free interest rates.
Furthermore, these obligations are unfunded. If these accruals are insufficient
or our liability in a particular year is greater than currently anticipated, our
future operating results could be adversely affected.
- 22
-
Our ability
to operate our company effectively could be impaired if we fail to attract and
retain key personnel.
Our
ability to operate our business and implement our strategies depends, in part,
on the efforts of our executive officers and other key employees. In addition,
our future success will depend on, among other factors, our ability to attract
and retain other qualified personnel. The loss of the services of any of our
executive officers or other key employees or the inability to attract or retain
other qualified personnel in the future could have a material adverse effect on
our business or business prospects.
A shortage of
skilled labor in the Appalachian region could pose a risk to achieving improved
labor productivity and competitive costs and could adversely affect our
profitability.
Efficient
coal mining using modern techniques and equipment requires skilled laborers,
preferably with at least a year of experience and proficiency in multiple mining
tasks. In recent years, a shortage of trained coal miners in the Appalachian
region has caused us to operate certain units without full staff, which
decreases our productivity and increases our costs. If the shortage of
experienced labor continues or worsens, it could have an adverse impact on our
labor productivity and costs and our ability to expand production in the event
there is an increase in the demand for our coal, which could adversely affect
our profitability.
Forward
sales and forward purchase contracts that are not accounted for as a hedge
could cause earnings volatility in our statement of income for a given
period.
We
participate in forward purchase and forward sales contracts that are considered
derivative instruments under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities (“SFAS 133”). SFAS 133
requires all derivative financial instruments to be reported on the balance
sheet at fair value. Changes in fair value are recognized either in earnings or
equity, depending on whether the transaction qualifies for hedge accounting, and
if so, the nature of the underlying exposure being hedged and how effective the
derivatives are at offsetting price movements in the underlying
exposure.
Certain of
our forward coal purchase and sales contracts that are considered derivative
instruments do not qualify under the “normal purchase and normal sales”
exception under SFAS 133. Transactions that do not qualify for this exception
are required to be marked to market and currently do not qualify for hedge
accounting. Accordingly, changes in fair value have been recognized in earnings.
During 2007, we decreased coal revenue related to mark to market unrealized
losses on open over the counter (“OTC”) coal sales contracts in the amount of
$8.3 million and decreased cost of sales related to mark to market unrealized
gains on open OTC coal purchase contracts by $17.2 million. The net
impact of these mark-to-market adjustments resulted in an increase to pretax
earnings of $8.9 million.
At December
31, 2007, we had unrealized gains (losses) on open sales and purchase contracts
in the amount of ($2.1 million) and $11.3 million, respectively. These assets
and liabilities are recorded in prepaid expenses and other current assets and
accrued expenses and other current liabilities, respectively, on the balance
sheet with periodic changes in fair value recorded to the income
statement. Since the Company intends to take delivery or provide
delivery of coal under these contracts, the unrealized gains and losses
recorded as of December 31, 2007 will reverse into the income statement in
future periods. The reversal of the unrealized gains related to forward
purchase contracts will result in higher costs of sales in future periods when
we ultimately take delivery of the coal under these contracts. The reversal of
the unrealized losses related to sales contracts will result in higher coal
revenues in future periods when we satisfy our commitments under these
contracts. Due to market price fluctuations, we could experience
significant earnings volatility related to these derivative coal
contracts.
We use
significant quantities of diesel fuel in our operations and are also exposed to
risk in the market price for diesel fuel. We have entered into swap agreements
and diesel put options to reduce the volatility in the price of diesel fuel for
our operations; however, if these instruments are not effective to protect
against volatility, we could incur higher expenses for diesel fuel and therefore
lower earnings. In addition, the diesel fuel swap agreements and put options are
not designated as a hedge and therefore the changes in the fair value for these
derivative instrument contracts are required to be marked to market and recorded
in cost of sales, which may also result in earnings volatility. During 2007, we
entered into diesel fuel swaps and put options each for approximately 2.7
million gallons or 10% of the Company's anticipated 2008 diesel fuel usage.
These diesel fuel swaps and put options use the NYMEX New York Harbor #2
heating oil as the underlying commodity reference price. The fair
value of these diesel fuel swap agreements and put options are an asset of less
than $0.1 million and $0.2 million, respectively, as of December 31,
2007.
Our
amount of indebtedness could harm our business by limiting our available cash
and our access to additional capital and could force us to sell material assets
or take other actions to attempt to reduce our indebtedness.
Our
financial performance could be affected by our amount of indebtedness. At
December 31, 2007, we had $446.9 million of indebtedness outstanding,
representing 53.8% of our total capitalization. This indebtedness consisted of
$175.0 million principal of our Senior Notes, a $233.1 million term loan
under our current credit facility and $38.8 million of other indebtedness,
including $0.7 million of capital lease obligations extending through March
2009, $18.5 million principal amount for the Gallatin project financing and
$18.9 million payable to an insurance premium finance company. In addition,
under our current credit facility, we had $82.2 million of letters of
credit outstanding at December 31, 2007.
This
level of indebtedness could have important consequences to our business. For
example, it could:
|
·
|
increase
our vulnerability to general adverse economic and industry
conditions;
|
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|
·
|
make
it more difficult to self-insure and obtain surety bonds or letters of
credit;
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|
·
|
limit
our ability to enter into new long-term sales contracts;
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|
·
|
make
it more difficult for us to pay interest and satisfy our debt obligations,
including our obligations with respect to the notes;
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|
·
|
require
us to dedicate a substantial portion of our cash flow from operations to
payments on our indebtedness, thereby reducing the availability of our
cash flow to fund working capital, capital expenditures, acquisitions and
other general corporate activities;
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|
·
|
limit
our ability to obtain additional financing to fund future working capital,
capital expenditures, research and development, debt service requirements
or other general corporate requirements;
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·
|
limit
our flexibility in planning for, or reacting to, changes in our business
and in the coal industry;
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|
·
|
place
us at a competitive disadvantage compared to less leveraged competitors;
and
|
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|
·
|
limit
our ability to borrow additional funds.
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If our
cash flows and capital resources are insufficient to fund our debt service
obligations or our requirements under our other long-term liabilities, we may be
forced to sell assets, seek additional capital or seek to restructure or
refinance our indebtedness. These alternative measures may not be successful and
may not permit us to meet our scheduled debt service obligations, including our
obligations with respect to the notes, or our requirements under our other long
term liabilities. In the absence of such operating results and resources, we
could face substantial liquidity problems and might be required to sell material
assets or operations to attempt to meet our debt service and other obligations.
Our current credit facility and the indenture under which the Senior Notes were
issued restrict our ability to sell assets and use the proceeds from the sales.
We may not be able to consummate those sales or to obtain the proceeds which we
could realize from them and these proceeds may not be adequate to meet any debt
service obligations then due. Furthermore, substantially all of our material
assets secure our indebtedness under our current credit
facility.
Despite
our current leverage, we may still be able to incur substantially more debt.
This could further exacerbate the risks associated with our significant
indebtedness.
We may be
able to incur substantial additional indebtedness in the future under the terms
of our credit facility and the indenture governing the Senior Notes.
Our current credit facility provides for a revolving line of credit of up
to $275.0 million, of which $192.8 million was available as of
December 31, 2007. The addition of new debt to our current debt levels
could increase the related risks that we now face. For example, the spread over
the variable interest rate applicable to loans under our credit facility is
dependent on our leverage ratio, and it would increase if our leverage ratio
increases. Additional drawings under our revolving line of credit could also
limit the amount available for letters of credit in support of our bonding
obligations, which we will require as we develop and acquire new
mines.
The covenants
in our credit facility and the indenture governing the senior notes impose
restrictions that may limit our operating and financial
flexibility.
Our
current credit facility and the indenture governing the Senior Notes contain a
number of significant restrictions and covenants that limit our ability and our
subsidiaries' ability to, among other things, incur additional indebtedness or
enter into sale and leaseback transactions, pay dividends, make redemptions and
repurchases of certain capital stock, make loans and investments, create liens,
engage in transactions with affiliates and merge or consolidate with other
companies or sell substantially all of our assets.
These
covenants could adversely affect our ability to finance our future operations or
capital needs or to execute preferred business strategies. In addition, if we
violate these covenants and are unable to obtain waivers from our lenders, our
debt under these agreements would be in default and could be accelerated by our
lenders. If our indebtedness is accelerated, we may not be able to repay our
debt or borrow sufficient funds to refinance it. Even if we were able to obtain
new financing, it may not be on commercially reasonable terms, on terms that are
acceptable to us, or at all. If our debt is in default for any reason, our
business, financial condition and results of operations could be materially and
adversely affected.
Failure
to obtain or renew surety bonds on acceptable terms could affect our ability to
secure reclamation and coal lease obligations, which could adversely affect our
ability to mine or lease coal.
Federal
and state laws require us to obtain surety bonds to secure payment of certain
long-term obligations such as mine closure or reclamation costs, federal and
state workers' compensation costs, coal leases and other obligations. These
bonds are typically renewable annually. Surety bond issuers and holders may not
continue to renew the bonds or may demand additional collateral or other less
favorable terms upon those renewals. The ability of surety bond issuers and
holders to demand additional collateral or other less favorable terms has
increased as the number of companies willing to issue these bonds has decreased
over time. Our failure to maintain, or our inability to acquire, surety bonds
that are required by state and federal law would affect our ability to secure
reclamation and coal lease obligations, which could adversely affect our ability
to mine or lease coal. That failure could result from a variety of factors
including, without limitation:
|
·
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lack
of availability, higher expense or unfavorable market terms of new
bonds;
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·
|
restrictions
on availability of collateral for current and future third-party surety
bond issuers under the terms of our credit facility or the indenture
governing our senior notes; and
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|
·
|
the
exercise by third-party surety bond issuers of their right to refuse to
renew the surety.
|
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Failure
to maintain capacity for required letters of credit could limit our available
borrowing capacity under our credit facility, limit our ability to obtain or
renew surety bonds and negatively impact our ability to obtain additional
financing to fund future working capital, capital expenditure or other general
corporate requirements.
At
December 31, 2007, we had $82.2 million of letters of credit in place,
of which $72.0 million served as collateral for reclamation surety bonds
and $10.2 million secured miscellaneous obligations. Our credit facility
provides for revolving commitments of up to $275.0 million, all of which
can be used to issue additional letters of credit. In addition, obligations
secured by letters of credit may increase in the future. Any such increase would
limit our available borrowing capacity under our current or future credit
facilities and could negatively impact our ability to obtain additional
financing to fund future working capital, capital expenditure or other general
corporate requirements. Moreover, if we do not maintain sufficient borrowing
capacity under our revolving credit facility for additional letters of credit,
we may be unable to obtain or renew surety bonds required for our mining
operations.
If
our assumptions regarding our likely future expenses related to benefits for
non-active employees are incorrect, then expenditures for these benefits could
be materially higher than we have predicted.
At the
times that we acquired the assets of our Predecessor and acquired companies, the
Predecessor and acquired operations were subject to long-term liabilities under
a variety of benefit plans and other arrangements with active and inactive
employees. We assumed a portion of these long-term obligations and are
continuing to incur additional costs from our operations for postretirement,
workers' compensation and black lung liabilities. The current and non-current
accrued portions of these long-term obligations, as reflected in our
consolidated financial statements as of December 31, 2007, included
$54.7 million of postretirement medical obligations and $10.5 million
of self-insured workers' compensation and black lung obligations. These
obligations have been estimated based on assumptions that are described in the
notes to our consolidated financial statements included elsewhere in this annual
report. However, if our assumptions are incorrect, we could be required to
expend greater amounts than anticipated.
Several
states in which we operate consider changes in workers' compensation laws from
time to time, which, if enacted, could adversely affect us. In addition, if any
of the sellers from whom we acquired our operations fail to satisfy their
indemnification obligations to us with respect to postretirement claims and
retained liabilities, then we could be required to expend greater amounts than
anticipated. The inability of the sellers of our Predecessor and acquired
companies to fulfill their indemnification obligations to us under our
acquisition agreements could increase our liabilities and adversely affect our
results of operations.” Moreover, under certain acquisition agreements, we
agreed to permit responsibility for black lung claims related to the sellers'
former employees who are employed by us for less than one year after the
acquisition to be determined in accordance with law (rather than specifically
assigned to one party or the other in the agreements). We believe that the
sellers remain liable as a matter of law for black lung benefits for their
former employees who work for us for less than one year; however, an adverse
ruling on this issue could increase our exposure to black lung benefit
liabilities.
Terrorist
attacks and threats, escalation of military activity in response to such attacks
or acts of war may negatively affect our business, financial condition and
results of operations.
Terrorist
attacks and threats, escalation of military activity in response to such attacks
or acts of war may negatively affect our business, financial condition, and
results of operations. Our business is affected by general economic conditions,
fluctuations in consumer confidence and spending, and market liquidity, which
can decline as a result of numerous factors outside of our control, such as
terrorist attacks and acts of war. Future terrorist attacks against
U.S. targets, rumors or threats of war, actual conflicts involving the
United States or its allies, or military or trade disruptions affecting our
customers may materially adversely affect our operations and those of our
customers. As a result, there could be delays or losses in transportation and
deliveries of coal to our customers, decreased sales of our coal and extension
of time for payment of accounts receivable from our customers. Strategic targets
such as energy-related assets may be at greater risk of future terrorist attacks
than other targets in the United States. In addition, disruption or significant
increases in energy prices could result in government-imposed price controls. It
is possible that any of these occurrences, or a combination of them, could have
a material adverse effect on our business, financial condition and results of
operations.
If
we are unable to accurately estimate the overall risks or costs when we bid on a
road construction contract which is ultimately awarded to us, we may achieve a
lower than anticipated profit or incur a loss on the
contract.
A larger
percentage of our road construction revenues and contract backlog are typically
derived from fixed unit price contracts. Fixed unit price contracts require us
to perform the contract for a fixed unit price irrespective of our actual costs.
As a result, we realize a profit on these contracts only if we successfully
estimate our costs and then successfully control actual costs and avoid cost
overruns. If our cost estimates for a contract are inaccurate, or if we do not
execute the contract within our cost estimates, then cost overruns may cause us
to incur losses or cause the contract not to be as profitable as we
expected. Also, if we do not recover the amounts of coal estimated on
our construction projects, profitability on our constructions contracts could be
less than projected. This, in turn, could negatively affect our cash flow,
earnings and financial position.
The costs
incurred and gross profit realized on those contracts can vary, sometimes
substantially, from the original projections due to a variety of factors,
including, but not limited to:
|
·
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onsite
conditions that differ from those assumed in the original
bid;
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·
|
delays
caused by weather conditions;
|
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·
|
contract
modifications creating unanticipated costs not covered by change
orders;
|
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·
|
changes
in availability, proximity and costs of materials, including diesel fuel,
explosives, and parts and supplies for our
equipment;
|
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·
|
coal
recovery which impacts the allocation of cost to road
construction;
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·
|
availability
and skill level of workers in the geographic location of a
project;
|
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·
|
our
suppliers' or subcontractors' failure to
perform;
|
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·
|
mechanical
problems with our machinery or
equipment;
|
|
·
|
citations
issued by a governmental authority, including the Occupational Safety and
Health Administration and the Mine Safety and Health
Administration;
|
|
·
|
difficulties
in obtaining required governmental permits or
approvals;
|
|
·
|
changes
in applicable laws and regulations;
and
|
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·
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claims
or demands from third parties alleging damages arising from our
work.
|
|
Item
1B.
|
None.
|
Item
2.
|
Coal
Reserves
We
estimate that, as of December 31, 2007, we owned or leased total proven and
probable coal reserves of approximately 617.5 million tons. We believe that
our total proven and probable reserves will support current production levels
for more than 20 years. “Reserves” are defined by SEC Industry Guide 7 as
that part of a mineral deposit which could be economically and legally extracted
or produced at the time of the reserve determination. “Proven (Measured)
Reserves” are defined by SEC Industry Guide 7 as reserves for which
(1) quantity is computed from dimensions revealed in outcrops, trenches,
workings or drill holes; grade and/or quality are computed from the results of
detailed sampling and (2) the sites for inspection, sampling and
measurement are spaced so closely and the geologic character is so well defined
that size, shape, depth and mineral content of reserves are well-established.
“Probable reserves” are defined by SEC Industry Guide 7 as reserves for which
quantity and grade and/or quality are computed from information similar to that
used for proven (measured) reserves, but the sites for inspection,
sampling, and measurement are farther apart or are otherwise less adequately
spaced. The degree of assurance, although lower than that for proven
(measured) reserves, is high enough to assume continuity between points of
observation.
Information
about our reserves consists of estimates based on engineering, economic and
geological data assembled and analyzed by our internal engineers, geologists and
finance associates. We periodically update our reserve estimates to reflect past
coal production, new drilling information and other geological or mining data,
and acquisitions or sales of coal properties. Coal tonnages are categorized
according to coal quality, mining method, permit status, mineability and
location relative to existing mines and infrastructure. In accordance with
applicable industry standards, proven reserves are those for which reliable data
points are spaced no more than 2,640 feet apart. Probable reserves are
those for which reliable data points are spaced 2,640 feet to
7,920 feet apart. Further scrutiny is applied using geological criteria and
other factors related to profitable extraction of the coal. These criteria
include seam height, roof and floor conditions, yield and
marketability.
We
periodically retain outside experts to independently verify our estimates of our
coal reserves. Prior to the initial public offering, we retained a
third party consultant to perform reserve estimates in November
2004. We have also retained a consultant to verify reserves for all
the major acquisitions since November 2004, which include the Callaway, Progress
Fuels, and Mingo Logan Ben’s Creek Complex acquisitions. These
reviews include the preparation of reserve maps and the development of estimates
by certified professional geologists based on data supplied by us and using
standards accepted by government and industry, including the methodology
outlined in U.S. Circular 891. Reserve estimates were developed using
criteria to assure that the basic geologic characteristics of the reserve (such
as minimum coal thickness and wash recovery, interval between deep mineable
seams and mineable area tonnage for economic extraction) were in reasonable
conformity with existing and recently completed operation capabilities on our
properties.
As with
most coal-producing companies in Appalachia, the great majority of our coal
reserves are subject to leases from third-party landowners. These leases convey
mining rights to the coal producer in exchange for a percentage of gross sales
in the form of a royalty payment to the lessor, subject to minimum payments.
Four percent of our reserve holdings are owned and require no royalty or per-ton
payment to other parties. The average royalties paid by us for coal reserves
from our producing properties was $3.19 per ton in 2007, representing 4.4% of
our 2007 coal revenue.
Although
our coal leases have varying renewal terms and conditions, they generally last
for the economic life of the reserves. According to our current mine plans, any
leased reserves assigned to a currently active operation will be mined during
the tenure of the applicable lease. Because the great majority of our leased or
owned properties and mineral rights are covered by detailed title abstracts
prepared when the respective properties were acquired by predecessors in title
to us and our current lessors, we generally do not thoroughly verify title to,
or maintain title insurance policies on, our leased or owned properties and
mineral rights.
The
following table provides the “quality” (sulfur content and average Btu content
per pound) of our coal reserves as of December 31, 2007.
|
Recoverable
Reserves
Proven
&
|
Sulfur
Content
|
Average
Btu
|
|||||||||||||
|
Regional
Business Unit
|
State
|
Probable
(1)
|
<1%
|
1.0%-1.5%
|
>1.5%
|
>12,500
|
<12,500
|
||||||||
|
(In millions of
tons)
|
|||||||||||||||
|
Paramont/
Alpha Land and Reserves (2)
|
Virginia
|
159.1
|
116.0
|
33.2
|
9.9
|
148.6
|
10.5
|
||||||||
|
Dickenson-Russell
|
Virginia
|
36.7
|
36.7
|
--
|
--
|
36.7
|
--
|
||||||||
|
Kingwood
|
West
Virginia
|
30.4
|
--
|
19.6
|
10.8
|
30.4
|
--
|
||||||||
|
Brooks
Run North
|
West
Virginia
|
46.3
|
11.6
|
34.7
|
--
|
32.0
|
14.3
|
||||||||
|
Brooks
Run South (3)
|
West
Virginia
|
88.6
|
87.1
|
1.5
|
--
|
88.6
|
--
|
||||||||
|
AMFIRE
|
Pennsylvania
|
70.1
|
12.5
|
21.6
|
36.0
|
61.5
|
8.6
|
||||||||
|
Enterprise/Enterprise
Land & Reserve, Inc (4)
|
Kentucky
|
164.1
|
60.5
|
49.9
|
53.7
|
140.8
|
23.3
|
||||||||
|
Callaway
(5)
|
West
Virginia and Virginia
|
22.2
|
22.2
|
--
|
--
|
12.9
|
9.3
|
||||||||
|
Totals
|
617.5
|
346.6
|
160.5
|
110.4
|
551.5
|
66.0
|
|||||||||
|
Percentages
|
56
|
%
|
26
|
%
|
18
|
%
|
89
|
%
|
11
|
%
|
|||||
| (1 | ) |
Recoverable
reserves represent the amount of proven and probable reserves that can
actually be recovered taking into account all mining and preparation
losses involved in producing a saleable product using existing methods
under current law. The reserve numbers set forth in the table exclude
reserves for which we have leased our mining rights to third parties.
Reserve information reflects a moisture factor of approximately 6.5%. This
moisture factor represents the average moisture present on our delivered
coal.
|
|
| (2 | ) |
Includes
proven and probable reserves in Virginia controlled by our subsidiary
Alpha Land and Reserves, LLC. Alpha Land and Reserves, LLC subleases a
portion of the mining rights to its proven and probable reserves in
Virginia to our subsidiary Paramont Coal Company Virginia,
LLC.
|
|
| (3 | ) |
Includes
proven and probable reserve in West Virginia controlled by our
subsidiaries Brooks Run South and Riverside Mining
Company.
|
|
| (4 | ) |
Includes
proven and probable reserves in Kentucky controlled by our subsidiary
Enterprise Land & Reserve Inc obtained from the Progress Energy
acquisition.
|
|
| (5 | ) |
Includes
proven and probable reserves controlled in West Virginia by Cobra Natural
Resource obtained from the Mingo Logan Ben Creek Complex
acquisition.
|
The
following table summarizes, by regional business unit, the tonnage of our coal
reserves that is assigned to our operating mines, our property interest in those
reserves and whether the reserves consist of steam or metallurgical coal, as of
December 31, 2007.
|
Recoverable
Reserves
Proven
&
|
Total Tons |
Total
Tons
|
|||||||||||||||||
|
Regional
Business Unit
|
State
|
Probable
(1)
|
Assigned
(2)
|
Unassigned
(2)
|
Owned
|
Leased
|
Coal Type
(3)
|
||||||||||||
|
(In
millions of tons)
|
|||||||||||||||||||
|
Paramont/
Alpha Land and Reserves (4)
|
Virginia
|
159.1 | 47.7 | 111.4 | -- | 159.1 |
Steam
and Metallurgical
|
||||||||||||
|
Dickenson-Russell
|
Virginia
|
36.7 | 36.7 | -- | -- | 36.7 |
Steam
and Metallurgical
|
||||||||||||
|
Kingwood
|
West
Virginia
|
30.4 | 19.1 | 11.3 | -- | 30.4 |
Steam
and Metallurgical
|
||||||||||||
|
Brooks
Run North
|
West
Virginia
|
46.3 | 28.7 | 17.6 | 2.3 | 44.0 |
Steam
and Metallurgical
|
||||||||||||
|
Brooks
Run South (5)
|
West
Virginia
|
88.6 | 41.4 | 47.2 | 1.1 | 87.5 |
Steam
and Metallurgical
|
||||||||||||
|
AMFIRE.
|
Pennsylvania
|
70.1 | 54.9 | 15.2 | 3.1 | 67.0 |
Steam
and Metallurgical
|
||||||||||||
|
Enterprise/Enterprise
Land and Reserve Inc (6)
|
Kentucky
|
164.1 | 15.8 | 148.3 | 20.1 | 144.0 |
Steam
|
||||||||||||
|
Callaway
(7)
|
West
Virginia and Virginia
|
22.2 | 18.3 | 3.9 | 0.7 | 21.5 |
Steam
and Metallurgical
|
||||||||||||
|
Totals
|
617.5 | 262.6 | 354.9 | 27.3 | 590.2 | ||||||||||||||
|
Percentages
|
43 | % | 57 | % | 4 | % | 96 | % | |||||||||||
| (1 | ) |
Recoverable
reserves represent the amount of proven and probable reserves that can
actually be recovered taking into account all mining and preparation
losses involved in producing a saleable product using existing methods
under current law. The reserve numbers set forth in the table exclude
reserves for which we have leased our mining rights to third parties.
Reserve information reflects a moisture factor of approximately 6.5%. This
moisture factor represents the average moisture present on our delivered
coal.
|
|
|
|
| (2 | ) |
Assigned
reserves represent recoverable coal reserves that can be mined without a
significant capital expenditure for mine development, whereas unassigned
reserves will require significant capital expenditures to mine the
reserves.
|
|
|
|
| (3 | ) |
Almost
all of our reserves that we currently market as metallurgical coal also
possess quality characteristics that would enable us to market them as
steam coal.
|
|
|
|
| (4 | ) |
Includes
proven and probable reserves in Virginia controlled by our subsidiary
Alpha Land and Reserves, LLC. Alpha Land and Reserves, LLC subleases a
portion of the mining rights to its proven and probable reserves in
Virginia to our subsidiary Paramont Coal Company Virginia,
LLC.
|
| (5 | ) |
Includes
proven and probable reserve in West Virginia controlled by our
subsidiaries Brooks Run South and Riverside Mining
Company
|
| (6 | ) |
Includes
proven and probable reserves in Kentucky controlled by our subsidiary
Enterprise Land & Reserve Inc obtained from the Progress Energy
acquisition.
|
| (7 | ) |
Includes
proven and probable reserves controlled by Cobra Natural Resource obtained
from the Mingo Logan Ben Creek Complex
acquisition.
|
The following map
shows the locations of Alpha's properties as of December 31, 2007 for each of
our eight regional business units:
See Item 1,
“Business”, for additional information regarding our coal operations and
properties.
|
Item 3.
|
General. We are a party to a
number of legal proceedings incident to our normal business activities. While we
cannot predict the outcome of these proceedings, we do not believe that any
liability arising from these matters individually or in the aggregate should
have a material impact upon our consolidated cash flows, results of operations
or financial condition.
Nicewonder Litigation. In
December 2004, prior to our Nicewonder Acquisition in October 2005, the
Affiliated Construction Trades Foundation brought an action against the West
Virginia Department of Transportation, Division of Highways (“WVDOH”) and
Nicewonder Contracting, Inc. ("NCI"), which became our wholly-owned indirect
subsidiary after the Nicewonder Acquisition, in the United States District Court
in the Southern District of West Virginia. The plaintiff sought a declaration
that the contract between NCI and the State of West Virginia related to NCI's
road construction project was illegal as a violation of applicable West Virginia
and federal competitive bidding and prevailing wage laws. The plaintiff also
sought an injunction prohibiting performance of the contract but has not sought
monetary damages.
On
September 5, 2007, the Court ruled that WVDOH and the Federal Highway
Administration (who is now a party to the suit) could not exempt a contractor,
like NCI, from paying the prevailing wages as required by the Davis-Bacon Act.
Although the Court has not yet decided what remedy it will impose, we expect a
ruling before mid-2008. We anticipate that the most likely remedy is
a directive that the contract be renegotiated for such payment. If that
renegotiation occurs, WVDOH has committed to agree and NCI has a contractual
right to insist, that additional costs resulting from the order will be
reimbursed by WVDOH and as such neither NCI nor the Company believe, at this
time, that they have any monetary expense from this ruling. As of December 31,
2007, the Company recorded a $6.1 million long-term receivable for the recovery
of these costs from WVDOH and a long-term liability for the obligations under
the ruling.
There
were no matters submitted to a vote of security holders through a solicitation
of proxies or otherwise during the fourth quarter ended December 31,
2007.
PART II
The
initial public offering of our common stock commenced on February 15, 2005.
The Company's common stock has been listed on the New York Stock Exchange since
that time under the symbol “ANR.” There was no public market for our common
stock prior to this date.
Price
range of our common stock
Trading
in our common stock commenced on the New York Stock Exchange on
February 15, 2005 under the symbol “ANR.” The following table sets forth,
for the periods indicated, the high and low sales prices per share of our common
stock reported in the New York Stock Exchange consolidated tape.
|
2007
|
High
|
Low
|
||||||
|
First
Quarter
|
$ | 15.66 | $ | 12.45 | ||||
|
Second
Quarter
|
20.79 | 15.61 | ||||||
|
Third
Quarter
|
23.23 | 16.52 | ||||||
|
Fourth
Quarter
|
33.84 | 23.68 | ||||||
|
2006
|
High
|
Low
|
||||||
|
First
Quarter
|
$ | 23.53 | $ | 19.37 | ||||
|
Second
Quarter
|
26.58 | 17.95 | ||||||
|
Third
Quarter
|
19.92 | 14.55 | ||||||
|
Fourth
Quarter
|
16.76 | 14.23 | ||||||
As of
December 31, 2007, there were approximately 240 registered holders of record of
our common stock, including 199 unvested restricted stock positions. The
transfer agent and registrar for our common stock is Computershare Trust
Company, N.A.
Dividend
Policy
We do not
presently pay dividends on our common stock.
Stock
Performance Graph
The
following stock performance graph compares the cumulative total return to
stockholders on a quarterly basis on our common stock with the cumulative total
return to stockholders on a quarterly basis on two indices, the Russell 3000
Index and the Russell 3000 Coal Index. The graph assumes that:
|
·
|
you
invested $100 in our common stock and in each index at the closing price
on February 15, 2005;
|
|
·
|
all
dividends were reinvested; and
|
|
·
|
you
continued to hold your investment through December 31,
2007.
|
You are
cautioned against drawing any conclusions from the data contained in this graph,
as past results are not necessarily indicative of future
performance. The indices used are included for comparative purposes
only and do not indicate an opinion of management that such indices are
necessarily an appropriate measure of the relative performance of our
stock.
|
Item 6.
|
The
following table presents selected financial and other data about us for the most
recent five fiscal periods. The selected financial data as of December 31, 2007,
2006, and 2005 and for the years then ended have been derived from the audited
consolidated financial statements and related footnotes of Alpha Natural
Resources, Inc. and subsidiaries included in this annual report. The selected
historical financial data as of December 31, 2004 and for the year then ended
have been derived from the combined financial statements of ANR Fund IX
Holdings, L.P. and Alpha NR Holding, Inc. and subsidiaries (the owners of a
majority of the membership interests of ANR Holdings prior to the Internal
Restructuring) and the related notes, which are not included in this annual
report. The selected historical financial data as of December 31, 2003 and for
the year then ended have been derived from the audited combined balance sheet of
ANR Fund IX Holdings, L.P. and Alpha NR Holding, Inc. and subsidiaries not
included in this annual report. You should read the following table in
conjunction with the financial statements, the related notes to those financial
statements, and “Management's Discussion and Analysis of Financial Condition and
Results of Operations.”
The
results of operations for the historical periods included in the following table
are not necessarily indicative of the results to be expected for future periods.
In addition, see Item 1A “Risk Factors” of this report for a discussion of
risk factors that could impact our future results of operations.
|
Alpha
Natural Resources, Inc and Subsidiaries
|
ANR
FUND IX Holdings, L.P. and Alpha NR Holding, Inc. and
Subsidiaries
|
||||||||||||||
|
Year
Ended December 31, 2007
|
Year
Ended December 31, 2006
|
Year
Ended December 31, 2005
|
Year
Ended December 31, 2004
|
|
Year
Ended December 31, 2003
|
||||||||||
|
(In
thousands, except per share and per ton amounts)
|
|||||||||||||||
|
Statement
of Operations Data:
|
|
|
|
||||||||||||
|
Revenues:
|
|
|
|
||||||||||||
|
Coal revenues
|
$
|
1,639,247
|
$
|
1,687,553
|
$
|
1,413,174
|
$
|
1,079,981
|
$
|
694,596
|
|||||
|
Freight
and handling revenues
|
205,086
|
188,366
|
185,555
|
141,100
|
73,800
|
||||||||||
| Other revenues |
33,241
|
34,743
|
27,926
|
28,347
|
13,453
|
||||||||||
|
Total
revenues
|
1,877,574
|
1,910,662
|
1,626,655
|
1,249,428
|
781,849
|
||||||||||
|
Costs
and expenses:
|
|||||||||||||||
|
Cost of coal sales (exclusive of items shown separately
below)
|
1,354,335
|
1,352,450
|
1,184,092
|
920,359
|
626,265
|
||||||||||
|
Freight and handling costs
|
205,086
|
188,366
|
185,555
|
141,100
|
73,800
|
||||||||||
|
Cost of other revenues
|
25,817
|
22,982
|
23,675
|
22,994
|
12,488
|
||||||||||
|
Depreciation, depletion and amortization
|
159,579
|
140,851
|
73,122
|
55,261
|
35,385
|
||||||||||
| Selling, general and administrative expenses (exclusive | |||||||||||||||
| of depreciation and amortization shown separately above) |
58,605
|
67,952
|
88,132
|
40,607
|
21,926
|
||||||||||
|
Total
costs and expenses
|
1,803,422
|
1,772,601
|
1,554,576
|
1,180,321
|
769,864
|
||||||||||
|
Income from operations
|
74,152
|
138,061
|
72,079
|
69,107
|
11,985
|
||||||||||
|
Other
income (expense):
|
|||||||||||||||
|
Interest
expense
|
(40,215
|
)
|
(41,774
|
)
|
(29,937
|
)
|
(20,041
|
)
|
(7,848
|
)
|
|||||
|
Interest
income
|
2,340
|
839
|
1,064
|
531
|
103
|
||||||||||
|
Miscellaneous
income (expense)
|
(93
|
)
|
523
|
91
|
722
|
574
|
|||||||||
|
Total
other income (expense), net
|
(37,968
|
)
|
(40,412
|
)
|
(28,782
|
)
|
(18,788
|
)
|
(7,171
|
)
|
|||||
|
Income from continuing operations before income taxes and minority
interest
|
36,184
|
97,649
|
43,297
|
50,319
|
4,814
|
||||||||||
|
Income
tax expense (benefit)
|
8,629
|
(30,519
|
)
|
18,953
|
5,150
|
898
|
|||||||||
|
Minority
interest
|
(179
|
)
|
--
|
2,918
|
22,781
|
1,164
|
|||||||||
|
Income from continuing operations
|
27,734
|
128,168
|
21,426
|
22,388
|
2,752
|
||||||||||
|
Loss
from discontinued operations
|
--
|
--
|
(213
|
)
|
(2,373
|
)
|
(490
|
)
|
|||||||
|
Net
income
|
$
|
27,734
|
$
|
128,168
|
$
|
21,213
|
$
|
20,015
|
$
|
2,262
|
|||||
| Earnings per share data: | |||||||||||||||
| Net income (loss) per share, as adjusted (1) | |||||||||||||||
| Basic and diluted: | |||||||||||||||
| Income from continuing operations | $ | 0.43 | $ | 2.00 | $ | 0.38 | $ | 1.52 | $ | 0.19 | |||||
| Loss from discontinued operations | -- | -- | -- | (0.16 | ) | (0.04 | ) | ||||||||
| Net income per basic and diluted share | $ | 0.43 | $ | 2.00 | $ | 0.38 | $ | 1.36 | $ | 0.15 | |||||
| Pro forma net income (loss) per share (2) | |||||||||||||||
| Basic and diluted: | |||||||||||||||
| Income from continuing operations | $ | 0.35 | $ | 0.25 | |||||||||||
| Loss from discontinued operations | -- | (0.07 | ) | ||||||||||||
| Net income per basic and diluted share | $ | 0.35 | $ | 0.18 | |||||||||||
|
Alpha Natural
Resources, Inc and Subsidiaries
|
ANR
FUND IX Holdings, L.P. and Alpha NR Holding, Inc. and
Subsidiaries
|
||||||||||||||
|
Year
Ended December 31, 2007
|
Year
Ended December 31, 2006
|
Year
Ended December 31, 2005
|
Year
Ended December 31, 2004
|
Year
Ended December 31, 2003
|
|||||||||||
|
(in
thousands, except per ton amounts)
|
|||||||||||||||
|
Balance
sheet data (at period end):
|
|||||||||||||||
|
Cash
and cash equivalents
|
$ | 54,365 | $ | 33,256 | $ | 39,622 | $ | 7,391 | $ | 11,246 | |||||
|
Operating
and working capital
|
157,147 | 116,464 | 35,074 | 56,257 | 32,714 | ||||||||||
|
Total
assets
|
1,210,914 | 1,145,793 | 1,013,658 | 477,121 | 379,336 | ||||||||||
|
Notes
payable and long-term debt, including current portion
|
446,913 | 445,651 | 485,803 | 201,705 | 84,964 | ||||||||||
|
Stockholders'
equity and partners' capital
|
380,836 | 344,049 | 212,765 | 45,933 | 86,367 | ||||||||||
|
Statement
of cash flows data:
|
|||||||||||||||
|
Net
cash provided by (used in):
|
|||||||||||||||
|
Operating
activities
|
$ | 225,741 | $ | 210,081 | $ | 149,643 | $ | 106,776 | $ | 54,104 | |||||
|
Investing
activities
|
(165,203 | ) | (160,046 | ) | (339,387 | ) | (86,202 | ) | (100,072 | ) | |||||
|
Financing
activities
|
(39,429 | ) | (56,401 | ) | 221,975 | (24,429 | ) | 48,770 | |||||||
|
Capital expenditures
|
(126,381 | ) | (131,943 | ) | (122,342 | ) | (72,046 | ) | (27,719 | ) | |||||
|
Other
data
|
|||||||||||||||
|
Production:
|
|||||||||||||||
|
Produced/processed
|
24,203 | 24,827 | 20,602 | 19,069 | 17,199 | ||||||||||
|
Purchased
|
4,189 | 4,090 | 6,284 | 6,543 | 3,938 | ||||||||||
|
Total
|
28,392 | 28,917 | 26,886 | 25,612 | 21,137 | ||||||||||
|
Tons
Sold:
|
|||||||||||||||
|
Steam
|
17,565 | 19,050 | 16,674 | 15,836 | 14,809 | ||||||||||
|
Met
|
10,980 | 10,029 | 10,023 | 9,490 | 6,804 | ||||||||||
|
Total
|
28,545 | 29,079 | 26,697 | 25,326 | 21,613 | ||||||||||
|
Coal
sales realization/ton:
|
|||||||||||||||
|
Steam
|
$ | 48.28 | $ | 49.05 | $ | 41.33 | $ | 32.66 | $ | 27.14 | |||||
|
Met
|
$ | 72.07 | $ | 75.09 | $ | 72.24 | $ | 59.31 | $ | 37.35 | |||||
|
Total
|
$ | 57.43 | $ | 58.03 | $ | 52.93 | $ | 42.64 | $ | 32.14 | |||||
|
Cost
of coal sales/ton
|
$ | 47.45 | $ | 46.51 | $ | 44.35 | $ | 36.34 | $ | 28.98 | |||||
|
Coal
margin/ton
|
$ | 9.98 | $ | 11.52 | $ | 8.58 | $ | 6.30 | $ | 3.16 | |||||
|
EBITDA,
as adjusted (3)
|
$ | 233,817 | $ | 279,435 | $ | 145,197 | $ | 119,327 | $ | 47,663 | |||||
| (1 | ) |
Basic
earnings per share is computed by dividing net income or loss by the
weighted average number of shares of common stock outstanding during the
periods. Diluted earnings per share is computed by dividing net income or
loss by the weighted average number of shares of common stock and dilutive
common stock equivalents outstanding during the periods. Common stock
equivalents include the number of shares issuable on exercise of
outstanding options less the number of shares that could have been
purchased with the proceeds from the exercise of the options based on the
average price of common stock during the period. 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 2005, 2004, and 2003 reflects certain adjustments,
as described below.
|
|
|
The
numerator for purposes of computing basic and diluted net income (loss)
per share, as adjusted, 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, 2003. 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 we are
subject to income taxes.
|
|||
|
The
denominator for purposes of computing basic net income (loss) per share,
as adjusted, 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, 2003.
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.
|
|||
|
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.
|
The
computations of basic and diluted net income (loss) per share, as adjusted for
2005, 2004, and 2003 are set forth below:
|
Year
Ended December 31,
|
||||||||||||
|
2005
|
2004
|
2003
|
||||||||||
|
(in
thousands, except per share amounts)
|
||||||||||||
|
Numerator:
|
||||||||||||
|
Reported
income from continuing operations
|
$ | 21,426 | $ | 22,388 | $ | 2,752 | ||||||
|
Deduct:
Income tax effect of ANR Fund IX Holdings, L.P. income from continuing
operations prior to Internal Restructuring
|
(91 | ) | (1,149 | ) | (138 | ) | ||||||
|
Income
from continuing operations, as adjusted
|
21,335 | 21,239 | 2,614 | |||||||||
|
Reported
loss from discontinued operations
|
(213 | ) | (2,373 | ) | (490 | ) | ||||||
|
Add:
Income tax effect of ANR Fund IX Holdings, L.P. loss from discontinued
operations prior to Internal Restructuring
|
2 | 149 | 27 | |||||||||
|
Loss
from discontinued operations, as adjusted
|
(211 | ) | (2,224 | ) | (463 | ) | ||||||
|
Net
income, as adjusted
|
$ | 21,124 | $ | 19,015 | $ | 2,151 | ||||||
|
Denominator:
|
||||||||||||
|
Weighted
average shares-- basic
|
55,664,081 | 13,998,911 | 13,998,911 | |||||||||
|
Dilutive
effect of stock options and restricted stock grants
|
385,465 | -- | -- | |||||||||
|
Weighted
average shares-- diluted
|
56,049,546 | 13,998,911 | 13,998,911 | |||||||||
|
Net
income per share, as adjusted-- basic and diluted:
|
||||||||||||
|
Income
from continuing operations, as adjusted
|
$ | 0.38 | $ | 1.52 | $ | 0.19 | ||||||
|
Loss
from discontinued operations, as adjusted
|
-- | (0.16 | ) | (0.04 | ) | |||||||
|
Net
income per share, as adjusted
|
$ | 0.38 | $ | 1.36 | $ | 0.15 | ||||||
| (2 | ) |
Pro
forma net income (loss) per share gives effect to the following
transactions as if each of these transactions had occurred on
January 1, 2004: the Nicewonder Acquisition and related debt
refinancing in October 2005, the Internal Restructuring and initial public
offering in February 2005, the issuance in May 2004 of $175.0 million
principal amount of 10% senior notes due 2012, and the entry into a
$175.0 million revolving credit facility in May
2004.
|
|
| (3 | ) |
EBITDA
is defined as net income (loss) plus interest expense, income tax expense
(benefit), depreciation, depletion and amortization, less interest income.
EBITDA, as adjusted, is EBITDA, further adjusted for minority interest
prior to our internal restructuring. EBITDA and EBITDA, as adjusted, are
non-GAAP measures used by management to measure operating performance, and
management also believes it is a useful indicator 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.
|
EBITDA
and EBITDA, as adjusted, are calculated as follows (unaudited, in
thousands):
|
2007
|
2006
|
2005
|
2004
|
2003
|
|||||||||||
|
Net
income
|
$ | 27,734 | $ | 128,168 | $ | 21,213 | $ | 20,015 | $ | 2,262 | |||||
|
Interest
expense
|
40,215 | 41,774 | 29,937 | 20,041 | 7,848 | ||||||||||
|
Interest
income
|
(2,340 | ) | (839 | ) | (1,064 | ) | (531 | ) | (103 | ) | |||||
|
Income
tax expense (benefit)
|
8,629 | (30,519 | ) | 18,860 | 3,960 | 668 | |||||||||
|
Depreciation,
depletion and amortization
|
159,579 | 140,851 | 73,405 | 56,012 | 36,054 | ||||||||||
|
EBITDA
|
233,817 | 279,435 | 142,351 | 99,497 | 46,729 | ||||||||||
|
Minority
interest
|
-- | -- | 2,846 | 19,830 | 934 | ||||||||||
|
EBITDA,
as adjusted
|
$ | 233,817 | $ | 279,435 | $ | 145,197 | $ | 119,327 | $ | 47,663 | |||||
You
should read the following discussion and analysis in conjunction with our
financial statements and related notes and our “Selected Historical Financial
Data” included elsewhere in this annual report. The historical financial
information discussed below for 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 on a combined basis, which prior to
the completion of our Internal Restructuring were the owners of a majority of
the membership interests of ANR Holdings, our top-tier holding company, and for
Alpha Natural Resources, Inc. and subsidiaries on a consolidated basis for
periods from and after the completion of our Internal
Restructuring.
Overview
We
produce, process and sell steam and metallurgical (met) coal from eight regional
business units, which, as of December 31, 2007, are supported by 32 active
underground mines, 26 active surface mines and 11 preparation plants located
throughout Virginia, West Virginia, Kentucky, and Pennsylvania, as well as a
road construction business in West Virginia and Virginia that recovers coal. We
also sell coal produced by others, 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.
Our sales of steam coal in 2007 and 2006 accounted for approximately 62% and
66%, respectively, of our annual coal sales volume, and our sales of
metallurgical coal in 2007 and 2006, which generally sells at a premium over
steam coal, accounted for approximately 38% and 34%, respectively, of our annual
coal sales volume. Our sales of steam coal during 2007 and 2006 were made
primarily to large utilities and industrial customers in the Eastern region of
the United States, and our sales of met coal during those years 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 38% of our sales revenue in 2007 and 35% of our sales revenue in
2006 was derived from sales made outside the United States, primarily in Canada,
Egypt, Belgium, Italy, Hungary and Brazil.
In
addition, we generate other revenues from equipment and parts sales, equipment
repair, road construction, 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.
Our
primary expenses are for 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, coal handling and processing operations and coal recovery
incidental to our road 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 and processing operations, which we report in our
other revenues and cost of other revenues, respectively.
Internal Restructuring and Our
Initial Public Offering. On February 11, 2005, we completed a series
of transactions in connection with the Internal Restructuring for the purpose of
transitioning our top-tier holding company from a limited liability company to a
corporation, and on February 18, 2005, we completed the initial public
offering of our common stock. Further information regarding our Internal
Restructuring and our initial public offering can be found in Note 2 to our
consolidated financial statements included in this annual report. As a result of
our initial public offering and our Internal Restructuring, we have incurred
during the period after the initial public offering and Internal Restructuring
and will continue to incur additional expenses that we did not incur in prior
periods, including expenses associated with compliance with corporate governance
and periodic financial reporting requirements for public companies. Moreover,
all of our income is now subject to income tax and therefore the effective tax
rates reflected in our financial statements for periods prior to the Internal
Restructuring are not indicative of our effective tax rates after our Internal
Restructuring.
As part
of our Internal Restructuring, our executive officers and certain other key
employees exchanged their interests in ANR Holdings for shares of our common
stock and the right to participate in a distribution of the proceeds we received
from the underwriters as a result of the underwriters' exercise of their
over-allotment option in connection with the initial public offering. As a
result, we recorded stock-based compensation expense equal to the fair value of
the unrestricted shares issued and distributions paid in the amount of
$45.8 million for the year ended December 31, 2005. In addition, as a
result of the conversion of outstanding options held by members of our
management to purchase units of Alpha Coal Management (“ACM”) into the ACM
Converted Options, we recorded stock-based compensation of $0.7 million in
2005. The aggregate amount of stock-based compensation expense we recorded in
2005 was $46.5 million, equal to the $45.8 million of expense
associated with distributions paid and the vested portions of shares issued in
the Internal Restructuring and amortization expense from the unvested portions
of shares issued in the Internal Restructuring, and $0.7 million of
amortization expense from the ACM Converted Options. In addition, we had
deferred stock-based compensation of $15.6 million, including
$12.8 million and $2.6 million related to our Internal Restructuring
and the ACM Converted Options, respectively, that we will record as non-cash
stock-based compensation expense over the remaining term of the applicable
two-year and five-year vesting periods, respectively, thereby reducing our
earnings in those periods.
In
connection with our Internal Restructuring, we assumed the obligation of ANR
Holdings to make distributions to (1) affiliates of AMCI in an aggregate
amount of $6.0 million, representing the approximate incremental tax
resulting from the recognition of additional tax liability resulting from our
Internal Restructuring, and (2) First Reserve Fund IX, L.P. in an
aggregate amount of approximately $4.5 million, representing the
approximate value of tax attributes conveyed as a result of the Internal
Restructuring (collectively, the “Tax Distributions”). The Tax Distributions to
affiliates of AMCI were paid in cash in five equal installments of $1.2 million
on April 15, 2005, June 15, 2005, September 15, 2005,
January 13, 2006 and April 17, 2006. The Tax Distributions to First Reserve
Fund IX, L.P. are in three installments of approximately $2.1 million, $2.1
million, and $0.3 million on December 15, 2007, 2008 and 2009,
respectively. The 2007 installment was paid in cash. We will pay the
remaining two installments in cash or, to the extent our subsidiaries are not
permitted by the terms of our credit facility or the indenture governing our
senior notes to distribute cash to us to pay the Tax Distributions, in shares of
our common stock.
NKC Disposition. On
April 14, 2005, we sold the assets of NKC to an unrelated third party for
cash in the amount of $4.4 million, plus an amount in cash equal to the
fair market value of NKC's coal inventory, and the assumption by the buyer of
certain liabilities of NKC. For the six months ended June 30, 2005, NKC
contributed revenues of $4.5 million, an after-tax and minority interest
loss of $0.2 million on sales of 0.1 million tons of steam coal sold.
In connection with the closing of the transaction, National King Coal, LLC was
renamed NatCoal LLC, and Gallup Transportation and Transloading Company, LLC was
renamed GTTC LLC. We recorded a gain on this sale in 2005 of $0.7 million
and have reported NKC as discontinued operations for all periods presented
herein.
Nicewonder Acquisition and 2005
Financing. On October 26, 2005, we completed the acquisition of
certain privately held coal reserves and operations of the Nicewonder Coal Group
in southern West Virginia and southwestern Virginia for an aggregate purchase
price of $328.2 million, consisting of cash at closing in the amount of
$35.2 million, a cash payment of $1.9 million made to the sellers
in April 2006, transaction costs of $4.7 million, $221.0 million
principal amount of promissory installment notes of one of our indirect, wholly
owned subsidiaries (of which $181.1 million was paid on November 2,
2005 and $40.0 million was paid on January 13, 2006), a payment on
February 6, 2006 in the amount of $12.3 million for working capital,
and 2,180,233 shares of our common stock valued at approximately
$53.2 million for accounting purposes. For this purpose, the value of the
common stock issued was based on the average closing prices of our common stock
for the five trading days surrounding October 20, 2005, the date the number
of shares to be issued under the terms of the acquisition agreement became fixed
without subsequent revision. In connection with the Nicewonder Acquisition, we
also agreed to make royalty payments to the former owners of the acquired
companies in the amount of $0.10 per ton of coal mined and sold from White
Flame Energy's Surface Mine No. 10. The Nicewonder Acquisition consisted of
the purchase of the outstanding capital stock of White Flame Energy, Inc., Twin
Star Mining, Inc. and Nicewonder Contracting, Inc., the equity interests of
Powers Shop, LLC and Buchanan Energy, LLC and substantially all of the assets of
Mate Creek Energy of W. Va., Inc. and Virginia Energy Company, and the business
of Premium Energy, Inc. by merger.
Also on
October 26, 2005, in connection with our acquisition of the Nicewonder Coal
Group, Alpha NR Holdings, Inc. (“Holdings”), as a guarantor, and Alpha Natural
Resources, LLC (“ANR LLC”), as the borrower, entered into a new $525 million
senior secured credit facility (the “Credit Facility”) with the lenders party
thereto and Citicorp North America, Inc., as administrative and collateral
agent. The Credit Facility includes a $250.0 million term loan
facility and a $275.0 million revolving credit facility. On June 28,
2007, the Credit Facility was amended to, among other things, permit the merger
of Holdings with and into Alpha Natural Resources, Inc. In connection
with the merger, Alpha Natural Resources, Inc. assumed all of Holdings’
obligations as a parent guarantor of ANR LLC’s obligations under the Credit
Facility and the Senior Notes. We used the net proceeds of the term loan
facility and a portion of the proceeds from drawings under the revolving credit
facility to finance the Nicewonder Acquisition and to refinance our
$175.0 million prior credit facility.
Progress Acquisition. On May
1, 2006, we completed the acquisition of certain coal mining operations in
eastern Kentucky from Progress Fuels Corp, a subsidiary of Progress Energy, for
$28.8 million, including an adjustment for working capital. The Progress
acquisition consisted of the purchase of the outstanding capital stock of
Diamond May Coal Co. and Progress Land Corp. and the assets of Kentucky May Coal
Co., Inc. The operations acquired are adjacent to Alpha's Enterprise business
unit and have been integrated into Enterprise.
Gallatin Materials LLC. On December 28, 2006, our subsidiary, Palladian Lime,
LLC (“Palladian”) acquired a 94% ownership interest in Gallatin Materials LLC
(“Gallatin”), a start-up lime manufacturing business in Verona, Kentucky by
assuming liabilities in the amount of $3.6 million consisting of a note
payable in the amount of $1.8 million and accounts payable and accrued
expenses in the amount of $1.7 million. The liabilities assumed were allocated
to fair value of assets acquired consisting mainly of intangible
assets. In addition, Palladin agreed to and made (i) cash
capital contributions of $10.3 million, of which $3.3 million was funded as of
December 31, 2006, (ii) a committed subordinated debt facility of up to
$8.8 million provided to Gallatin by Palladian, of which $3.8 million was funded
as of December 31, 2007 and (iii) a letter of credit procured for Gallatin’s
benefit under our current senior credit facility in the amount of $2.6 million
to cover project cost overruns. The first of two planned rotary pre-heater lime
kilns is expected to be in production in the first quarter 2008 and will produce
lime to be sold primarily to coal-burning utilities as a scrubbing agent for
removing sulfur dioxide from flue gas, helping them to meet increasingly
stringent air quality standards under the federal Clean Air Act. The lime will
also be sold to steel producers for use as flux in electric arc and basic oxygen
furnaces. The minority owners were granted restricted member interests in
Gallatin, which vest based on performance criteria approximately three years
from the closing date and which, if earned in their entirety, would reduce our
ownership to 77.5%. Approximately $22.3 million was spent on capital
expenditures by Gallatin during 2007. As of December 31, 2007,
Gallatin borrowed $18.5 million for project
financing.
Mingo Logan
Acquisition. On June 29, 2007, we completed the acquisition of
certain coal mining assets in western West Virginia from Arch Coal, Inc. known
as Mingo Logan for $43.9 million. The Mingo Logan purchase
consists of coal reserves, one active deep mine and a load-out and processing
plant, which is managed by our Callaway business unit.
Coal Pricing
Trends, Uncertainties and
Outlook
Conditions
in the thermal and the metallurgical coal markets, both in North America and
worldwide, are solidly in favor of coal producers.
Thermal
coal exports from the U.S. are expected to increase again in 2008 in the wake of
continued weakness in the U.S. dollar and disruptions in operations and shipping
in a number of countries that compete in the world coal markets. Worldwide, we
believe thermal coal stockpiles generally are at multi-year lows, especially in
major coal consuming nations such as China and India. We believe that although
utility coal stockpile levels in the U.S. are at levels above historical norms,
some Eastern utilities are struggling with extremely low levels of supply. The
result has been an increasing number of requests for spot
shipments.
As of
December 31, 2007, we had committed 98% of planned thermal coal production for
2008 while leaving approximately 66% of planned production uncommitted for 2009
and 91% for 2010. We are in active discussions with a number of U.S. utilities
for supply in 2009 and beyond.
With
steel prices rising at the end of 2007, and the domestic steel industry
expecting a strong rebound this year after a dramatic draw down of service
center inventories, demand for metallurgical coal has remained very strong.
Supply meanwhile has been constrained by flooding in the world’s most productive
metallurgical coal-producing region in Australia and by logistics constraints
there, as well as production difficulties experienced by other significant North
American producers.
At the
end of 2007, we had approximately one million tons of planned metallurgical
production remaining to be contracted for 2008, mostly in the export market.
Uncommittted and unpriced production for 2009 stands at approximately 8.5
million tons and 8.1 million tons for 2010. Metallurgical sales are expected to
account for 37-39 percent of expected 2008 sales volumes, similar to
2007. Due to the fact that pricing resets at the end of the first
quarter of every year for the majority of our contracted metallurgical business,
the company expects to achieve a proportionally higher level of revenues in the
second through fourth quarters than in the first quarter as the higher-priced
export contracts phase in.
While our
outlook on coal pricing remains positive, future coal prices are subject to
factors beyond our control and we cannot predict whether and for how long this
current coal pricing environment will continue. As of December 31, 2007, 95% of
our planned 2008 production was committed and priced and less than 1% was
committed and unpriced, with approximately 1.2 million tons uncommitted.
Committed steam coal prices for 2008 average $48.64 per ton and met coal prices
average $81.27 per ton. Approximately 27% of our planned production in 2009 is
committed.
At
December 31, 2007, we had unrealized gains (losses) on open purchase and sale
contracts that meet the definition of a derivative under SFAS 133 in the amount
of $11.3 million and ($2.1 million), respectively. These assets and liabilities
are recorded in prepaid expenses and other current assets and accrued expenses
and other current liabilities, respectively, on our balance sheet, with periodic
changes in fair value recorded to the income statement. Since the
Company intends to take delivery or provide delivery of coal under
these contracts, the unrealized gains and losses recorded as of December
31, 2007 will reverse into the income statement in future periods. The
reversal of unrealized gains related to purchase coal contracts will result in
higher costs of sales in future periods when we ultimately take delivery of the
coal under these contracts and sell it to our customers. The reversal of
the unrealized losses related to sales contracts will result in higher coal
revenues in future periods when we satisfy our commitments under these
contracts. Due to market price fluctuations, we could experience
significant earnings volatility related to coal contracts classified as
derivatives.
For
additional information regarding some of the risks and uncertainties that affect
our business, see Item 1A “Risks Factors.”
Year
Ended December 31, 2007 Compared to Year Ended December 31,
2006
Summary
For the
year ended December 31, 2007, we recorded revenues of $1,877.6 million
compared to $1,910.7 million for the year ended December 31, 2006, a
decrease of $33.1 million. Net income decreased from $128.2 million in
2006 to $27.7 million in 2007 and operating income decreased
$63.9 million to $74.2 million. Included in our 2007
results were a $1.4 million credit ($1.1 million net of tax) related to an
insurance settlement for damages caused by Hurricane Katrina, an unrealized gain
related to changes in mark-to-market valuations of $8.9 million ($6.8 million
net of tax) for certain forward purchase and forward sales contracts which are
considered to be derivatives and are recorded at fair value, a write-off of
development costs at an underground mine that was abandoned of $2.1 million
($1.6 million net of tax), and a charge of $1.2 million ($0.9 million net of
tax) related to a loss in equity earnings from our Venezuelan
investment. Included in our 2006 results was a tax benefit from the
reversal of a portion of our valuation allowance for deferred tax assets in the
amount of $55.6 million, after-tax stock-based compensation charges of
$12.8 million related to our IPO, as well as $5.2 million after-tax charge
for the buyout of a multi-year legacy coal supply agreement. Tons
sold decreased from 29.1 million tons in 2006 to 28.5 million tons in
2007 mainly due to a decrease in steam tons sold. Coal margin, which we define
as coal revenues less cost of coal sales, divided by coal revenues, decreased
from 19.9% in 2006 to 17.4% in 2007.
Revenues
|
Year
Ended December 31,
|
Increase
(Decrease)
|
||||||||||
|
2007
|
2006
|
$
or Tons
|
%
|
||||||||
|
(In
thousands, except per ton data)
|
|||||||||||
|
Coal
revenues
|
$ | 1,639,247 | $ | 1,687,553 | $ | (48,306 | ) | (2.9 | ) % | ||
|
Freight
and handling revenues
|
205,086 | 188,366 | 16,720 | 8.9 | % | ||||||
|
Other
revenues
|
33,241 | 34,743 | (1,502 | ) | (4.3 | ) % | |||||
|
Total
revenues
|
$ | 1,877,574 | $ | 1,910,662 | $ | (33,088 | ) | (1.7 | ) % | ||
|
Tons
sold
|
28,545 | 29,079 | (534 | ) | (1.8 | ) % | |||||
|
Coal
sales realization per ton sold
|
$ | 57.43 | $ | 58.03 | $ | (0.60 | ) | (1.0 | ) % | ||
Coal Revenues. Coal
revenues decreased for the year ended December 31, 2007 by
$48.3 million or 2.9%, to $1,639.2 million, as compared to the year
ended December 31, 2006. This decrease was due primarily to a
$0.60 per ton decrease in the average sales price of our coal and a
decrease of 0.5 million tons sold over the comparable period last year.
Tons sold decreased from 29.1 million tons in 2006 to 28.5 million
tons in 2007 mainly due to a decrease in steam tons sold. The mark-to-market
adjustments for certain forward sales contracts which are considered derivatives
under SFAS 133 and are recorded at fair value decreased revenues by $8.3
million, or $0.29 per ton. We have unrealized losses of $2.1 million recorded as
of December 31, 2007 on our statement of financial position related to forward
contracts for the sale of coal on the OTC market which are considered
derivatives under SFAS 133. Since we intend to satisfy our commitments under
these derivative contracts by providing delivery of the coal that is the subject
of the derivative, the unrealized losses recorded as of December 31, 2007 will
reverse into the income statement in future periods resulting in higher
coal revenues in those future periods. Met coal revenues per ton decreased by
$3.02 to $72.07 per ton and steam coal revenues per ton decreased by $0.77
to an average of $48.28 per ton. Our sales mix of met coal and steam coal
based on volume in 2007 was 38% and 62%, respectively, compared with 34% and
66%, respectively, in 2006.
Freight and Handling
Revenues. Freight and handling revenues increased to $205.1 million
for the year ended December 31, 2007, an increase of $16.7 million
compared to the year ended December 31, 2006 due to an increase in freight
costs, arising primarily from vessel freight and fuel surcharges. These revenues
are offset by equivalent costs and do not contribute to our
profitability.
Other Revenues. Other
revenues decreased for the year ended December 31, 2007 by
$1.5 million, or 4.3%, to $33.2 million, as compared to the same
period for 2006. Revenues from our road construction operations were $20.4
million, a $3.6 million decrease mainly due to the completion of a portion
of the King Coal Highway in West Virginia in 2006, partially offset by increased
revenue in our ongoing road construction projects. Maxxim Rebuild revenues
also decreased $1.1 million due to reduced third-party selling
activity. These decreases were partially offset by an increase
in coal processing and terminal operations of $2.8 million. Other
revenues attributable to our Coal Operations segment for the years ended
December 31, 2007 and 2006 were $4.6 million and $2.7 million,
respectively.
Costs
and Expenses
|
Year
Ended December 31,
|
Increase
(Decrease)
|
||||||||||
|
2007
|
2006
|
$
|
%
|
||||||||
|
(In
thousands, except per ton data)
|
|||||||||||
|
Cost
of coal sales (exclusive of items shown separately below)
|
$ | 1,354,335 | $ | 1,352,450 | $ | 1,885 | 0.1 | % | |||
|
Freight
and handling costs
|
205,086 | 188,366 | 16,720 | 8.9 | % | ||||||
|
Cost
of other revenues
|
25,817 | 22,982 | 2,835 | 12.3 | % | ||||||
|
Depreciation,
depletion and amortization
|
159,579 | 140,851 | 18,728 | 13.3 | % | ||||||
|
Selling,
general and administrative expenses (exclusive of depreciation and
amortization shown separately above)
|
58,605 | 67,952 | (9,347 | ) | (13.8 | )% | |||||
|
Total
costs and expenses
|
$ | 1,803,422 | $ | 1,772,601 | $ | 30,821 | 1.7 | % | |||
|
Cost
of coal sales per ton sold
|
$ | 47.45 | $ | 46.51 | $ | 0.94 | 2.0 | % | |||
Cost of Coal Sales. For the
year ended December 31, 2007, our cost of coal sales, which excludes
charges for depreciation, depletion and amortization, increased by
$1.9 million to $1,354.3 million compared to the year ended
December 31, 2006. The mark-to-market adjustments on certain forward
purchase contracts which are considered derivatives and are recorded at fair
value decreased cost of coal sales by $17.2 million or $0.60 per ton. We have
unrealized gains of $11.3 million recorded as of December 31, 2007 on our
statement of financial position related to forward contracts for the purchase of
coal which are considered derivatives under SFAS 133. Since we intend to take
delivery of the coal that is the subject of the derivative and sell the coal to
our customers, the unrealized gains recorded as of December 31, 2007 will
reverse into the income statement in future periods resulting in higher
cost of sales in those future periods. Our cost of coal sales
increased as a result of increased prices for labor, diesel fuel and other mine
supplies, and the performance and cost of contract mining services. In addition,
our costs were impacted due to lower productivity in 2007 when compared to 2006
mainly due to an increase in our average surface mine overburden ratio and a
decrease in clean tons per foot in our deep mines. The average cost per ton sold
increased 2.0% from $46.51 per ton in 2006 to $47.45 per ton in 2007.
Our cost of coal sales as a percentage of coal revenues increased from 80.1% in
2006 to 82.6% in 2007. For the years ended December 31, 2007 and 2006 our
average cost per ton for our produced and processed coal sales was $47.59 and
$44.33, respectively. Our average cost per ton for coal that we purchased from
third parties and resold without processing was $46.58 and $58.76, respectively.
The decrease in the cost per ton purchased is primarily due to a favorable
mark-to-market adjustment in 2007 of $17.2 million related to certain forward
purchase contracts which are considered to be derivatives and are recorded at
fair value.
Freight and Handling Costs.
Freight and handling costs increased
$16.7 million to $205.1 million during 2007 as compared to 2006 due to
an increase in freight costs, arising primarily from vessel freight and fuel
surcharges. These costs were offset by an equivalent amount of freight and
handling revenue.
Cost of Other Revenues. Cost of other revenues increased $2.8 million, or
12.3%, to $25.8 million for the year ended December 31, 2007 as
compared to the prior year due to a $3.1 million increase in costs associated
with our new Gallatin Lime operations and higher coal processing and terminal
operation volumes in the amount of $2.2 million. These were
partially offset by a decrease in Maxxim Rebuild's outside sales activity of
$1.7 million and a $0.8 million decrease in costs associated with our road
construction operations. This decrease in cost for road construction
is due to the completion of a portion of the King Coal Highway in West Virginia,
partially offset by increased activity for ongoing construction
projects.
Depreciation, Depletion and
Amortization. Depreciation, depletion, and amortization increased
$18.7 million, or 13.3%, to $159.6 million for the year ended
December 31, 2007 as compared to the same period of 2006. Depreciation,
depletion and amortization attributable to our Coal Operations segment were
$152.3 million in 2007 and $131.9 million in 2006. Depreciation, depletion
and amortization per ton sold for our produced and processed coal increased from
$5.34 per ton for the year ended December 31, 2006 to $6.24 per
ton in the same period of 2007 mainly due to our acquisitions, increase in
depletion due to a change in estimated recoverable coal reserves at one of our
mines, and an increase due to capital additions.
Selling, General and Administrative Expenses.
Selling, general and administrative expenses (SG&A) decreased
$9.3 million, or 13.8%, to $58.6 million for the year ended
December 31, 2007 compared to the same period in 2006 is primarily due
to a decrease in stock-based compensation charges of $12.8 million in 2006
related to our IPO. These charges ended at December 31, 2006. This decrease was
partially offset by an increase in legal and professional fees of $1.9 million
and increases in wages and benefits in the amount of $1.5 million driven by an
increase in wages and benefits and the additional expense related to our key
employee retention plan. Our SG&A expenses as a percentage of
total revenues decreased from 3.6% in 2006 to 3.1% in 2007.
Interest Expense
Interest
expense decreased $1.6 million to $40.2 million due to a decrease in our
average amount of debt outstanding in 2007.
Interest
Income
Interest
income increased $1.5 million to $2.3 million. The increase is due to
our average cash balance increase.
Income
Tax Expense (Benefit)
Income
tax expense for the year ended December 31, 2007 was $8.6 million as
compared to income tax benefit of $30.5 million for the year ended
December 31, 2006. Our effective tax rates for the year ended
December 31, 2007 and 2006 were 23.8% and (31.3%), respectively. The
effective tax rate for 2007 was lower than the statutory federal tax rate due
primarily to the tax benefits associated with percentage depletion, partially
offset by state income taxes, change in the valuation allowance, and share-based
compensation charges which are not deductible for tax purposes.
The
effective tax rate for 2006 was lower than the statutory federal tax rate due
primarily to the reversal of a portion of the valuation allowance for deferred
tax assets, the additional tax benefits associated with percentage depletion,
and the extraterritorial income exclusion - partially offset by non-deductible
stock-based compensation charges associated with the IPO and state income
taxes.
Since our
formation and through the third quarter of 2006, for purposes of evaluating the
need for a valuation allowance on deferred tax assets, we did not weigh
significantly our forecast of future taxable income (subjective evidence) as we
had not yet established an adequate earnings history (defined by us as at least
three years) to provide objective evidence of the ability to generate future
income. Accordingly, we had recorded a valuation allowance against a substantial
portion of our deferred tax asset. As of December 31, 2006, we had a three-year
history of cumulative earnings. As a result, we believe we were able to
place a higher degree of reliance on our projections of future taxable income.
Based on the results of a comprehensive analysis completed in the fourth quarter
of 2006, we concluded that it was more likely than not that a portion of the
deferred tax asset previously reserved through a valuation allowance will be
realized. As a result, we recorded a tax benefit in the fourth quarter 2006 of
$55.6 million. Excluding
this reversal of the valuation allowance, the effective tax rate would have been
approximately 25.7% for 2006.
Year
Ended December 31, 2006 Compared to Year Ended December 31,
2005
Summary
For the
year ended December 31, 2006, we recorded revenues of $1,910.7 million
compared to $1,626.7 million for the year ended December 31, 2005, an
increase of $284.0 million. Net income increased from $21.2 million in
2005 to $128.2 million in 2006 and operating income increased
$66.0 million to $138.1 million. Included in our 2006 results was a
tax benefit from the reversal of a portion of our valuation allowance for
deferred tax assets in the amount of $55.6 million, after-tax stock-based
compensation charges of $12.8 million related to our IPO, as well as $5.2
million after-tax charge for the buyout of a multi-year legacy coal supply
agreement. Our results for 2005 were unfavorably impacted by an after-tax charge
of $46.5 million for stock based compensation also related to our IPO. Tons sold
increased from 26.7 million tons in 2005 to 29.1 million tons in 2006
mainly due to the impact of the Nicewonder and Progress acquisitions,
representing 5.3 million tons, partially offset by a reduction of 1.7 million
tons of purchased coal sold. Coal margin, which we define as coal revenues less
cost of coal sales, divided by coal revenues, increased from 16.2% in 2005 to
19.9% in 2006.
Revenues
|
Year
Ended December 31,
|
Increase
(Decrease)
|
||||||||||
|
2006
|
2005
|
$
or Tons
|
%
|
||||||||
|
(In
thousands, except per ton data)
|
|||||||||||
|
Coal
revenues
|
$ | 1,687,553 | $ | 1,413,174 | $ | 274,379 | 19.4 | % | |||
|
Freight
and handling revenues
|
188,366 | 185,555 | 2,811 | 1.5 | % | ||||||
|
Other
revenues
|
34,743 | 27,926 | 6,817 | 24.4 | % | ||||||
|
Total
revenues
|
$ | 1,910,662 | $ | 1,626,655 | $ | 284,007 | 17.5 | % | |||
|
Tons
sold
|
29,079 | 26,698 | 2,381 | 8.9 | % | ||||||
|
Coal
sales realization per ton sold
|
$ | 58.03 | $ | 52.93 | $ | 5.10 | 9.6 | % | |||
Coal Revenues. Coal revenues
increased for the year ended December 31, 2006 by $274.4 million or
19.4%, to $1,687.6 million, as compared to the year ended December 31,
2005. This increase was due primarily to a $5.10 per ton increase in the
average sales price of our coal and the sale of 2.4 million additional tons
over the comparable period in 2005. Tons sold increased from 26.7 million
tons in 2005 to 29.1 million tons in 2006 mainly due to the addition of the
Nicewonder and Progress acquisitions, representing 5.3 million tons, partially
offset by a reduction of 1.7 million tons of purchased coal sold. The
mark-to-market adjustment for certain forward sales contracts which are
considered derivatives and are recorded at fair value increased revenues by $6.1
million or $0.21 per ton. The increase in the average sales price of our coal
was due to the general increase in coal prices during the period. Met coal
revenue per ton increased by $2.85 to $75.09 per ton and steam coal revenue
per ton increased by $7.72 to an average of $49.05 per ton including the
effects of the $7.0 million payment to terminate a multi-year coal contract,
which was recorded as a reduction in steam coal revenues. Our sales mix of met
coal and steam coal based on volume in 2006 was 34% and 66%, respectively,
compared with 38% and 62%, respectively, in 2005.
Freight and Handling
Revenues. Freight and handling revenues increased to $188.4 million
for the year ended December 31, 2006, an increase of $2.8 million
compared to the year ended December 31, 2005 due to an increase in freight
costs, arising primarily from fuel surcharges. These revenues are offset by
equivalent costs and do not contribute to our profitability.
Other Revenues. Other
revenues increased for the year ended December 31, 2006 by
$6.8 million, or 24.4%, to $34.7 million, as compared to the same
period for 2005. Revenues from our road construction operations were $24.0
million, a $20.2 million increase mainly due to a full year of operations
in 2006. This increase was mostly offset by a decrease in revenues from outside
sales by Maxxim Rebuild of $7.1 million, a decrease in fees from coal processing
and handling operations of $7.6 million, net of an increase in rents, royalties
and other in the amount of $1.3 million. Other revenues attributable to our Coal
Operations segment were $2.7 million in 2006 and $10.1 million in
2005.
Costs
and Expenses
|
Year
Ended December 31,
|
Increase
(Decrease)
|
||||||||||
|
2006
|
2005
|
$
|
%
|
||||||||
|
(In
thousands, except per ton data)
|
|||||||||||
|
Cost
of coal sales (exclusive of items shown separately below)
|
$ | 1,352,450 | $ | 1,184,092 | $ | 168,358 | 14.2 | % | |||
|
Freight
and handling costs
|
188,366 | 185,555 | 2,811 | 1.5 | % | ||||||
|
Cost
of other revenues
|
22,982 | 23,675 | (693 | ) | (2.9 | )% | |||||
|
Depreciation,
depletion and amortization
|
140,851 | 73,122 | 67,729 | 92.6 | % | ||||||
|
Selling,
general and administrative expenses (exclusive of depreciation and
amortization shown separately above)
|
67,952 | 88,132 | (20,180 | ) | (22.9 | )% | |||||
|
Total
costs and expenses
|
$ | 1,772,601 | $ | 1,554,576 | $ | 218,025 | 14.0 | % | |||
|
Cost
of coal sales per ton sold
|
$ | 46.51 | $ | 44.35 | $ | 2.16 | 4.9 | % | |||
Cost of Coal Sales. For the
year ended December 31, 2006, our cost of coal sales, which excludes
charges for depreciation, depletion and amortization, increased
$168.4 million, or 14.2%, to $1,352.5 million compared to the year
ended December 31, 2005. The mark-to-market adjustment on certain forward
purchase contracts which are considered derivatives and are recorded at fair
value increased cost of coal sales by $5.7 million or $0.20 per
ton. Approximately $208.2 million of the year ended December 31, 2006
increase in costs were associated with our Nicewonder and Progress acquisitions,
partially offset by a reduction in spending for purchased coal of $100.0
million. In addition, our cost of coal sales increased as a result of increased
prices for labor, diesel fuel and other mine supplies, the performance and cost
of contract mining services, and increased variable sales-related costs, such as
royalties and severance taxes. The average cost per ton sold increased 4.9% from
$44.35 per ton in 2005 to $46.51 per ton in 2006. Our cost of coal
sales as a percentage of coal revenues decreased from 83.8% in 2005 to 80.1% in
2006. For the years ended December 31, 2006 and 2005 our average cost per
ton for our produced and processed coal sales was $44.33 and $40.07,
respectively, and our average cost per ton for coal that we purchased from third
parties and resold without processing was $58.76 and $58.88,
respectively.
Freight and Handling Costs.
Freight and handling costs increased $2.8 million to $188.4 million
during 2006 as compared to 2005 due to an increase in freight costs, arising
primarily from fuel surcharges. These costs were offset by an equivalent amount
of freight and handling revenue.
Cost of Other Revenues. Cost
of other revenues decreased $0.7 million, or 2.9%, to $23.0 million
for the year ended December 31, 2006 as compared to the prior year due to a
decrease in costs associated with lower coal processing and handling volumes in
the amount of $7.3 million, a decrease in Maxxim Rebuild's outside sales
activity of $7.0 million mostly offset by a $13.9 million increase in costs
associated with our road construction operations primarily driven by a full year
of road construction activity in 2006.
Depreciation, Depletion and
Amortization. Depreciation, depletion, and amortization increased
$67.7 million, or 92.6%, to $140.9 million for the year ended
December 31, 2006 as compared to the same period of 2005 due to capital
additions resulting in additional depreciation and due to the impact of the
Nicewonder and Progress acquisitions. Depreciation, depletion and amortization
attributable to our Coal Operations segment were $131.9 million in 2006 and
$70.6 million 2005. Depreciation, depletion and amortization per ton sold
for our produced and processed coal increased from $3.44 per ton for the
year ended December 31, 2005 to $5.34 per ton in the same period of
2006 mainly due to our acquisitions.
Selling, General and Administrative
Expenses. Selling, general and administrative expenses (SG&A)
decreased $20.2 million, or 22.9%, to $68.0 million for the year ended
December 31, 2006 compared to the same period in 2005 primarily due to a
decrease in stock-based compensation charges. Stock-based compensation charges
included in SG&A totaled $18.2 million and $46.5 million in 2006 and 2005,
respectively. Stock-based compensation charges in the amount of $12.8 and $46.5
million in 2006 and 2005, respectively, are related to our IPO. These charges
ended at December 31, 2006. This decrease was mostly offset by an increase in
wages and benefits in the amount of $5.3 million driven by a 7.5% increase in
administrative personnel and the additional expense related to our key employee
retention plan and an increase in professional fees ($1.1 million) related to
being a public company. Our SG&A expenses as a percentage of total revenues
decreased from 5.4% in 2005 to 3.6% in 2006.
Interest
Expense
Interest
expense increased $11.8 million to $41.8 million due to an increase in our
average amount of debt outstanding in 2006 related to Nicewonder Acquisition and
a general increase in interest rates.
Interest
Income
Interest
income decreased $0.2 million to $0.8 million. This decrease is due to
the reduction in the average amount outstanding on an interest bearing note
receivable from a coal supplier mostly offset by additional interest earned on
invested cash.
Income
Tax Expense (Benefit)
Income
tax expense from continuing operations decreased $49.5 million to a benefit
of $30.5 million for the year ended December 31, 2006 as compared to
the year ended December 31, 2005. Our effective tax rates for the year
ended December 31, 2006 and 2005 were (31.3%) and 43.8%,
respectively.
The
effective tax rate for 2006 was lower than the statutory federal tax rate due
primarily to the reversal of a portion of the valuation allowance for deferred
tax assets, the additional tax benefits associated with percentage depletion,
and the extraterritorial income exclusion - partially offset by non-deductible
stock-based compensation charges associated with the IPO and state income
taxes.
Since our
formation and through the third quarter of 2006, we did not weigh significantly
our forecast of future taxable income (subjective evidence) as we had not yet
established an adequate earnings history (defined by us as at least three years)
to provide objective evidence of the ability to generate future income.
Accordingly, we had recorded a valuation allowance against a substantial portion
of our deferred tax asset. As of December 31, 2006, we had a three-year history
of cumulative earnings. As a result, we believe we were able to place a higher
degree of reliance on our projections of future taxable income. Based on the
results of a comprehensive analysis completed in the fourth quarter of 2006, we
concluded that it was more likely than not that a portion of the deferred tax
asset previously reserved through a valuation allowance will be realized. As a
result, we recorded a tax benefit in the fourth quarter 2006 of $55.6
million. Excluding this reversal of the valuation allowance, the effective
tax rate would have been approximately 25.7% for 2006.
The
effective tax rate for 2005 is higher than the statutory federal tax rate due
primarily to 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 that is not deductible for tax
purposes. To a much lesser extent, state income taxes increased the effective
tax rate above the statutory rate. The increase in expected income tax expense
related to the stock-based compensation charge and state income taxes is offset
in part by the tax benefits associated with percentage depletion, the
extraterritorial income exclusion, a reduction in valuation allowance of
$6.1 million, and the effect of not providing taxes on the minority
interest and pass-through entity prior to the Internal
Restructuring.
Liquidity and Capital
Resources
Our
primary liquidity and capital resource requirements are to finance the cost of
our coal production and purchases, make capital expenditures, pay income taxes,
and service our debt and reclamation obligations. Our primary sources of
liquidity are cash flow from sales of our produced and purchased coal, other
revenue and borrowings under our Credit Facility.
At
December 31, 2007, our available liquidity was $247.0 million, including
cash and cash equivalents of $54.4 million, of which $7.2 million is
restricted for the use of our Gallatin operations by our non-recourse senior
loan agreement with Nedbank, $192.8 million available under our Credit
Facility, less $0.2 million related to our bank overdraft. Our total
indebtedness was $447.1 million at December 31, 2007, a decrease of $22.4
million from the year ended December 31, 2006 primarily due to paying down
our bank overdraft of $23.6 million and our term loan of $14.4 million,
partially offset by $18.5 million of project financing borrowings by Gallatin.
Our cash capital spending for the year ended December 31, 2007 was
$126.4 million, and we expect to spend from $165.0 million to $175.0
million in cash capital spending in 2008, including capital expenditures for
Gallatin.
Based on
the terms of our outstanding insurance premium note payable, capital lease
obligations, and indebtedness as of December 31, 2007, projected 2008
payments of principal on capital lease obligations and indebtedness are
$21.5 million in the aggregate, of which $6.5 million, $7.4 million, $6.4
million and $1.2 million are due in each of the four quarters of 2008,
respectively. Based on our projection of cash to be generated from operations in
2008 and projected availability under our revolving line of credit, we believe
that cash from operations and available borrowings will be sufficient to meet
our working capital requirements, anticipated capital expenditures and debt
repayment requirements during each quarter of 2008.
Cash
Flows
Net cash
provided by operating activities in 2007 was $225.7 million, an increase of
$15.6 million from the $210.1 million during 2006. Excluding the
non-cash deferred income tax benefit of $48.7 million in 2006, the
increase in 2007 was due to an increase in non-cash items of $4.0 million and an
increase in cash provided from operating assets and liabilities of $63.3
million, partially offset by a decrease in net income of $100.4
million.
Net cash
used in investing activities was $165.2 million in 2007, an increase of $5.2
million from the $160.0 million in 2006. The increase in 2007 was
primarily due to an increase in acquisition costs, mostly offset by decreases in
capital expenditures and disposals of property, plant and
equipment.
Net cash used
in financing activities was $39.4 million in 2007, a decrease of $17.0 million
from $56.4 million in 2006. The decrease was primarily due to a
decrease in bank overdraft and lower payments on notes payable than
2006.
Net cash
provided by operating activities in 2006 was $210.0 million, an increase of
$60.4 million from the $149.6 million of net cash provided by
operations during 2005. This increase is due to an increase in net income of
$107.0 million and a decrease in non-cash items of $6.3 million, offset in
part by an increase in cash required for operating assets and liabilities in the
amount of $40.3 million due to an increase in our overall business
activity. In 2006, the non-cash items include a deferred income tax
benefit of $48.7 million.
Net cash
used in investing activities was $179.3 million less in 2006 over 2005
mainly due to a decrease in the cash required for acquisitions offset by an
increase in cash used for capital expenditures.
Net cash
provided by financing activities decreased by $278.4 million in 2006 from
2005. In 2005, we completed our previously discussed Internal Restructuring and
initial public offering. The proceeds from the IPO were used to repay
shareholders' notes issued as part of the Internal Restructuring. During 2006,
we made payments on notes payable in the amount of $58.3 million, a net
repayment of $3.4 million of long-term debt and paid $2.4 million in
distributions to former members of ANR Holding, LLC.
Credit
Facility and Long-term Debt
As of
December 31, 2007, our total long-term indebtedness, including capital
lease obligations, consisted of the following (in thousands):
|
December
31, 2007
|
||||
|
Term
loan
|
$
|
233,125
|
||
|
10%
Senior notes due 2012
|
175,000
|
|||
|
Gallatin
loan facility
|
18,500
|
|||
|
Capital
lease obligation
|
705
|
|||
|
Other
|
700
|
|||
|
Total
long-term debt
|
428,030
|
|||
|
Less
current portion
|
2,579
|
|||
|
Long-term
debt, net of current portion
|
$
|
425,451
|
||
The Credit
Facility and the indenture governing the Senior Notes each impose certain
restrictions on ANR LLC and its restricted subsidiaries, including, subject to
certain exceptions, restrictions on their 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;
pay dividends or make distributions, 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 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. The Credit Facility also requires us to satisfy two financial
performance covenants: a minimum interest coverage ratio and a
maximum leverage ratio. In addition, Alpha Natural Resources, Inc. is
a guarantor of ANR LLC’s obligations under the Credit Facility and the Senior
Notes. The Credit Facility prohibits Alpha Natural Resources, Inc.
from engaging in any business or activities other than the following: holding
the equity interests of ANR LLC; paying taxes; preparing reports to governmental
authorities and shareholders; holding director and shareholder meetings;
preparing corporate records and engaging in activities required to maintain its
corporate existence; fulfilling obligations under acquisition and disposition
agreements; and guaranteeing certain obligations of its
subsidiaries.
Borrowings
under the Credit Facility are subject to mandatory prepayment (1) with 100%
of the net cash proceeds received from asset sales or other dispositions of
property by the Company and its subsidiaries (including insurance and other
condemnation proceedings), subject to certain exceptions and reinvestment
provisions, and (2) with 100% of the net cash proceeds received by the
Company and its subsidiaries from the issuance of debt securities or other
incurrence of debt, excluding certain indebtedness. At December 31,
2007, ANR LLC had net assets of $369.9 million and, except for allowable
distributions for the payment of income taxes, administrative expenses and, in
certain circumstances, dividends or repurchases of common stock of the Company,
the net assets of ANR LLC are restricted.
All of our
borrowings under the Credit Facility are at a variable rate, so we are exposed
to the effect of rising interest rates. As of December 31, 2007, we had a $233.1
million term loan outstanding with a variable interest rate based upon the
3-month London Interbank Offered Rate (“LIBOR”) (4.70% at December 31, 2007)
plus the applicable margin (1.75%, at December 31, 2007). To reduce our exposure
to rising interest rates, effective May 22, 2006, we entered 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 based on LIBOR to a fixed interest rate of 5.59%
plus the applicable margin defined in the debt agreement for the remainder of
our term loan. We account for the interest rate swap as a cash flow hedge and
changes in fair value of the swap are recorded to other comprehensive income
(loss). The critical terms of the swap and the underlying debt instrument that
it hedges perfectly match, resulting in no hedge ineffectiveness being
recognized in the income statement during the years ended December 31, 2007 and
2006. The fair value of the swap at December 31, 2007 and 2006 were $15.6
million and $7.2 million, respectively, which was recorded in other liabilities
in the consolidated balance sheet and the offsetting unrealized loss of $11.9
million and $5.4 million, respectively, net of tax benefit, were recorded in
accumulated other comprehensive loss. As interest expense is accrued on the debt
obligation, amounts in accumulated other comprehensive loss related to the
derivative hedging instrument are reclassified into earnings to obtain a net
cost on the debt obligation of 5.59% plus the applicable margin.
Gallatin
entered into a non-recourse senior secured loan facility with Nedbank Limited on
December 28, 2006 (the “Gallatin Loan Facility”) to provide phase one project
financing for the construction of assets in the amount of $23,150 which includes
a $20,550 senior term loan facility and a $2,600 senior standby term loan
facility at an interest rate based upon the 6-month London Interbank Offered
Rate (“LIBOR”) plus an applicable margin of 3.5% at December 31, 2007. The
final maturity date is July 26, 2016.
We are in
compliance with all covenants under the Gallatin Loan Facility. The
financial covenants require that we maintain the following:
|
·
|
Loan
life coverage ratio greater than or equal to 1.30, defined as the ratio of
the present value of future cash flow to aggregate principal amount of all
outstanding loans;
|
|
·
|
Gearing
ratio less than 1.85, defined as the ratio of outstanding net
interest-bearing indebtedness to total borrower equity;
and
|
|
·
|
Debt
service cover ratio greater than 1.20, defined as the ratio of actual cash
flow available for debt service to funded debt
service.
|
As of
December 31, 2007, our financial covenants are 4.62 and 1.31 for the loan life
coverage ratio and the gearing ratio, respectively. Phase one was not
complete, therefore, the debt service cover ratio was not required.
In addition, as of December 31, 2007 Gallatin had borrowed $18,500 under this
loan facility.
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 related businesses, and acquisitions
of, or combinations with, coal mining companies and related businesses. 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.
Analysis
of Material Debt Covenants
We were
in compliance with all covenants under the Credit Facility and the indenture
governing the Senior Notes as of December 31, 2007.
The
financial covenants in the Credit Facility require, among other things, that
we:
|
·
|
Maintain
a maximum leverage ratio, defined as the ratio of consolidated debt less
unrestricted cash and cash equivalents to EBITDA (as defined in the Credit
Facility (“Adjusted EBITDA”)), of not more than 3.75 for the three fiscal
quarter periods ending on June 30, September 30 and December 31, 2007, and
3.50 for the four fiscal quarter periods ending on March 31, 2008 and each
quarter end thereafter; and
|
|
·
|
Maintain
a minimum interest coverage ratio, defined as the ratio of Adjusted EBITDA
to cash interest expense, of at least 2.50 for the four fiscal quarter
periods ending on the last day of any fiscal
quarter.
|
Based
upon Adjusted EBITDA, our leverage ratio and interest coverage ratio (as such
ratios are defined in the Credit Facility) at December 31, 2007 were 1.56
and 6.82, respectively. A breach of the 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 under our Credit Facility would also result in a
default under the indenture for the Senior Notes.
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.
|
Three
Months
Ended
March
31,
2007
|
Three
Months
Ended
June
30,
2007
|
Three
Months
Ended
September
30,
2007
|
Three
Months
Ended
December
31,
2007
|
Twelve
Months
Ended
December
31,
2007
|
|||||||||||
|
(In
thousands)
|
|||||||||||||||
|
Net
income
|
$ | 8,349 | $ | 4,747 | $ | 8,949 | $ | 5,689 | $ | 27,734 | |||||
|
Interest
expense, net
|
9,356 | 9,573 | 9,836 | 9,110 | 37,875 | ||||||||||
|
Income
tax expense
|
2,629 | 1,502 | 2,363 | 2,135 | 8,629 | ||||||||||
|
Depreciation,
depletion, and amortization
|
35,789 | 37,855 | 43,926 | 42,009 | 159,579 | ||||||||||
|
EBITDA
|
56,123 | 53,677 | 65,074 | 58,943 | 233,817 | ||||||||||
|
Unrestricted
subsidiary
|
773 | 628 | 758 | 1,031 | 3,190 | ||||||||||
|
Fair
value of derivative instruments
|
(449 | ) | (391 | ) | (1,413 | ) | (6,674 | ) | (8,927 | ) | |||||
|
Other
allowable adjustments
|
(71 | ) | (958 | ) | 603 | 1,452 | 1,026 | ||||||||
|
Accretion
expense
|
1,556 | 1,566 | 1,838 | 1,885 | 6,845 | ||||||||||
|
Amortization
of deferred gains
|
(228 | ) | (265 | ) | (214 | ) | (184 | ) | (891 | ) | |||||
|
Stock-based
compensation charges
|
2,308 | 1,072 | 2,341 | 2,592 | 8,313 | ||||||||||
|
Adjusted
EBITDA
|
$ | 60,012 | $ | 55,329 | $ | 68,987 | $ | 59,045 | $ | 243,373 | |||||
|
Leverage
ratio (1)
|
1.56 | ||||||||||||||
|
Interest
coverage ratio (2)
|
6.82 | ||||||||||||||
| (1 | ) |
Leverage
ratio is defined in our credit facility as total debt divided by Adjusted
EBITDA.
|
| (2 | ) |
Interest
coverage ratio is defined in our credit facility as Adjusted EBITDA
divided by cash interest expense.
|
Contractual
Obligations
The
following is a summary of our significant contractual obligations as of
December 31, 2007 (in thousands):
|
2008
|
2009-2010
|
2011-2012
|
After
2012
|
Total
|
|||||||||||
|
Long-term
debt and capital leases (1)
|
$ | 523 | $ | 182 | $ | 408,125 | $ | -- | $ | 408,830 | |||||
|
Equipment
purchase commitments
|
45,170 | -- | -- | -- | 45,170 | ||||||||||
|
Operating
leases
|
2,729 | 2,681 | 2,406 | 8,301 | 16,117 | ||||||||||
|
Minimum
royalties
|
13,475 | 20,226 | 21,599 | 31,126 | 86,426 | ||||||||||
|
Coal
purchase commitments
|
187,504 | 5,479 | -- | -- | 192,983 | ||||||||||
|
Gallatin
commitments (1)
|
2,056 | 4,111 | 4,111 | 8,222 | 18,500 | ||||||||||
|
Gallatin
commitment - other
|
-- | 700 | -- | -- | 700 | ||||||||||
|
Coal
contract buyout
|
680 | 1,247 | -- | -- | 1,927 | ||||||||||
|
Total
|
$ | 252,137 | $ | 34,626 | $ | 436,241 | $ | 47,649 | $ | 770,653 | |||||
| (1 | ) |
Gallatin
commitments and long-term debt and capital leases include principal
amounts due in the years shown. Interest payable on these obligations,
with interest rates ranging between 6.5% and 12.2% on our loans and
capital leases, would be approximately $33.9 million in 2008,
$67.4 million in 2009 to 2010, $55.9 million in 2011 to 2012,
and $1.4 million after 2012.
|
Additionally,
we have long-term liabilities relating to asset retirement obligations, workers'
compensation and black lung benefits and postretirement benefits. The table
below reflects the estimated undiscounted cash flows for these obligations (in
thousands):
|
Within
|
||||||||||||||||||||
|
1
Year
|
2-3
Years
|
4-5
Years
|
After
5 Years
|
Total
|
||||||||||||||||
|
Asset
retirement obligation
|
$ | 8,179 | $ | 16,242 | $ | 24,632 | $ | 78,134 | $ | 127,187 | ||||||||||
|
Postretirement
|
973 | 3,171 | 4,993 | 132,822 | 141,959 | |||||||||||||||
|
Workers'
compensation benefits and black lung benefits
|
1,779 | 1,443 | 1,009 | 6,603 | 10,834 | |||||||||||||||
|
Total
|
$ | 10,931 | $ | 20,856 | $ | 30,634 | $ | 217,559 | $ | 279,980 | ||||||||||
Off-Balance
Sheet Arrangements
In the
normal course of business, we are a party to certain off-balance sheet
arrangements. These arrangements include 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 our
consolidated balance sheets, and we do not expect any material adverse effects
on our financial condition, results of operations or cash flows to result from
these off-balance sheet arrangements.
From time
to time, we provide guarantees to financial institutions to facilitate the
acquisition of mining equipment by third parties who mine coal for us. This
arrangement is beneficial to us because it helps insure a continuing source of
coal production.
Federal
and state laws require us to secure payment of certain long-term obligations
such as mine closure and reclamation costs, federal and state workers'
compensation, coal leases and other obligations. We typically secure these
payment obligations by using surety bonds, an off-balance sheet instrument. The
use of surety bonds is less expensive for us than the alternative of posting a
100% cash bond or a bank letter of credit, either of which would require a
greater use of our credit facility. We then use bank letters of credit to secure
our surety bonding obligations as a lower cost alternative than securing those
bonds with cash. In recent years, surety bond costs have
increased, while the market terms of surety bonds have generally become less
favorable to us. To the extent that surety bonds become unavailable, we would
seek to secure our reclamation obligations with letters of credit, cash deposits
or other suitable forms of collateral.
As of
December 31, 2007, we have a committed bonding facility with Travelers
Casualty and Surety Company of America, pursuant to which Travelers has agreed,
subject to certain conditions, to issue surety bonds on our behalf in a maximum
amount of $150.0 million. We also have a committed bonding facility with
the Chubb Group of Insurance Companies, pursuant to which Chubb has agreed,
subject to certain conditions, to issue surety bonds on our behalf in a maximum
amount of $50.0 million. In 2007, we added a third facility with
Safeco Insurance Company of America pursuant to which they have
agreed, subject to certain conditions, to issue surety bonds on our behalf in a
maximum amount of $35.0 million. As of December 31, 2007, we have posted an
aggregate of $142.5 million in reclamation bonds and $10.2 million of
other types of bonds under these facilities and maintained letters of credit
totaling $82.2 million to secure reclamation and other surety bond
obligations.
Critical
Accounting Policies and Estimates
Our
discussion and analysis of our financial condition, results of operations,
liquidity and capital resources is based upon our consolidated financial
statements, which have been prepared in accordance with U.S. generally
accepted accounting principles (“GAAP”). GAAP requires that we make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities. On an
ongoing basis, we evaluate our estimates. We base our estimates on historical
experience and on various other assumptions that we believe are reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these
estimates.
Reclamation. Our asset
retirement obligations arise from the federal Surface Mining Control and
Reclamation Act of 1977 and similar state statutes, which require that mine
property be restored in accordance with specified standards and an approved
reclamation plan. Significant reclamation activities include reclaiming refuse
and slurry ponds, reclaiming the pit and support acreage at surface mines, and
sealing portals at deep mines. We account for the costs of our reclamation
activities in accordance with the provisions of SFAS No. 143, Accounting for Asset Retirement
Obligations (“SFAS 143”). We determine the
future cash flows necessary to satisfy our reclamation obligations on a
mine-by-mine basis based upon current permit requirements and various estimates
and assumptions, including estimates of disturbed acreage, cost estimates, and
assumptions regarding productivity. Estimates of disturbed acreage are
determined based on approved mining plans and related engineering data. Cost
estimates are based upon third-party costs. Productivity assumptions are based
on historical experience with the equipment that is expected to be utilized in
the reclamation activities. In accordance with the provisions of SFAS 143,
we determine the fair value of our asset retirement obligations. In order to
determine fair value, we must also estimate a discount rate and third-party
margin. Each is discussed further below:
|
·
|
Discount Rate.
SFAS 143 requires that asset retirement obligations be recorded at
fair value. In accordance with the provisions of SFAS 143, we utilize
discounted cash flow techniques to estimate the fair value of our
obligations. We base our discount rate on the rates of treasury bonds with
maturities similar to expected mine lives, adjusted for our credit
standing.
|
|
·
|
Third-Party Margin.
SFAS 143 requires the measurement of an obligation to be based upon
the amount a third party would demand to assume the obligation. Because we
plan to perform a significant amount of the reclamation activities with
internal resources, a third-party margin was added to the estimated costs
of these activities. This margin was estimated based upon our historical
experience with contractors performing similar types of reclamation
activities. The inclusion of this margin will result in a recorded
obligation that is greater than our estimates of our cost to perform the
reclamation activities. If our cost estimates are accurate, the excess of
the recorded obligation over the cost incurred to perform the work will be
recorded as a gain at the time that reclamation work is
completed.
|
On at
least an annual basis, we review our entire reclamation liability and make
necessary adjustments for permit changes as granted by state authorities,
additional costs resulting from accelerated mine closures, and revisions to cost
estimates and productivity assumptions, to reflect current experience. At
December 31, 2007, we had recorded asset retirement obligation liabilities
of $91.2 million, including amounts reported as current. While the precise
amount of these future costs cannot be determined with certainty, as of
December 31, 2007, we estimate that the aggregate undiscounted cost of
final mine closures is approximately $127.2 million.
Coal Reserves. There are
numerous uncertainties inherent in estimating quantities of economically
recoverable coal reserves, many of which are beyond our control. As a result,
estimates of economically recoverable coal reserves are by their nature
uncertain. Information about our reserves consists of estimates based on
engineering, economic and geological data assembled by our internal engineers
and geologists and reviewed by a third party consultant. Some of the factors and
assumptions that impact economically recoverable reserve estimates
include:
|
·
|
geological
conditions;
|
||||||
|
·
|
historical
production from the area compared with production from other producing
areas;
|
||||||
|
·
|
the
assumed effects of regulations and taxes by governmental
agencies;
|
||||||
|
·
|
assumptions
governing future prices; and
|
||||||
|
·
|
future
operating costs.
|
||||||
Each of
these factors may in fact vary considerably from the assumptions used in
estimating reserves. For these reasons, estimates of the economically
recoverable quantities of coal attributable to a particular group of properties,
and classifications of these reserves based on risk of recovery and estimates of
future net cash flows, may vary substantially. Actual production, revenues and
expenditures with respect to reserves will likely vary from estimates, and these
variances may be material. At
December 31, 2007, we had 617.5 million tons of proven and probable coal
reserves.
Postretirement Medical
Benefits. We have
long-term liabilities for postretirement benefit cost obligations. Detailed
information related to these liabilities is included in the notes to our
financial statements included elsewhere in this annual report. Liabilities for
postretirement benefit costs are not funded. The liability is actuarially
determined, and we use various actuarial assumptions, including the discount
rate and future cost trends, to estimate the costs and obligations for
postretirement benefit costs. The discount rate used to determine the net
periodic benefit cost for postretirement benefits other than pensions was 5.92%
for the year ended December 31, 2007 and 5.50% for the year ended
December 31, 2006. At December 31, 2007, we had postretirement medical
benefit obligations of $54.8 million.
| Health care cost trend rate (dollars in thousands): |
One-Percentage-
Point
Increase
|
One-Percentage-
Point
Decrease
|
|||||
|
Effect
on total service and interest cost components
|
$
|
35
|
$
|
(94
|
)
|
||
|
Effect
on accumulated postretirement benefit obligation
|
853
|
(702
|
)
|
||||
|
Discount
rate (dollars in thousands):
|
One
Half-
Percentage-
Point
Increase
|
One
Half-
Percentage-
Point
Decrease
|
|||||
|
Effect
on total service and interest cost components
|
$ | (430 | ) | $ | 495 | ||
|
Effect
on accumulated postretirement benefit obligation
|
(3,320 | ) | 3,915 | ||||
Workers' Compensation.
Workers' compensation is a system by which individuals who sustain personal
injuries due to job-related accidents are compensated for their disabilities,
medical costs, and on some occasions, for the costs of their rehabilitation, and
by which the survivors of workers who suffer fatal injuries receive compensation
for lost financial support. The workers' compensation laws are administered by
state agencies with each state having its own set of rules and regulations
regarding compensation that is owed to an employee who is injured in the course
of employment. Our operations are covered through a combination of a
self-insurance program and an insurance policy. We accrue for any self-insured
liability by recognizing costs when it is probable that a covered liability has
been incurred and the cost can be reasonably estimated. Our estimates of these
costs are adjusted based upon actuarial studies. Actual losses may differ from
these estimates, which could increase or decrease our costs. At
December 31, 2007, we had workers’ compensation obligations of $9.0
million.
Coal Workers' Pneumoconiosis.
We are required by federal and state statutes to provide benefits to employees
for awards related to coal workers' pneumoconiosis disease (black lung). These
claims are covered by a third-party insurance provider in all locations where we
operate with the exception of West Virginia. The Company is self-insured for
state black lung related claims at certain locations in West Virginia. We
account for self-insured black lung obligations under the provisions of SFAS No.
106, Employers'
Accounting for Postretirement Benefit Other than Pension , and SFAS No.
158, Employers'
Accounting for Defined Benefit Pension and Other Postretirement
Plans.
Charges
are made to operations for state black lung claims in West Virginia, as
determined by an independent actuary at the present value of the actuarially
computed liability for such benefits over the employee's applicable term of
service. As of
December 31, 2007, we had black lung obligations of $1.5
million.
Income Taxes. We account for
income taxes in accordance with SFAS No. 109, Accounting for Income
Taxes (“SFAS 109”), which
requires the recognition of deferred tax assets and liabilities using enacted
tax rates for the effect of temporary differences between the book and tax bases
of recorded assets and liabilities. SFAS 109 also requires that deferred
tax assets be reduced by a valuation allowance if it is more likely than not
that some portion or all of the deferred tax asset will not be realized. In
evaluating the need for a valuation allowance, we analyze both positive and
negative evidence as required by SFAS 109. Such evidence includes objective
evidence obtained from our historical earnings, future sales commitments,
outlooks on the coal industry by us and third parties, expected level of future
earnings (with sensitivities on expectations considered), timing of temporary
difference reversals, ability or inability to meet forecasted earnings,
unsettled industry circumstances, ability to carry back and utilize a future tax
loss (if a loss were to occur), available tax planning strategies, limitations
on deductibility of temporary differences, and the impact the alternative
minimum tax has on utilization of deferred tax assets. As further described in
Note 30, we reported three consecutive years of positive earnings history in the
fourth quarter of 2006. This objective evidence, coupled with a review of the
aforementioned areas in the fourth quarter, resulted in our recording of a
reversal of a significant portion of the valuation allowance. The valuation
allowance is monitored and reviewed quarterly. If our conclusions change in the
future regarding the realization of a portion or all of our net deferred tax
assets, we may record a change to the valuation allowance through income tax
expense in the period the determination is made. As of
December 31, 2007, we
had gross deferred tax assets of $165.5 million less a valuation allowance
of $44.4 million.
New
Accounting Pronouncements
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 141(R), Business Combinations (“SFAS
141(R)”), and SFAS No. 160, Accounting and Reporting of
Noncontrolling Interest in Consolidated Financial Statements, an
amendment of ARB No. 51 (“SFAS 160”). SFAS 141(R) and SFAS 160 will
significantly change the accounting for and reporting of business combination
transactions and noncontrolling (minority) interests in consolidated financial
statements. SFAS 141(R) retains the fundamental requirements in SFAS No.
141,Business Combinations,
while providing additional definitions, such as the definition of the
acquirer in a purchase and improvements in the application of how the
acquisition method is applied. SFAS 160 will change the accounting and reporting
for minority interests, which will be recharacterized as noncontrolling
interests, and classified as a component of equity. These Statements become
simultaneously effective January 1, 2009. Early adoption is not permitted.
We are currently evaluating the impact this guidance will have on our
consolidated financial statements.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities – Including an Amendment of SFAS No. 115
(“SFAS 159”). This Statement permits entities to choose to measure many
financial instruments and certain other items at fair value. The objective is to
improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. This Statement is effective as of the beginning of an entity’s first
fiscal year that begins after November 15, 2007. Early adoption is
permitted as of the beginning of a fiscal year that begins on or before
November 15, 2007, provided the entity also elects to apply the provisions
of SFAS No. 157, Fair Value
Measurements (“SFAS 157”). We do not expect this
guidance to have a significant impact on our consolidated financial statements;
however management is currently assessing the impact of adopting SFAS
159.
In
September 2006, the FASB issued SFAS 157, which defines fair value, establishes
a framework for measuring fair value in generally accepted accounting principles
and requires additional disclosures about fair value measurements. SFAS 157 aims
to improve the consistency and comparability of fair value measurements by
creating a single definition of fair value. The Statement emphasizes that fair
value is not entity-specific, but instead is a market-based measurement of an
asset or liability. SFAS 157 upholds the requirements of previously issued
pronouncements concerning fair value measurements and expands the required
disclosures. This Statement is effective for financial statements issued for
fiscal years beginning after November 15, 2007, however earlier application
is permitted provided the reporting entity has not yet issued financial
statements for that fiscal year. The FASB deferred the effective date of SFAS
157 for one year for nonfinancial assets and nonfinancial liabilities that are
recognized or disclosed at fair value in the financial statements on a
nonrecurring basis. We do not expect this guidance to have a significant impact
on our consolidated financial statements; however management is currently
assessing the impact of adopting SFAS 157.
Discussion
of Seasonality Impacts on Operations
Our
business is seasonal, with operating results varying from quarter to quarter. We
have historically experienced lower sales during winter months primarily due to
the freezing of lakes that we use to transport coal to some of our customers. As
a result, our first quarter may be negatively impacted. Lower than expected
sales by us during this period could have an adverse affect on the timing of our
cash flows and therefore our ability to service our obligations with respect to
our existing and future indebtedness.
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 and interest rates.
Commodity
Price Risk
We are
exposed to market price risk in the normal course of selling coal. As of
December 31, 2007, approximately 5% and 66%, respectively, of our planned
production for 2008 and 2009 was uncommitted. As compared to prior
years, we have increased the proportion of our planned future production in 2008
and 2009 for which we have contracts to sell coal, which has the effect of
reducing 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 have entered into swap agreements
and diesel put options to reduce the volatility in the price of diesel fuel for
our operations. The diesel fuel swap agreements and put options are not
designated as hedges and therefore the changes in the fair value for these
derivative instrument contracts are required to be recorded in cost of
sales. These diesel fuel swaps and put options use the NYMEX New York
Harbor #2 heating oil as the underlying commodity reference price.
As of
December 31, 2007 approximately 2.7 million gallons or 10% of the Company's
anticipated 2008 diesel fuel usage has been capped with the swap agreements in
which the company has agreed to pay a fixed price and receive a floating price
per gallon of diesel fuel. The fixed prices for the notional quantity of
2.7 million gallons range from $2.49 to $2.60 per gallon for the last
eleven months of 2008. The fair value of these diesel fuel swap
agreements are an asset of less than $0.1 million as of December 31,
2007.
As of
December 31, 2007, the Company entered into diesel fuel put options for 2.7
million gallons at a price range of $2.25 to $2.45 per gallon for the last
eleven months of 2008. In the event that diesel prices decline below
the strike price, the Company can exercise the put options and sell the 2.7
million gallons at the strike price, therefore reducing the impact of the
swap agreements. These put options provide downside protection and
reduce the fixed position risk of the outstanding diesel fuel swap agreements in
the event of a decline in diesel fuel prices below the strike price. The fair
value of these diesel fuel put options are an asset of $0.2 million as of
December 31, 2007.
We
purchase coal in the 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 customer's requirements. We also
sell 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
derivatives for speculative purpose. The use of purchase and sales contracts
which 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.
These
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 December 31, 2007 that are considered derivative
instruments are summarized as follows:
|
Purchase
Contracts
|
Purchase
Price Range
|
Tons
Outstanding
|
Delivery
Period
|
Mark-To-Market
Adjustment (In Millions)
|
||||
|
$40.00-$51.00
|
1,031,986
|
01/01/08-12/31/08
|
$
|
9.9
|
||||
|
$45.00-$60.00
|
360,000
|
01/01/08-12/31/08
|
$
|
1.3
|
||||
|
1,391,986
|
$
|
11.2
|
||||||
|
Sales
Contracts
|
Selling
Price Range
|
Tons
Outstanding
|
Delivery
Period
|
Mark-To-Market
Adjustment (In Millions)
|
||||
|
$45.00-$50.00
|
243,000
|
01/01/08-12/31/08
|
$
|
(2.5
|
)
|
|||
|
$51.00-$60.00
|
226,433
|
01/01/08-12/31/08
|
$
|
0.4
|
||||
|
469,433
|
$
|
(2.1
|
)
|
|||||
Interest
Rate Risk
All of
our borrowings under our Credit Facility and the Gallatin Loan Facility are at a
variable rate, exposing us to the effect of rising interest rates in the United
States. As of December 31, 2007, our Credit Facility had a $233.1 million term
loan outstanding with a variable interest rate based upon the 3-month London
Interbank Offered Rate (“LIBOR”) (4.70% at December 31, 2007) plus an applicable
margin (1.75% at December 31, 2007). To reduce our exposure to rising
interest rates, effective May 22, 2006 we entered 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 based on the LIBOR to a fixed interest rate of 5.59%
plus the applicable margin defined in the debt agreement (1.75% at December 31,
2007) for the remainder of our term loan. We account for the interest rate swap
as a cash flow hedge and accordingly changes in fair value of the swap are
recorded to other comprehensive income (loss). The fair value of the swap
at year end December 31, 2007 was a liability of $15.6 million ($11.9 million
net of tax). As of December 31, 2007, Gallatin had outstanding
borrowings under the Gallatin Loan Facility of $18.5 million at an interest rate
based upon the 6-month LIBOR (4.60% at December 31, 2007) plus an applicable
margin of 3.5%. A one percentage point increase in interest rates would result
in an annualized increase in interest expense of approximately $0.2 million
based on our variable rate borrowings as of December 31, 2007.
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Stockholders
Alpha
Natural Resources, Inc.:
We have
audited the accompanying consolidated balance sheets of Alpha Natural Resources,
Inc. and subsidiaries (the Company) as of December 31, 2007 and 2006,
and the related consolidated statements of income, stockholders' equity and
partners' capital and comprehensive income, and cash flows for each of the years
in the three-year period ended December 31, 2007. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Alpha Natural Resources,
Inc. and subsidiaries as of December 31, 2007 and 2006, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 2007, in conformity with U.S. generally accepted
accounting principles.
As
discussed in notes 3 and 18 to the consolidated financial statements, the
Company changed its method for accounting and reporting for share-based payments
and its method of accounting for postretirement benefits, respectively in 2006.
Also, as discussed in note 3 to the consolidated financial statements, the
Company changed its method of quantifying errors in 2006.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company's internal control over financial
reporting as of December 31, 2007, based on criteria established in Internal Control - Integrated
Framework, issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO), and our report dated February 29, 2008
expressed an unqualified opinion on the effectiveness of the Company’s internal
control over financial reporting.
/s/KPMG
LLP
Roanoke,
Virginia
February
29, 2008
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
December
31,
|
||||||
|
2007
|
2006
|
|||||
|
(In
thousands)
|
||||||
|
ASSETS
|
||||||
|
Current
assets:
|
||||||
|
Cash
and cash equivalents
|
$ | 54,365 | $ | 33,256 | ||
|
Trade accounts receivable, net
|
183,969 | 171,195 | ||||
|
Notes and other receivables
|
11,141 | 6,466 | ||||
|
Inventories
|
70,780 | 76,844 | ||||
|
Prepaid expenses and other current assets
|
59,954 | 50,893 | ||||
|
Total current assets
|
380,209 | 338,654 | ||||
|
Property,
plant, and equipment, net
|
640,258 | 637,136 | ||||
|
Goodwill
|
20,547 | 20,547 | ||||
|
Other
intangibles, net
|
9,376 | 11,720 | ||||
|
Deferred
income taxes
|
97,130 | 94,897 | ||||
|
Other
assets
|
63,394 | 42,839 | ||||
|
Total assets
|
$ | 1,210,914 | $ | 1,145,793 | ||
|
LIABILITIES AND
STOCKHOLDERS' EQUITY
|
||||||
|
Current
liabilities:
|
||||||
|
Current portion of long-term debt
|
$ | 2,579 | $ | 3,254 | ||
|
Note payable
|
18,883 | 20,941 | ||||
|
Bank overdraft
|
160 | 23,814 | ||||
|
Trade accounts payable
|
95,605 | 75,986 | ||||
|
Deferred income taxes
|
9,753 | 7,601 | ||||
|
Accrued expenses and other current liabilities
|
96,082 | 90,594 | ||||
|
Total current liabilities
|
223,062 | 222,190 | ||||
|
Long-term
debt
|
425,451 | 421,456 | ||||
|
Workers'
compensation benefit obligations
|
9,055 | 7,169 | ||||
|
Postretirement
medical benefit obligations
|
53,811 | 50,712 | ||||
|
Asset
retirement obligations
|
83,020 | 69,495 | ||||
|
Deferred
gains on sale of property interests
|
3,176 | 3,885 | ||||
|
Other
liabilities
|
30,930 | 26,837 | ||||
|
Total liabilities
|
828,505 | 801,744 | ||||
|
Minority
interest
|
1,573 | -- | ||||
| Commitments and contingencies (Note 21 and Note 25) | -- | -- | ||||
|
Stockholders'
equity:
|
||||||
|
Preferred
stock-- par value $0.01, 10,000,000 shares authorized, none
issued
|
-- | -- | ||||
| Common stock-- par value $0.01, 100,000,000 shares authorized, 65,769,303 and 64,964,287 shares | ||||||
|
issued and outstanding at
December 31, 2007 and 2006, respectively
|
658 | 650 | ||||
|
Additional
paid-in capital
|
227,336 | 215,020 | ||||
|
Accumulated
other comprehensive loss
|
(22,290 | ) | (19,019 | ) | ||
|
Retained
earnings
|
175,132 | 147,398 | ||||
|
Total stockholders' equity
|
380,836 | 344,049 | ||||
|
Total liabilities and stockholders' equity
|
$ | 1,210,914 | $ | 1,145,793 | ||
See
accompanying notes to consolidated financial statements.
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
|
Year
Ended December 31,
|
|||||||||
|
2007
|
2006
|
2005
|
|||||||
|
(In
thousands, except per share amounts)
|
|||||||||
|
Revenues:
|
|||||||||
|
Coal
revenues
|
$ | 1,639,247 | $ | 1,687,553 | $ | 1,413,174 | |||
|
Freight
and handling revenues
|
205,086 | 188,366 | 185,555 | ||||||
|
Other
revenues
|
33,241 | 34,743 | 27,926 | ||||||
|
Total
revenues
|
1,877,574 | 1,910,662 | 1,626,655 | ||||||
|
Costs
and expenses:
|
|||||||||
|
Cost
of coal sales (exclusive of items shown separately below)
|
1,354,335 | 1,352,450 | 1,184,092 | ||||||
|
Freight
and handling costs
|
205,086 | 188,366 | 185,555 | ||||||
|
Cost
of other revenues
|
25,817 | 22,982 | 23,675 | ||||||
|
Depreciation,
depletion and amortization
|
159,579 | 140,851 | 73,122 | ||||||
|
Selling,
general and administrative expenses (exclusive of depreciation and
amortization shown separately above)
|
58,605 | 67,952 | 88,132 | ||||||
|
Total
costs and expenses
|
1,803,422 | 1,772,601 | 1,554,576 | ||||||
|
Income
from operations
|
74,152 | 138,061 | 72,079 | ||||||
|
Other
income (expense):
|
|||||||||
|
Interest
expense
|
(40,215 | ) | (41,774 | ) | (29,937 | ) | |||
|
Interest
income
|
2,340 | 839 | 1,064 | ||||||
|
Miscellaneous
income (expense)
|
(93 | ) | 523 | 91 | |||||
|
Total
other income (expense), net
|
(37,968 | ) | (40,412 | ) | (28,782 | ) | |||
|
Income
from continuing operations before income taxes and minority
interest
|
36,184 | 97,649 | 43,297 | ||||||
|
Income
tax expense (benefit)
|
8,629 | (30,519 | ) | 18,953 | |||||
|
Income
before minority interest
|
27,555 | 128,168 | 24,344 | ||||||
|
Minority
interest
|
(179 | ) | -- | 2,918 | |||||
|
Income
from continuing operations
|
27,734 | 128,168 | 21,426 | ||||||
|
Discontinued
operations (Note 26):
|
|||||||||
|
Loss
from discontinued operations before income taxes and minority
interest
|
-- | -- | (378 | ) | |||||
|
Income
tax benefit
|
-- | -- | (93 | ) | |||||
|
Minority
interest
|
-- | -- | (72 | ) | |||||
|
Loss
from discontinued operations
|
-- | -- | (213 | ) | |||||
|
Net
income
|
$ | 27,734 | $ | 128,168 | $ | 21,213 | |||
|
Net
income per share, as adjusted (Note 4):
|
|||||||||
|
Basic
and diluted:
|
|||||||||
|
Income
from continuing operations
|
$ | 0.43 | $ | 2.00 | $ | 0.38 | |||
|
Loss
from discontinued operations
|
-- | -- | -- | ||||||
|
Net
income, as adjusted in 2005
|
$ | 0.43 | $ | 2.00 | $ | 0.38 | |||
See
accompanying notes to consolidated financial statements.
|
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
|
||||||||||||||||||||||||||||||||||||
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL AND COMPREHENSIVE
INCOME
|
||||||||||||||||||||||||||||||||||||
|
(In
thousands)
|
||||||||||||||||||||||||||||||||||||
|
Alpha
Natural Resources, Inc.
|
Alpha
NR Holding, Inc
|
ANR
Fund IX Holdings, L.P.
|
||||||||||||||||||||||||||||||||||
|
Common
Stock
|
||||||||||||||||||||||||||||||||||||
|
Shares
|
Amount
|
Additional
Paid in Capital
|
Accumulated
Other Comprehensive Loss
|
Retained
Earnings
|
Total
Stockholders'
Equity
|
Common
Stock
|
Additional
Paid in Capital
|
Retained
Earnings
|
Total
Stockholders'
Equity
|
Partners'
Capital
|
Total
Stockholders' Equity and Partners' Capital
|
|||||||||||||||||||||||||
|
Balances,
December 31, 2004
|
-- | $ | -- | $ | -- | $ | -- | $ | -- | $ | -- | $ | -- | $ | 22,153 | $ | 18,828 | $ | 40,981 | $ | 4,952 | $ | 45,933 | |||||||||||||
|
Noncash
distribution of Virginia Tax Credit
|
-- | -- | -- | -- | -- | -- | -- | -- | -- | -- | (40 | ) | (40 | ) | ||||||||||||||||||||||
|
Net
income prior to Internal Restructuring
|
-- | -- | -- | -- | -- | -- | -- | -- | 2,320 | 2,320 | 379 | 2,699 | ||||||||||||||||||||||||
|
Distribution
to First Reserve Fund IX, L.P. and ANR Fund IX Holdings, L.P.
prior to the Internal Restructuring
|
-- | -- | -- | -- | -- | -- | -- | -- | (7,920 | ) | (7,920 | ) | (1,243 | ) | (9,163 | ) | ||||||||||||||||||||
|
Contribution
by First Reserve Fund IX, L.P. of all of the outstanding common stock
of Alpha NR Holding, Inc. in exchange for shares of Alpha Natural
Resources, Inc. common stock
|
12,463 | 125 | 35,256 | -- | -- | 35,381 | -- | (22,153 | ) | (13,228 | ) | (35,381 | ) | -- | -- | |||||||||||||||||||||
|
Contribution
by ANR Fund IX Holdings, L.P. of its membership interest in ANR
Holdings, LLC in exchange for shares of Alpha Natural Resources, Inc.
common stock upon completion of the Internal Restructuring
|
1,536 | 15 | 4,033 | -- | -- | 4,048 | -- | -- | -- | -- | (4,048 | ) | -- | |||||||||||||||||||||||
|
Contribution
by minority interest holders, including certain members of management, of
their membership interests in ANR Holdings, LLC in exchange for shares of
Alpha Natural Resources, Inc. common stock and recognition of unearned
stock-based compensation
|
14,289 | 143 | 56,302 | -- | -- | 56,445 | -- | -- | -- | -- | -- | 56,445 | ||||||||||||||||||||||||
See
accompanying notes to consolidated financial statements.
(Continued)
(Continued)
|
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
|
||||||||||||||||||||||||||||||||||||
|
CONSOLIDATED
STATEMENT OF STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL AND COMPREHENSIVE
INCOME
|
||||||||||||||||||||||||||||||||||||
|
(In
thousands)
|
||||||||||||||||||||||||||||||||||||
|
Alpha
Natural Resources, Inc.
|
Alpha
NR Holding, Inc
|
ANR
Fund IX Holdings, L.P.
|
||||||||||||||||||||||||||||||||||
|
Common
Stock
|
||||||||||||||||||||||||||||||||||||
|
Shares
|
Amount
|
Additional
Paid in Capital
|
Accumulated
Other Comprehensive Loss
|
Retained
Earnings
|
Total
Stockholders'
Equity
|
Common
Stock
|
Additional
Paid in Capital
|
Retained
Earnings
|
Total
Stockholders'
Equity
|
Partners'
Capital
|
Total
Stockholders' Equity
and
Partners'
Capital
|
|||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Issuance
of Restructuring Notes
|
-- | $ | -- | $ | (517,692 | ) | $ | -- | $ | -- | $ | (517,692 | ) | $ | -- | $ | -- | $ | -- | $ | -- | $ | -- | $ | (517,692 |
)
|
||||||||||
|
Tax
Distributions payable recorded upon the completion of the Internal
Restructuring
|
-- | -- | (10,500 | ) | -- | -- | (10,500 | ) | -- | -- | -- | -- | -- | (10,500 |
)
|
|||||||||||||||||||||
|
Change
in net deferred income taxes recognized upon the completion of the
Internal Restructuring
|
-- | -- | 34,504 | -- | -- | 34,504 | -- | -- | -- | -- | -- | 34,504 | ||||||||||||||||||||||||
|
Proceeds
from initial public offering of common shares ($19 per share), net of
offering costs of $48,296
|
33,925 | 339 | 596,072 | -- | -- | 596,411 | -- | -- | -- | -- | -- | 596,411 | ||||||||||||||||||||||||
|
Distribution
of net proceeds received from underwriters’ exercise of over-allotment
option
|
-- | -- | (71,135 | ) | -- | -- | (71,135 | ) | -- | -- | -- | -- | -- | (71,135 |
)
|
|||||||||||||||||||||
|
Issuance
of restricted shares
|
12 | -- | -- | -- | -- | -- | -- | -- | -- | -- | -- | -- | ||||||||||||||||||||||||
|
Shares
issued in connection with acquisition
|
2,180 | 22 | 53,162 | -- | -- | 53,184 | -- | -- | -- | -- | -- | 53,184 | ||||||||||||||||||||||||
|
Amortization
of unearned stock-based compensation
|
-- | -- | 13,407 | -- | -- | 13,407 | -- | -- | -- | -- | -- | 13,407 | ||||||||||||||||||||||||
|
Exercise
of stock options
|
15 | -- | 199 | -- | -- | 199 | -- | -- | -- | -- | -- | 199 | ||||||||||||||||||||||||
|
Net
income subsequent to Internal Restructuring
|
-- | -- | -- | -- | 18,513 | 18,513 | -- | -- | -- | -- | -- | 18,513 | ||||||||||||||||||||||||
|
Balances,
December 31, 2005
|
64,420 | $ | 644 | $ | 193,608 | $ | -- | $ | 18,513 | $ | 212,765 | $ | -- | $ | -- | $ | -- | $ | -- | $ | -- | $ | 212,765 | |||||||||||||
See
accompanying notes to consolidated financial statements.
(Continued)
(Continued)
|
ALPHA NATURAL RESOURCES, INC.
AND SUBSIDIARIES
|
|||||||||||||||||||||||||||||||||
|
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS’ EQUITY AND PARTNERS’ CAPITAL AND COMPREHENSIVE
INCOME
|
|||||||||||||||||||||||||||||||||
|
(In
thousands)
|
|||||||||||||||||||||||||||||||||
|
Alpha
Natural Resources Inc.
|
Alpha
NR Holding, Inc
|
|
|||||||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||||
|
Common
Stock
|
|||||||||||||||||||||||||||||||||
|
Shares
|
Amount
|
Additional
Paid in Capital
|
Accumulated
Other Comprehensive Loss
|
Retained
Earnings
|
Total
Stockholders'
Equity
|
Common
Stock
|
Additional
Paid in Capital
|
Retained
Earnings
|
Total
Stockholders'
Equity
|
Total
Stockholders' Equity
|
|||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||||
|
Comprehensive
Income
|
|||||||||||||||||||||||||||||||||
|
Net
Income
|
-- | $ | -- | $ | -- | $ | -- | $ | 128,168 | $ | 128,168 | $ | -- | $ | -- | $ | -- | $ | -- | $ | 128,168 | ||||||||||||
|
Change
in derivative financial instrument, net of income tax of
$1,787
|
-- | -- | -- | (5,437 | ) | -- | (5,437 | ) | -- | -- | -- | -- | (5,437 | ) | |||||||||||||||||||
|
Total
Comprehensive Income
|
122,731 | ||||||||||||||||||||||||||||||||
|
Initial
impact of adoption of Staff Accounting Bulletin No. 108, net of income tax
(Note 3 (t))
|
-- | -- | -- | -- | 717 | 717 | -- | -- | -- | -- | 717 | ||||||||||||||||||||||
|
Exercise
of stock options
|
60 | 1 | 953 | -- | -- | 954 | -- | -- | -- | -- | 954 | ||||||||||||||||||||||
|
Amortization
of unearned stock-based compensation
|
484 | 5 | 20,459 | -- | -- | 20,464 | -- | -- | -- | -- | 20,464 | ||||||||||||||||||||||
|
Initial
impact of adoption of Statement of Financial Accounting Standards No. 158,
net of income tax
|
-- | -- | -- | (13,582 | ) | -- | (13,582 | ) | -- | -- | -- | -- | (13,582 | ) | |||||||||||||||||||
|
Balances,
December 31, 2006
|
64,964 | $ | 650 | $ | 215,020 | $ | (19,019 | ) | $ | 147,398 | $ | 344,049 | $ | -- | $ | -- | $ | -- | $ | -- | $ | 344,049 | |||||||||||
See
accompanying notes to consolidated financial statements.
(Continued)
(Continued)
|
ALPHA NATURAL RESOURCES, INC. AND
SUBSIDIARIES
|
|||||||||||||||||||||||||||||||||
|
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND PARTNERS'
CAPITAL AND COMPREHENSIVE INCOME
|
|||||||||||||||||||||||||||||||||
|
(In
thousands)
|
|||||||||||||||||||||||||||||||||
|
Alpha
Natural Resources Inc.
|
Alpha
NR Holding, Inc
|
|
|||||||||||||||||||||||||||||||
|
Common
Stock
|
|||||||||||||||||||||||||||||||||
|
Shares
|
Amount
|
Additional
Paid in Capital
|
Accumulated
Other Comprehensive Loss
|
Retained
Earnings
|
Total
Stockholders'
Equity
|
Common
Stock
|
Additional
Paid in Capital
|
Retained
Earnings
|
Total
Stockholders'
Equity
|
Total
Stockholders' Equity
|
|||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||||
|
Comprehensive
Income
|
|||||||||||||||||||||||||||||||||
|
Net
Income
|
-- | $ | -- | $ | -- | $ | -- | $ | 27,734 | $ | 27,734 | $ | -- | $ | -- | $ | -- | $ | -- | $ | 27,734 | ||||||||||||
|
Change
in derivative financial instrument, net of income tax of
$2,070
|
-- | -- | -- | (6,298 | ) | -- | (6,298 | ) | -- | -- | -- | -- | (6,298 | ) | |||||||||||||||||||
|
Impact
of Statement of Financial Accounting Standards No. 158, net of income tax,
net of income tax benefit of ($997)
|
-- | -- | -- | 3,027 | -- | 3,027 | -- | -- | -- | -- | 3,027 | ||||||||||||||||||||||
|
Total
Comprehensive Income
|
24,463 | ||||||||||||||||||||||||||||||||
|
Exercise
of stock options
|
268 | 3 | 3,969 | -- | -- | 3,972 | -- | -- | -- | -- | 3,972 | ||||||||||||||||||||||
|
Amortization
of unearned stock-based compensation
|
537 | 5 | 8,347 | -- | -- | 8,352 | -- | -- | -- | -- | 8,352 | ||||||||||||||||||||||
|
Balances,
December 31, 2007
|
65,769 | $ | 658 | $ | 227,336 | $ | (22,290 | ) | $ | 175,132 | $ | 380,836 | $ | -- | $ | -- | $ | -- | $ | -- | $ | 380,836 | |||||||||||
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
Year
Ended December 31,
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
(In
thousands)
|
||||||||||
|
Operating
activities:
|
||||||||||
|
Net
income
|
$ | 27,734 | $ | 128,168 | $ | 21,213 | ||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||
|
Depreciation,
depletion and amortization
|
159,579 | 140,851 | 73,405 | |||||||
|
Amortization
and write-off of debt issuance costs
|
2,318 | 2,282 | 3,357 | |||||||
|
Minority
interest
|
(179 | ) | -- | 2,846 | ||||||
|
Accretion
of asset retirement obligation
|
6,845 | 4,874 | 3,514 | |||||||
|
Virginia
tax credit
|
-- | -- | (343 | ) | ||||||
|
Stock-based
compensation-- non-cash
|
9,681 | 20,464 | 39,045 | |||||||
|
Gain
on sale of discontinued operations
|
-- | -- | (704 | ) | ||||||
|
Change
in fair value of derivative instruments
|
(8,927 | ) | (150 | ) | -- | |||||
|
Deferred
income tax expense (benefit)
|
1,032 | (48,720 | ) | 3,736 | ||||||
|
Gain
on sale of fixed assets
|
(2,219 | ) | (972 | ) | (1,585 | ) | ||||
|
Other
non-cash items
|
2,746 | (553 | ) | 1,070 | ||||||
|
Changes
in operating assets and liabilities:
|
||||||||||
|
Trade
accounts receivable
|
(12,968 | ) | (24,101 | ) | (52,102 | ) | ||||
|
Notes
and other receivables
|
(7,335 | ) | 3,124 | 13,276 | ||||||
|
Inventories
|
15,543 | 7,943 | (16,182 | ) | ||||||
|
Prepaid
expenses and other current assets
|
15,530 | 20,922 | 4,348 | |||||||
|
Other
assets
|
(24,303 | ) | (3,688 | ) | (6,033 | ) | ||||
|
Trade
accounts payable
|
23,548 | (28,359 | ) | 48,462 | ||||||
|
Accrued
expenses and other current liabilities
|
11,686 | (20,057 | ) | 5,453 | ||||||
|
Workers'
compensation benefits
|
1,375 | 875 | 1,155 | |||||||
|
Postretirement
medical benefits
|
7,475 | 8,716 | 8,824 | |||||||
|
Asset
retirement obligation expenditures
|
(6,124 | ) | (3,187 | ) | (4,142 | ) | ||||
|
Other
liabilities
|
2,704 | 1,649 | 1,030 | |||||||
|
Net
cash provided by operating activities
|
225,741 | 210,081 | 149,643 | |||||||
|
Investing
activities:
|
||||||||||
|
Capital
expenditures
|
(126,381 | ) | (131,943 | ) | (122,342 | ) | ||||
|
Proceeds
from disposition of property, plant, and equipment
|
6,101 | 1,471 | 5,450 | |||||||
|
Purchase
of net assets of acquired companies
|
(43,893 | ) | (31,532 | ) | (221,869 | ) | ||||
|
Investment
in affiliate
|
(403 | ) | (344 | ) | (1,234 | ) | ||||
|
Collections
on note receivable from coal supplier
|
-- | 3,000 | 5,608 | |||||||
|
Payment
of additional consideration on previous acquisition
|
-- | -- | (5,000 | ) | ||||||
|
Other
|
(627 | ) | (698 | ) | -- | |||||
|
Net
cash used in investing activities
|
(165,203 | ) | (160,046 | ) | (339,387 | ) | ||||
See
accompanying notes to consolidated financial statements.
(Continued)
(Continued)
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
Year
Ended December 31,
|
|||||||||||
|
2007
|
2006
|
2005
|
|||||||||
|
(In
thousands)
|
|
||||||||||
|
Financing
activities:
|
|||||||||||
|
Repayments
on note payable
|
(20,941 | ) | (58,315 | ) | (15,228 |
)
|
|||||
|
Proceeds
from issuance of long-term debt
|
18,900 | 286,821 | 323,000 | ||||||||
|
Repayment
of long-term debt
|
(15,580 | ) | (290,210 | ) | (82,743 |
)
|
|||||
|
Increase
(decrease) in bank overdraft
|
(23,654 | ) | 6,749 | 7,041 | |||||||
|
Proceeds
from initial public offering, net of offering costs
|
-- | -- | 598,066 | ||||||||
|
Proceeds
from exercise of stock options
|
3,972 | 954 | 199 | ||||||||
|
Repayment
of restructuring notes payable
|
-- | -- | (517,692 |
)
|
|||||||
|
Distributions
to prior members of ANR Holdings, LLC subsequent to Internal
Restructuring
|
-- | -- | (71,135 |
)
|
|||||||
|
Payment
of Sponsor Distributions related to Internal Restructuring
|
(2,126 | ) | (2,400 | ) | (3,600 |
)
|
|||||
|
Distributions
to prior members of ANR Holdings, LLC prior to Internal
Restructuring
|
-- | -- | (7,732 |
)
|
|||||||
|
Debt
issuance costs
|
-- | -- | (8,201 |
)
|
|||||||
|
Net
cash (used in) provided by financing activities
|
(39,429 | ) | (56,401 | ) | 221,975 | ||||||
|
Net
increase (decrease) in cash and cash equivalents
|
21,109 | (6,366 | ) | 32,231 | |||||||
|
Cash
and cash equivalents at beginning of year
|
33,256 | 39,622 | 7,391 | ||||||||
|
Cash
and cash equivalents at end of year
|
$ | 54,365 | $ | 33,256 | $ | 39,622 | |||||
See
accompanying notes to consolidated financial statements.
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(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, and on February 18, 2005, Alpha completed the initial public
offering of its common stock. The internal restructuring and initial public
offering are discussed in Note 2. Prior to the internal restructuring
transactions, 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 FR
Affiliates were entities under the common control of First Reserve GP IX, Inc.
and were formed in 2002 to acquire coal mining assets in the Appalachian region
of the United States. In December 2002, the FR Affiliates formed ANR Holdings,
LLC (ANR Holdings). ANR Holdings was the parent of Alpha Natural Resources, LLC
and the latter entity and its subsidiaries acquired our predecessor, the
majority of the Virginia coal operations of Pittston Coal Company, a subsidiary
of The Brink's Company (formerly known as The Pittston Company), on
December 13, 2002.
The
acquisition of Coastal Coal Company, LLC was completed on January 31, 2003
by subsidiaries of ANR Holdings. The acquisition of the majority of the North
American operations of American Metals and Coal International, Inc. (U.S. AMCI)
was completed on March 11, 2003. Concurrent with the acquisition of
U.S. AMCI, ANR Holdings issued additional membership interests in the
aggregate amount of 45.3% to the former owners of U.S. AMCI, Madison
Capital Funding, LLC and members of management in exchange for the net assets of
U.S. AMCI and cash. After completion of this transaction, the FR Affiliates
owned 54.7% of ANR Holdings. Other major acquisitions include the acquisition of
Mears Enterprises, Inc. and affiliated entities on November 17, 2003, and
the acquisition of the Nicewonder Coal Group on October 26, 2005. See
Note 22 for further discussion concerning acquisitions.
The
acquisition of Progress Fuel Corp, a subsidiary of Progress Energy, was
completed on May 1, 2006. The Progress acquisition consisted of the
purchase of the outstanding capital stock of Diamond May Coal Co. and Progress
Land Corp., and the assets of Kentucky May Coal Co., Inc. The operations
acquired are adjacent to the Company's Enterprise business unit and have been
integrated into Enterprise.
The
acquisition of a 94% ownership interest in Gallatin Materials LLC (Gallatin) was
completed on December 28, 2006. Gallatin is a lime manufacturing business
in Verona, Kentucky. Gallatin expects to complete construction of the first of
two rotary pre-heater lime kilns in the first quarter of 2008, which
is expected to produce lime to be sold to coal-burning utilities as a
scrubbing agent for removing sulfur dioxide from flue gas. The lime will also be
sold in the first quarter of 2008 to steel producers for use as flux in electric
arc and basic oxygen furnaces. The minority owners were granted restricted
membership interests in Gallatin, which vest based on performance criteria
over a period of approximately three years from the closing date and which, if
earned in their entirety, would reduce the Company's ownership to
77.5%.
The
acquisition of Mingo Logan from Arch Coal, Inc. was completed on June 29,
2007. The Mingo Logan purchase consists of coal reserves, one active deep
mine and a load-out and processing plant, which is managed by our Callaway
business unit.
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Basis
of Presentation
The
consolidated financial statements for the year ended December 31, 2007 and 2006,
respectively, include Alpha and its majority owned and controlled subsidiaries.
The financial statements for the year ended December 31, 2005 include 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
December 31, 2005. The entities included in the financial
statements are collectively referred to as “the Company.”
On
April 14, 2005, the Company sold the assets of its Colorado mining
subsidiary, National King Coal LLC, and related trucking subsidiary, Gallup
Transloading Company LLC, to an unrelated third party. The results of these
operations for the years ended December 31, 2005 have been reported as
discontinued operations. See also Note 26.
|
(2)
|
Internal
Restructuring and Public Offerings
|
On
February 11, 2005, the Company completed a series of transactions to
transition from a structure in which the Company's top-tier holding company was
a limited liability company, ANR Holdings, to one in which the top-tier holding
company is a corporation, Alpha Natural Resources, Inc., which was formed on
November 29, 2004. These transactions are referred to collectively as the
Internal Restructuring, and they included the following:
|
·
|
Alpha
Coal Management, LLC (ACM) was dissolved and liquidated, after which
(1) the interests in ANR Holdings previously held by ACM were
distributed to and held directly by the Company's officers and employees
who were owners of ACM prior to its dissolution and (2) outstanding
options to purchase units in ACM 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, and Alpha
Natural Resources, Inc. assumed the obligations of ACM under the Alpha
Coal Management, LLC 2004 Long-Term Incentive Plan.
|
||
|
·
|
Alpha
Natural Resources, Inc. assumed the obligations of ANR Holdings to make
distributions to (1) affiliates of AMCI in an aggregate amount of
$6,000, representing the approximate incremental tax resulting from the
recognition of additional tax liability resulting from the Internal
Restructuring and (2) First Reserve Fund IX, L.P. in an
aggregate amount of approximately $4,500, representing the approximate
value of tax attributes conveyed as a result of the Internal Restructuring
(collectively, the Sponsor Distributions). The Sponsor Distributions to
affiliates of AMCI were paid in cash in five equal installments on the
dates for which estimated income tax payments were due in each of April
2005, June 2005, September 2005, January 2006 and April 2006. The Sponsor
Distributions to First Reserve Fund IX, L.P. are payable in three
installments of approximately $2,100, $2,100 and $300 on December 15,
2007, 2008 and 2009, respectively. The Sponsor Distributions will be
payable in cash or, to the extent Alpha Natural Resources, Inc. is not
permitted by the terms of the senior credit facility or the indenture
governing the senior notes to pay the Sponsor Distributions in cash, in
shares of Alpha Natural Resources, Inc. common stock.
|
||
|
·
|
First
Reserve Fund IX, L.P., the direct parent of Alpha NR Holding, Inc.,
contributed all of the outstanding common stock of Alpha NR Holding, Inc.
to Alpha Natural Resources, Inc. in exchange for 12,462,992 shares of
Alpha Natural Resources, Inc. common stock and demand promissory notes in
an aggregate adjusted principal amount of $206,734.
|
||
|
·
|
ANR
Fund IX Holdings, L.P., Madison Capital Funding, LLC and affiliates
of AMCI contributed all of their membership interests in ANR Holdings to
Alpha Natural Resources, Inc. in exchange for 13,052,431 shares of
Alpha Natural Resources, Inc. common stock and demand promissory notes in
an aggregate adjusted principal amount of $310,958.
|
||
|
·
|
The
officers and employees who were the members of ACM contributed all of
their interests in ANR Holdings to Alpha Natural Resources, Inc. in
exchange for 2,772,157 shares of Alpha Natural Resources, Inc. common
stock. Of these shares, 82,297 were for the officers' and employees'
purchased interest. One half of the remainder, 1,344,930 shares, were
immediately vested and resulted in compensation expense being recorded at
$19 per share (based upon the initial public offering price for the
Company's stock on February 18, 2005), or $25,554 in total. The
remaining 1,344,930 shares vested over the two year period ending
December 31, 2006. The $25,554 in compensation expense related to
these shares was deferred and amortized to expense over the vesting period
through December 31, 2006.
|
||
|
·
|
The
Board of Directors of Alpha Natural Resources, Inc. declared a pro rata
distribution to the former members of ANR Holdings in an aggregate amount
equal to the net proceeds Alpha Natural Resources, Inc. received upon the
exercise by the underwriters of their over-allotment option with respect
to the public offering described
below.
|
||
|
·
|
The
Company, the FR Affiliates and affiliates of AMCI amended certain of the
post-closing arrangements previously entered into as part of the Company's
acquisition of U.S. AMCI.
|
||
|
·
|
Alpha
Natural Resources, Inc. contributed the membership interests in ANR
Holdings received in the Internal Restructuring to Alpha NR Holding, Inc.
and another indirect wholly-owned subsidiary of Alpha Natural Resources,
Inc.
|
||
On
February 18, 2005, Alpha Natural Resources, Inc. completed the initial
public offering of 33,925,000 shares of its common stock, including
4,425,000 shares issued pursuant to the exercise in full of the
underwriters' over-allotment option. Alpha Natural Resources, Inc. received net
proceeds (after deducting issuance costs) of $598,066 from the offering. Alpha
Natural Resources, Inc. used $517,692 of the net proceeds to repay all
outstanding principal and accrued interest on its demand promissory notes issued
in the Internal Restructuring to the FR Affiliates, affiliates of AMCI and
Madison Capital Funding LLC. In addition, $78,610 of the net proceeds were
distributed by Alpha Natural Resources, Inc. on a pro rata basis to its
stockholders of record as of the close of business on February 11, 2005
pursuant to the distribution declared by Alpha Natural Resources, Inc.'s Board
of Directors in connection with the Internal Restructuring. Included in the pro
rata distribution was $7,475 distributed to officers and employees who were the
members of ACM, which was recorded as compensation expense.
On
January 24, 2006, a secondary public offering of the common stock of Alpha
Natural Resources, Inc. was completed in which an aggregate of
14,163,527 shares of its common stock were sold by First Reserve
Fund IX, L.P., ANR Fund IX Holdings, L.P. and Madison Capital Funding,
LLC. The Company received no proceeds from the secondary
offering.
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
|
(3)
|
Summary
of Significant Accounting Policies and
Practices
|
|
(a)
|
Cash
and Cash Equivalents
|
Cash and
cash equivalents consist of cash and highly liquid, short-term investments. Cash
and cash equivalents are stated at cost, which approximates fair market value.
The Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents. As of
December 31, 2007, the Company had a cash and cash equivalent balance of $54,365
of which $7,200 is restricted for the use of our Gallatin operations by our
non-recourse senior loan agreement with Nedbank. As of December 31,
2006, the Company had a cash and cash equivalent balance of
$33,256.
|
(b)
|
Trade
Accounts Receivable and Allowance for Doubtful
Accounts
|
Trade
accounts receivable are recorded at the invoiced amount and do not bear
interest. The allowance for doubtful accounts is the Company's best estimate of
the amount of probable credit losses in the Company's existing accounts
receivable. The Company establishes provisions for losses on accounts receivable
when it is probable that all or part of the outstanding balance will not be
collected. The Company regularly reviews collectibility and establishes or
adjusts the allowance as necessary using the specific identification method.
Account balances are charged off against the allowance after all means of
collection have been exhausted and the potential for recovery is considered
remote. The allowance for doubtful accounts was $399 and $323 at
December 31, 2007 and 2006, respectively. Credit losses were insignificant
in the three-year period ending December 31, 2007. The Company does not
have off-balance-sheet credit exposure related to its customers.
|
(c)
|
Inventories
|
Coal
inventories are stated at the lower of cost or market. The cost of coal
inventories is determined based on average cost of production, which includes
all costs incurred to extract, transport and process the coal. Coal is
classified as inventory at the point in time the coal is extracted from the mine
and weighed at a loading facility.
Material
and supplies inventories are valued at average cost, less an allowance for
obsolete and surplus items.
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
|
(d)
|
Property,
Plant, and Equipment
|
Costs for
mineral properties, mineral rights, and mine development incurred to expand
capacity of operating mines or to develop new mines are capitalized and charged
to operations on the units-of-production method over the estimated proven and
probable reserve tons. Mine development costs include costs incurred for site
preparation and development of the mines during the development stage. Mobile
mining equipment and other fixed assets are stated at cost and depreciated on a
straight-line basis over estimated useful lives ranging from 2 to 20 years.
Leasehold improvements are amortized, using the straight-line method, over their
estimated useful lives or the term of the lease, whichever is shorter. Major
repairs and betterments that significantly extend original useful lives or
improve productivity are capitalized and depreciated over the period benefited.
Maintenance and repairs are expensed as incurred.
|
(e)
|
Impairment
of Long-Lived Assets
|
In
accordance with Statement of Financial Accounting Standards
(SFAS) No. 144,
Accounting for the Impairment or Disposal of Long-lived Assets,
long-lived assets, such as property, plant, equipment, and purchased intangibles
subject to amortization, are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying amount of an
asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the
fair value of the asset. Assets to be disposed of would be separately presented
in the balance sheet and reported at the lower of the carrying amount or fair
value less costs to sell, and would no longer be depreciated. The assets and
liabilities of a disposal group classified as held for sale would be presented
separately in the appropriate asset and liability sections of the balance
sheet.
|
(f)
|
Goodwill
|
Goodwill
represents the excess of costs over fair value of net assets of businesses
acquired. Pursuant to SFAS No. 142, Goodwill and Other Intangible
Assets (“SFAS 142”), goodwill and intangible assets acquired in a
purchase business combination and determined to have an indefinite useful life
are not amortized, but instead tested for impairment at least annually (as of
August 31) in accordance with the provisions of SFAS 142. The impairment
review in 2007 supported the carrying value of goodwill.
|
(g)
|
Health
Insurance Programs
|
The
Company is principally self-insured for costs of health and medical claims. The
Company utilizes commercial insurance to cover specific claims in excess of $500
($250 prior to January 1, 2005). Estimated liabilities for health and
medical claims are recorded based on the Company's historical experience and
includes a component for incurred but not reported claims.
|
(h)
|
Income
Taxes
|
The
Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income
Taxes (“SFAS 109”), which
requires the recognition of deferred tax assets and liabilities using enacted
tax rates for the effect of temporary differences between the book and tax bases
of recorded assets and liabilities. SFAS 109 also requires that deferred
tax assets be reduced by a valuation allowance if it is more likely than not
that some portion or all of the deferred tax asset will not be realized. In
evaluating the need for a valuation allowance, the Company takes into account
various factors, including objective evidence obtained from historical earnings,
future sales commitments, the expected level of future taxable income and
available tax planning strategies, and the impact the alternative minimum tax
has on utilization of deferred tax assets. If future taxable income is lower
than expected or if expected tax planning strategies are not available as
anticipated, we may record a change to the valuation allowance through income
tax expense in the period the determination is made.
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
|
(i)
|
Asset
Retirement Obligation
|
Minimum
standards for mine reclamation have been established by various regulatory
agencies and dictate the reclamation requirements at the Company's operations.
The Company records these reclamation obligations under the provisions of
SFAS No. 143,
Accounting for Asset Retirement Obligations (“SFAS 143”). SFAS 143
requires the fair value of a liability for an asset retirement obligation to be
recognized in the period in which the legal obligation associated with the
retirement of the long-lived asset is incurred. When the liability is initially
recorded, the offset is capitalized by increasing the carrying amount of the
related long-lived asset. Over time, the liability is accreted to its present
value each period, and the capitalized cost is depreciated over the useful life
of the related asset. To settle the liability, the obligation is paid, and to
the extent there is a difference between the liability and the amount of cash
paid, a gain or loss upon settlement is recorded. The Company annually reviews
its estimated future cash flows for its asset retirement
obligations.
In
connection with the business acquisitions described in Note 22, the Company
recorded the fair value of the reclamation liabilities assumed as part of the
acquisitions in accordance with SFAS 143.
|
(j)
|
Royalties
|
Lease
rights to coal lands are often acquired in exchange for royalty payments.
Advance mining royalties are advance payments made to lessors under terms of
mineral lease agreements that are recoupable against future production. These
advance payments are deferred and charged to operations as the coal reserves are
mined. The Company regularly reviews recoverability of advance mining royalties
and establishes or adjusts the allowance for advance mining royalties as
necessary using the specific identification method. In instances where advance
payments are not expected to be offset against future production royalties, the
Company establishes a provision for losses on the advance payments that have
been paid and the scheduled future minimum payments are expensed and recognized
as liabilities. Advance royalty balances are charged off against the allowance
when the lease rights are either terminated or expire.
The
changes in the allowance for advance mining royalties were as
follows:
|
Balance
at December 31, 2004
|
$
|
5,441
|
||
|
Provision
for non-recoupable advance mining royalties
|
580
|
|||
|
Write-offs
of advance mining royalties
|
(1,191
|
)
|
||
|
Balance
at December 31, 2005
|
4,830
|
|||
|
Provision
for non-recoupable advance mining royalties
|
2,215
|
|||
|
Write-offs
of advance mining royalties
|
(766
|
)
|
||
|
Balance
at December 31, 2006
|
6,279
|
|||
|
Provision
for non-recoupable advance mining royalties
|
511
|
|||
|
Write-offs
of advance mining royalties
|
(1,254
|
)
|
||
|
Balance
at December 31, 2007
|
$
|
5,536
|
|
(k)
|
Revenue
Recognition
|
The
Company recognizes revenue on coal sales when title passes to the customer in
accordance with the terms of the sales agreement. Revenue from domestic coal
sales is recorded at the time of shipment or delivery to the customer, and the
customer takes ownership and assumes risk of loss based on shipping terms.
Revenue from international coal sales is recorded at the time coal is loaded
onto the shipping vessel, when the customer takes ownership and assumes risk of
loss. In the event that new contracts are negotiated with a customer
and shipments commence before the old contract is complete, the Company
recognizes as revenue the lower of the cumulative amount billed or an amount
based on the weighted average price of the new and old contracts applied to the
tons sold.
Freight
and handling costs paid to third-party carriers and invoiced to coal customers
are recorded as freight and handling costs and freight and handling revenues,
respectively.
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Other
revenues generally consist of equipment and parts sales, equipment rebuild and
maintenance services, coal handling and processing, royalties and rental income.
These revenues are recognized in the period earned or when the service is
completed. Beginning on October 26, 2005, the Company began earning
revenues from the operation of a road construction business which was acquired
as part of the acquisition of the Nicewonder Coal Group (Note 22). Revenue
from road construction contracts is recognized under the percentage of
completion method of accounting for long-term contracts in accordance with
Accounting Research Bulletin No. 45 Long-Term Construction
Contracts and the American Institute of Certified Public Accountants
Statement of Position 81-1,
Accounting for Performance of Construction-Type and Certain Production-Type
Contracts.
|
(l)
|
Deferred
Financing Costs
|
In
connection with our Gallatin acquisition financing, the Company incurred
deferred financing costs totaling $918. In addition, the Company
incurred deferred financing costs totaling $8,201 for the year ended December
31, 2005. These deferred financing costs are being amortized to interest expense
over the life of the related indebtedness or credit facility using the
straight-line method which approximates the effective interest method.
Unamortized deferred financing costs are included in other assets in the
accompanying balance sheets. Amortization expense for the years ended
December 31, 2007, 2006 and 2005 totaled $2,318, $2,282 and $3,357,
respectively. Amortization for the year ended December 31, 2005 included
$1,503 for deferred financing costs written off in connection with refinancing
transactions.
|
(m)
|
Virginia
Coalfield Employment Enhancement Tax
Credit
|
For tax
years 1996 through 2014, Virginia companies with an economic interest in coal
earn tax credits based upon tons sold, seam thickness, and employment levels.
The maximum credit earned equals $0.40 per ton for surface mined coal and
$1.00 or $2.00 per ton for deep mined coal depending on seam thickness.
Credits allowable are reduced from the maximum amounts if employment levels are
not maintained from the previous year, and no credit is allowed for coal sold to
Virginia utilities. Currently, the cash benefit of the credit is realized three
years after being earned and either offsets taxes imposed by Virginia at 100% or
is refundable by the state at 85% of the face value to the extent taxes are not
owed. The Company records the present value of the portion of the credit that is
refundable as a reduction of operating costs as it is earned. Prior
to the Internal Restructuring, the portion of the credits allocated to ANR
Fund IX Holdings, L.P. and minority interest owners were recorded as
noncash distributions.
|
(n)
|
Workers'
Compensation and Pneumoconiosis (Black Lung)
Benefits
|
Workers'
Compensation
The
Company is self-insured for workers' compensation claims at certain of its
operations in West Virginia. Workers' compensation at all other locations in
West Virginia is insured through a third-party insurance provider. Workers'
compensation claims at locations in all other states where the Company operates
are covered by a third-party insurance provider.
The
liabilities for workers' compensation claims that are self-insured are estimates
of the ultimate losses incurred based on the Company's experience, and include a
provision for incurred but not reported losses. Adjustments to the probable
ultimate liabilities are made annually based on an actuarial study and
adjustments to the liability are recorded based on the results of this
study.
Black
Lung Benefits
The
Company is required by federal and state statutes to provide benefits to
employees for awards related to black lung disease. These claims are covered by
a third-party insurance provider in all locations where the Company operates
with the exception of West Virginia. The Company is self-insured for state black
lung related claims at certain locations in West Virginia. The Company accounts
for self-insured black lung obligations under the provisions of SFAS No.
106, Employers‘ Accounting for
Postretirement Benefit Other than Pension (“SFAS 106”), and SFAS No.
158, Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans (“SFAS 158”).
Charges
are made to operations for self-insured state black lung claims in West
Virginia, as determined by an independent actuary at the present value of the
actuarially computed liability for such benefits over the employee's applicable
term of service. The Company did not assume any responsibility for workers'
compensation or black lung claims incurred by any of its subsidiaries prior to
their acquisition. Effective December 31, 2006, the Company adopted SFAS 158
Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans (“SFAS 158”), which
requires that the Company recognize on its balance sheet the amount of the
Company's unfunded Accumulated Benefit Obligation (“ABO”) at the end of the
year. The initial effect of the adoption of SFAS 158 was recorded in accumulated
other comprehensive loss, net of tax. Amounts recognized in accumulated other
comprehensive loss are adjusted out of accumulated other comprehensive loss when
they are subsequently recognized as components of net periodic benefit
cost. Subsequent to the year of adoption, these are recorded as
components of comprehensive income (loss).
|
(o)
|
Postretirement
Benefits Other Than Pensions
|
The
Company accounts for health care benefits provided for current and certain
retired employees and their dependents by accruing the cost of such benefits
over the service lives of employees. Unrecognized actuarial gains and losses are
amortized over the estimated average remaining service period for active
employees and over the estimated average remaining life for retirees. Effective
December 31, 2006, the Company adopted SFAS No. 158, which requires that the
Company recognize on its balance sheet the amount of the Company's unfunded
Accumulated Postretirement Benefit Obligation (“APBO”) at the end of the year.
The initial effect of the adoption of SFAS 158 was recorded in accumulated other
comprehensive loss, net of tax. Amounts recognized in accumulated other
comprehensive loss are adjusted out of accumulated other comprehensive loss when
they are subsequently recognized as components of net periodic benefit
cost. Subsequent to the year of adoption, these are recorded as components
of comprehensive income (loss).
|
(p)
|
Equity
Investments
|
The
accompanying consolidated financial statements include the accounts of the
Company and its majority owned subsidiaries. Investments in unconsolidated
subsidiaries representing ownership of at least 20% but less than 50% are
accounted for under the equity method. Under the equity method of accounting,
the Company's proportionate share of the investment company's income or loss is
included in the Company's net income or loss with a corresponding increase or
decrease in the carrying value of the investment.
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
|
(q)
|
Share-Based
Compensation
|
Effective
January 1, 2006, the Company adopted SFAS No. 123(R), “Share-Based Payment”
(“SFAS 123(R)”), which requires that the measurement and recognition of
compensation expense for all stock-based payment awards made to employees and
directors be based on the estimated fair value of the awards 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 123(R), 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 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
123(R).
For the
year ended December 31, 2007 and 2006, approximately 61% and 90%, respectively,
of stock-based compensation expense is reported as selling, general and
administrative expenses and approximately 39% and 10%, respectively, of the
stock-based compensation expense was recorded as a component of cost of sales.
At December 31, 2007 and 2006, approximately $108 and $77 of stock-based
compensation costs were capitalized as a component of inventories,
respectively. Under SFAS 123(R) the Company is required to report the
benefits of income tax deductions that exceed recognized compensation as cash
flow from financing activities. Such excess tax benefits were insignificant for
the year ended December 31, 2007 and 2006.
The
following table illustrates the effect on net income, as adjusted, and earnings
per share as if the Company had applied the fair value recognition provisions of
SFAS 123 to share-based compensation using the Black-Scholes option-pricing
model for the year ended December 31, 2005:
|
Year
Ended
|
||||
|
December 31,
2005
|
||||
|
Net
income, as adjusted (Note 4)
|
$
|
21,124
|
||
|
Add:
stock option expense included in net income, as adjusted, net of income
taxes and minority interest
|
484
|
|||
|
Deduct:
stock option expense determined under fair-value method, net of income
taxes and minority interest
|
(1,322
|
)
|
||
|
Pro
forma net income, adjusted for effect of fair value of stock
options
|
$
|
20,286
|
||
|
Earnings
per share-- basic and diluted
|
||||
|
Net
income, as adjusted (Note 4)
|
$
|
0.38
|
||
|
Pro
forma earnings per share - basic and diluted, adjusted for effect of fair
value of stock options
|
$
|
0.36
|
||
In
addition to the stock option expense reflected above, the Company recorded
$45,875 in expense in 2005 for stock-based compensation other than stock
options, the expense for which would have been the same under SFAS 123. Such
amount includes $7,475, representing a cash distribution to certain officers and
employees of a portion of the net proceeds from the Company's initial public
offering attributable to the underwriters' exercise of their over-allotment
option. Substantially all of the remainder is non-cash expense attributable to
shares issued in connection with the Internal Restructuring to certain officers
and employees. (See Note 2)
The
Company had not granted equity-based awards prior to November 2004. For purposes
of the above, the weighted average fair value of stock options granted in the
years ended December 31, 2005 and 2004 was estimated to be $6.42 and $9.04,
respectively. The fair value of stock options granted was estimated on the date
of each 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 Company's expected life
assumption was 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 the Company at the time the options
were granted.
The
expected volatility assumption was 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 was 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 Company's expected dividend policy
at the time the options were granted. The quarterly expected dividend range is
between $0.02 and $0.03, or $0.08 and $0.12 per year. A mid-range was chosen to
be included in the assumption above, however, the Company does not currently pay
a dividend.
No stock
options were granted during the years ended December 31, 2007 and 2006,
respectively.
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
|
(r)
|
Derivative
Financial Instruments
|
Derivative
financial instruments are accounted for in accordance with SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities (“SFAS 133”). SFAS 133 requires all
derivative financial instruments to be reported on the balance sheet at fair
value. Changes in fair value are recognized either in earnings or equity,
depending on whether the transaction qualifies for hedge accounting, and if so,
the nature of the underlying exposure being hedged and how effective the
derivatives are at offsetting price movements in the underlying
exposure.
The
Company accounts for certain forward purchase and forward sale contracts that do
not qualify under the “normal purchase and normal sale” exception of SFAS 133,
as derivatives and records these contracts as assets or liabilities at fair
value. Accordingly, changes in fair value for these forward sales and forward
purchase contracts have been recorded in revenue and cost of sales,
respectively. At December 31, 2007, the Company had unrealized gains (losses) on
open sales and purchase contracts of $11,253 and ($2,139), respectively. At
December 31, 2006, the Company had unrealized gains (losses) on open sales and
purchase contracts of $6,119 and ($5,940), respectively. These amounts are
recorded in prepaid expenses and other current assets and accrued expenses and
other current liabilities, respectively.
The
Company has utilized interest rate swap agreements to modify the interest
characteristics of a portion of the Company's outstanding debt. The swap
agreements essentially convert variable-rate debt to fixed-rate debt and have
been designated as cash flow hedges. Changes in the fair value of interest
rate swaps designated as hedging instruments of the variability of cash flows
associated with floating rate and long-term debt obligations are reported in
accumulated other comprehensive income (loss). These amounts are
subsequently reclassified into interest expense in the same period in which the
related floating rate debt obligation affects earnings.
The
Company is also exposed to the risk of fluctuations in cash flows related to its
purchase of diesel fuel. The Company has entered into diesel fuel swap
agreements and diesel put options to reduce the volatility in the price of
diesel fuel for its operations. The diesel fuel swap agreements and put options
are not designated as hedges and therefore the changes in the fair value for
these derivative instrument contracts have been recorded in cost of sales. These
diesel fuel swaps and put options use the NYMEX New York Harbor #2 heating oil
as the underlying commodity reference price. Any unrealized loss is
recorded in other current liabilities and any unrealized gain is recorded in
other current assets.
As of
December 31, 2007 approximately 2,688 gallons or 10% of the Company's
anticipated 2008 diesel fuel usage has been capped with the swap agreements in
which the company has agreed to pay a fixed price and receive a floating price
per gallon of diesel fuel. The fixed prices for the notional quantity of
2,688 gallons range from $2.49 to $2.60 per gallon for the last eleven months of
2008. The fair value of these diesel fuel swap agreements are an asset of
$36 as of December 31, 2007.
As of
December 31, 2007, the Company entered into diesel fuel put options for 2,688
gallons at a price range of $2.25 to $2.45 per gallon for the last eleven months
of 2008. In the event that diesel prices decline below the strike
price, the Company can exercise the put options and sell the 2,688 gallons at
the strike price, therefore reducing the impact of the swap
agreements. These put options provide downside protection and reduce
the fixed position risk of the outstanding diesel fuel swap agreements in the
event of a decline in diesel fuel prices below the strike price. The fair value
of these diesel fuel put options are an asset of $204 as of December 31,
2007.
|
(s)
|
New
Acccounting Pronouncements
|
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 141(R), Business Combinations (“SFAS
141(R)”), and SFAS No. 160, Accounting and Reporting of
Noncontrolling Interest in Consolidated Financial Statements, an
amendment of ARB No. 51 (“SFAS 160”). SFAS 141(R) and SFAS 160 will
significantly change the accounting for and reporting of business combination
transactions and noncontrolling (minority) interests in consolidated financial
statements. SFAS 141(R) retains the fundamental requirements in SFAS No.
141,Business Combinations,
while providing additional definitions, such as the definition of the
acquirer in a purchase and improvements in the application of how the
acquisition method is applied. SFAS 160 will change the accounting and reporting
for minority interests, which will be recharacterized as noncontrolling
interests, and classified as a component of equity. These Statements become
simultaneously effective January 1, 2009. Early adoption is not permitted.
We are currently evaluating the impact this guidance will have on our
consolidated financial statements.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities – Including an Amendment of SFAS No. 115
(“SFAS 159”). This Statement permits entities to choose to measure many
financial instruments and certain other items at fair value. The objective is to
improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. This Statement is effective as of the beginning of an entity’s first
fiscal year that begins after November 15, 2007. Early adoption is
permitted as of the beginning of a fiscal year that begins on or before
November 15, 2007, provided the entity also elects to apply the provisions
of SFAS No. 157, Fair Value
Measurements (“SFAS 157”). We do not expect this
guidance to have a significant impact on our consolidated financial statements;
however management is currently assessing the impact of adopting SFAS
159.
In
September 2006, the FASB issued SFAS 157, which defines fair value, establishes
a framework for measuring fair value in generally accepted accounting principles
and requires additional disclosures about fair value measurements. SFAS 157 aims
to improve the consistency and comparability of fair value measurements by
creating a single definition of fair value. The Statement emphasizes that fair
value is not entity-specific, but instead is a market-based measurement of an
asset or liability. SFAS 157 upholds the requirements of previously issued
pronouncements concerning fair value measurements and expands the required
disclosures. This Statement is effective for financial statements issued for
fiscal years beginning after November 15, 2007, however earlier application
is permitted provided the reporting entity has not yet issued financial
statements for that fiscal year. The FASB deferred the effective date of SFAS
157 for one year for nonfinancial assets and nonfinancial liabilities that are
recognized or disclosed at fair value in the financial statements on a
nonrecurring basis. We do not expect this guidance to have a significant impact
on our consolidated financial statements; however management is currently
assessing the impact of adopting SFAS 157.
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
|
(t)
|
Adoption
of SAB 108
|
On
September 13, 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 108, Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements (“SAB 108”), which provides interpretive guidance on the
consideration of effects of prior year misstatements in quantifying current year
misstatements for the purpose of assessing materiality. SAB 108 was effective
for the Company for the year ended December 31, 2006 and provided for a one time
transitional cumulative effect adjustment to retained earnings as of January 1,
2006 for errors which were not previously deemed to be material, but which are
material under the guidance of SAB 108. As a result of the adoption of SAB 108,
the Company changed its method of accounting for costs related to perpetual
water treatment and also for certain materials and supplies inventories which
are used in mining operations. For the year ended December 31, 2006,
the Company recorded a cumulative effect adjustment to increase beginning
retained earnings by $717 (net of income tax effect of $238) for the effect of
these accounting changes. The Company considered the impact of these errors to
be immaterial prior to the adoption of SAB 108.
Perpetual
Water Treatment
The
Company is legally obligated to treat runoff and effluence for its mines and
preparation plants, including for closed sites, and prior to the adoption of SAB
108 had historically expensed these costs as paid. The Company believes these
costs should be accrued when incurred pursuant to
SFAS 143. Substantially all of these obligations existed upon
formation of the Company and were assumed as a result of acquisitions prior to
formation. Upon adoption of SAB 108 for the year ended December 31, 2006, the
Company recorded an increase to property, plant and equipment, net of $1,877, an
increase to goodwill of $1,906, an increase to deferred tax assets of $678,
an increase to other long-term assets of $82, a reduction of deferred gain on
sales of property interest of $1,115, an increase to asset retirement obligation
of $7,700 and a decrease in beginning retained earnings of $2,042.
Mine
Supplies Inventory
Since its
formation, the Company has not recorded as inventory certain mine supplies,
including tires, explosives and fuel, that are maintained at some of its mines
and used in mine operations. The Company's policy was to expense these costs
when the supplies were purchased. Since the inventory balances remained
consistent from period to period, the impact of this policy was considered
immaterial prior to the adoption of SAB 108. Upon adoption of SAB 108, the
Company changed its policy to record these amounts in inventory when purchased
and to expense the items when used in mining operations. For the year ended
December 31, 2006, the Company recorded an increase to inventory of $3,675, a
decrease in deferred tax assets of $916 and an increase in beginning retained
earnings of $2,759.
|
(u)
|
Use
of Estimates
|
The
preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant items subject to such estimates and assumptions
include inventories; mineral reserves; allowance for non-recoupable advance
mining royalties; asset retirement obligations; employee benefit liabilities;
future cash flows associated with assets; useful lives for depreciation,
depletion, and amortization; workers' compensation and black lung claims;
postretirement benefits other than pensions; income taxes; revenue recognized
using the percentage of completion method; and fair value of financial
instruments. Due to the subjective nature of these estimates, actual results
could differ from those estimates.
|
(v)
|
Reclassifications
|
Certain
amounts in prior periods have been reclassified to conform with the current year
presentation with no effect on previously reported net income or stockholders’
equity.
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
|
(4)
|
Earnings
Per Share
|
Basic
earnings per share is computed by dividing net income or loss by the weighted
average number of shares of common stock outstanding during the periods. Diluted
earnings per share is computed using the treasury stock method by dividing net
income or loss by the weighted average number of shares of common stock and
dilutive common stock equivalents outstanding during the periods. Common stock
equivalents include the number of shares issuable on exercise of outstanding
awards less the number of shares that could have been purchased with the
proceeds from the exercise of the options based on the average price of common
stock during the period. In 2007, the number of stock options and restricted
shares which were not included in the calculation of diluted earnings per share
because to do so would have been antidilutive were 691,100 and 555,901,
respectively. 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 2005 reflects certain adjustments, as
described below.
The
numerator for purposes of computing basic and diluted net income (loss) per
share, as adjusted for 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,
2003. For purposes of the computation of basic and diluted net income (loss) per
share, as adjusted, the proforma 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 is
necessary subsequent to February 11, 2005 because the Company is subject to
income taxes.
The
denominator for purposes of computing basic net income per share, as adjusted
for 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, 2003. 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.
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.
The
computations of basic and diluted net income per share for 2007, 2006, and
as adjusted in 2005, are set forth below:
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Numerator:
|
||||||||||||
|
Reported
income from continuing operations
|
$ | 27,734 | $ | 128,168 | $ | 21,426 | ||||||
|
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 in 2005
|
27,734 | 128,168 | 21,335 | |||||||||
|
Reported
loss from discontinued operations
|
-- | -- | (213 | ) | ||||||||
|
Add:
Income tax effect of ANR Fund IX Holdings, L.P. loss from discontinued
operations prior to Internal Restructuring
|
-- | -- | 2 | |||||||||
|
Loss
from discontinued operations, as adjusted in 2005
|
-- | -- | (211 | ) | ||||||||
|
Net
income, as adjusted in 2005
|
$ | 27,734 | $ | 128,168 | $ | 21,124 | ||||||
|
Denominator:
|
||||||||||||
|
Weighted
average shares—basic
|
64,631,507 | 64,093,571 | 55,664,081 | |||||||||
|
Dilutive
effect of stock options and restricted stock grants
|
377,923 | 57,209 | 385,465 | |||||||||
|
Weighted
average shares—diluted
|
65,009,430 | 64,150,780 | 56,049,546 | |||||||||
|
Net
income per share, as adjusted-- basic and diluted:
|
||||||||||||
|
Income
from continuing operations, as adjusted in 2005
|
$ | 0.43 | $ | 2.00 | $ | 0.38 | ||||||
|
Loss
from discontinued operations, as adjusted in 2005
|
-- | -- | -- | |||||||||
|
Net
income per share, as adjusted in 2005
|
$ | 0.43 | $ | 2.00 | $ | 0.38 | ||||||
ALPHA NATURAL RESOURCES, INC. AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
|
(5)
|
Inventories
|
Inventories
consisted of the following:
|
December
31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Raw
coal
|
$ | 8,754 | $ | 8,868 | ||||
|
Saleable
coal
|
48,928 | 53,428 | ||||||
|
Equipment
purchased for resale
|
1,688 | 1,744 | ||||||
|
Materials
and supplies
|
11,410 | 12,804 | ||||||
|
Total
inventories
|
$ | 70,780 | $ | 76,844 | ||||
|
(6)
|
Prepaid
Expenses and Other Current Assets
|
Prepaid
expenses and other current assets consisted of the following:
|
December
31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Prepaid
insurance
|
$ | 20,958 | $ | 23,169 | ||||
|
Advance
mining royalties, net
|
4,884 | 4,511 | ||||||
|
Refundable
income taxes
|
8,841 | 3,334 | ||||||
|
Fair
value of certain forward coal purchase and sale contracts
|
11,492 | 6,119 | ||||||
|
Prepaid
freight
|
11,213 | 11,299 | ||||||
|
Other
prepaid expenses
|
2,566 | 2,461 | ||||||
|
Total
prepaid expenses and other current assets
|
$ | 59,954 | $ | 50,893 | ||||
|
(7)
|
Property,
Plant, and Equipment
|
Property,
plant, and equipment consisted of the following:
|
December
31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Land
|
$ | 14,226 | $ | 14,065 | ||||
|
Mineral
rights
|
343,152 | 324,703 | ||||||
|
Plant
and mining equipment
|
616,917 | 505,056 | ||||||
|
Vehicles
|
5,659 | 4,816 | ||||||
|
Mine
development
|
61,433 | 54,350 | ||||||
|
Office
equipment and software
|
13,030 | 9,304 | ||||||
|
Construction
in progress
|
25,410 | 14,564 | ||||||
| 1,079,827 | 926,858 | |||||||
|
Less
accumulated depreciation, depletion, and amortization
|
439,569 | 289,722 | ||||||
|
Property,
plant, and equipment, net
|
$ | 640,258 | $ | 637,136 | ||||
As of
December 31, 2007, the Company had commitments to purchase approximately
$45,170 of new equipment, expected to be acquired at various dates in
2008.
Depreciation
and amortization expense associated with property, plant and equipment was
$120,754, $100,732 and $60,502, and depletion expense was $43,730, $40,716 and
$11,698, for the years ended December 31, 2007, 2006, and 2005,
respectively.
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
|
(8)
|
Capitalized
Interest
|
Interest
costs applicable to major asset additions are capitalized during the
construction period. During the years ended December 31, 2007, 2006,
and 2005, interest costs of $1,743, $827, and $427 were
capitalized.
|
(9)
|
Other
Intangibles
|
Other
intangible assets consisted of the following:
|
December
31, 2007
|
December
31, 2006
|
|||||||||||||||
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
|||||||||||||
|
Sales
contracts
|
$ | 5,084 | $ | 1,907 | $ | 7,546 | $ | 3,960 | ||||||||
|
Customer
relationships
|
8,006 | 2,065 | 8,678 | 1,111 | ||||||||||||
|
Noncompete
agreements
|
927 | 669 | 1,177 | 610 | ||||||||||||
| $ | 14,017 | $ | 4,641 | $ | 17,401 | $ | 5,681 | |||||||||
Total
amortization expense for the above intangible assets was $2,122, $3,210 and
$1,205 for the years ended December 31, 2007, 2006 and 2005, respectively,
and is expected to be approximately $3,318, $3,042, $1,512, $1,505 for the years
ended December 31, 2008, 2009, 2010, and thereafter,
respectively.
|
(10)
|
Other
Assets
|
Other
assets consisted of the following:
|
December
31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Advance
mining royalties, net
|
$ | 16,174 | $ | 10,374 | ||||
|
Deferred
loan costs, net of accumulated amortization of $6,245 and $3,927 in 2007
and 2006, respectively
|
11,501 | 12,901 | ||||||
|
Investment
in terminal facility
|
1,498 | 1,087 | ||||||
|
Investment
in Excelven Pty Ltd
|
4,870 | 5,921 | ||||||
|
Virginia
tax credit receivable
|
20,181 | 12,105 | ||||||
|
Davis-Bacon
litigation (see Note 25(b))
|
6,125 | -- | ||||||
|
Other
|
3,045 | 451 | ||||||
|
Total
other assets
|
$ | 63,394 | $ | 42,839 | ||||
|
(11)
|
Note Payable
|
At
December 31, 2007, the company had one note payable for $18,883 that was
incurred to finance various insurance premiums. Interest, which accrues at the
rate of 4.96%, and principal are due in monthly installments, with the final
payment due in September 2008. At December 31, 2006, note payable
included $20,941 that was incurred to finance various insurance premiums.
Interest, which accrued at the rate of 6.15%, and principal were paid in monthly
installments, with the final payment paid in September 2007.
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
|
(12)
|
Accrued
Expenses and Other Current
Liabilities
|
Accrued
expenses and other current liabilities consisted of the following:
|
December
31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Wages
and employee benefits
|
$ | 29,750 | $ | 25,176 | ||||
|
Current
portion of asset retirement obligation
|
8,179 | 7,797 | ||||||
|
Taxes
other than income taxes
|
16,884 | 12,415 | ||||||
|
Freight
|
8,154 | 10,669 | ||||||
|
Contractor
escrow
|
1,201 | 1,087 | ||||||
|
Deferred
gains on sales of property interests
|
-- | 389 | ||||||
|
Deferred
revenues
|
1,355 | 1,000 | ||||||
|
Current
portion of self-insured workers' compensation benefits
|
1,779 | 1,175 | ||||||
|
Workers'
compensation insurance premium payable
|
1,340 | 4,091 | ||||||
|
Interest
payable
|
2,876 | 2,289 | ||||||
|
Additional
consideration for acquisition
|
-- | 549 | ||||||
|
Fair
value of certain forward coal purchase and sale contracts
|
2,139 | 5,940 | ||||||
|
Unamortized
portion of unfavorable coal sales contract
|
6,763 | 6,763 | ||||||
|
Construction
billings in excess of costs
|
5,454 | 2,943 | ||||||
|
Other
|
10,208 | 8,311 | ||||||
|
Total
accrued expenses and other current liabilities
|
$ | 96,082 | $ | 90,594 | ||||
|
(13)
|
Long-Term
Debt
|
Long-term debt consisted of the following:
|
December
31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Term
loan
|
$ | 233,125 | $ | 247,500 | ||||
|
10%
Senior notes due 2012
|
175,000 | 175,000 | ||||||
|
Gallatin
loan facility
|
18,500 | -- | ||||||
|
Capital
lease obligation
|
705 | 1,510 | ||||||
|
Other
|
700 | 700 | ||||||
|
Total
long-term debt
|
428,030 | 424,710 | ||||||
|
Less
current portion
|
2,579 | 3,254 | ||||||
|
Long-term
debt, net of current portion
|
$ | 425,451 | $ | 421,456 | ||||
Term
Loan
On
October 26, 2005, Alpha Natural Resources, LLC (“ANR LLC”), entered into a
senior secured credit facility with a group of lending institutions led by
Citicorp North America, Inc., as administrative agent (the “Citicorp Credit
Facility”). The Citicorp Credit Facility consists of a $250,000 term loan
facility and a $275,000 revolving credit facility. The revolving credit facility
includes borrowing capacity available for letters of credit.
As of
December 31, 2007 and 2006, there were $233,125 and $247,500 in borrowings,
respectively, under the term loan facility and no borrowings under the revolving
credit facility. In addition, there were $82,195 and $81,094 in letters of
credit outstanding for December 31, 2007 and 2006, respectively. At December 31,
2007, $192,805 was available for borrowing.
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
All of our
borrowings under the Credit Facility are at a variable rate, so we are exposed
to the effect of rising interest rates. As of December 31, 2007, we had a
$233,125 term loan outstanding with a variable interest rate based upon the
3-month London Interbank Offered Rate (“LIBOR”) (4.70% at December 31, 2007)
plus the applicable margin (1.75%, at December 31, 2007). To reduce our exposure
to rising interest rates, effective May 22, 2006, we entered into a pay-fixed,
receive variable interest rate swap on the notional amount of $233,125 for a
period of approximately six and one-half years. In effect, this swap converted
the variable interest rates based on LIBOR to a fixed interest rate of 5.59%
plus the applicable margin defined in the debt agreement for the remainder of
our term loan. We account for the interest rate swap as a cash flow hedge and
changes in fair value of the swap are recorded to other comprehensive income
(loss). The critical terms of the swap and the underlying debt instrument that
it hedges coincide, resulting in no hedge ineffectiveness being recognized in
the income statement during the years ended December 31, 2007 and 2006. The fair
value of the swap at December 31, 2007 was $15,590 which was recorded in other
liabilities in the consolidated balance sheet and the offsetting unrealized loss
of $11,880, net of tax benefit, was recorded in accumulated other comprehensive
loss. As interest expense is accrued on the debt obligation, amounts in
accumulated other comprehensive loss related to the derivative hedging
instrument are reclassified into earnings to obtain a net cost on the debt
obligation of 5.59% plus the applicable margin. For the years ended
December 31, 2007 and 2006, $648 and $314 of losses in accumulated other
comprehensive loss were reclassified into interest expense.
The Credit
Agreement and the Senior Notes each place restrictions on the ability of ANR LLC
and its subsidiaries to make distributions or loans to the Company. At December
31, 2007, ANR LLC had net assets of $369,932 and, except for allowable
distributions for the payment of income taxes, administrative expenses, and in
certain circumstances, dividends or repurchases of common stock of the Company,
the net assets of ANR LLC are restricted.
10% Senior
Notes Due June 2012
On
May 18, 2004, ANR, LLC and its wholly-owned subsidiary, Alpha Natural
Resources Capital Corp., issued $175,000 of 10% senior notes due June 2012
in a private placement offering under Rule 144A of the Securities Act of
1933, as amended, resulting in net proceeds of approximately $171,500 after fees
and other offering costs. The senior notes are unsecured but are guaranteed
fully and unconditionally on a joint and several basis by all of the Company's
wholly-owned domestic restricted subsidiaries other than the issuers of the
notes, and the Company, as the parent guarantor as a result of the merger of ANR
Holdings in the Company. The senior notes are the Company's senior unsecured
obligations and rank equally in right of payment to any existing and future
unsecured indebtedness and rank senior in right of payment to any future
subordinated or senior subordinated indebtedness. The senior notes are
effectively subordinated in right of payment to the Company's secured
indebtedness, including borrowings under the Citicorp Credit Facility. Interest
on the senior notes is payable semi-annually in June and December.
The
senior notes may be redeemed in whole or in part on or after June 1, 2008
at the prices described in the governing indenture. In addition, the indenture
provides for the redemption of up to 35% of the aggregate principal amount of
senior notes for 110% of the principal amount of the senior notes with the net
proceeds of certain underwritten equity offerings. Any of the senior notes may
be redeemed at any time before June 1, 2008 in cash at 100% of the
principal amount plus accrued and unpaid interest and a make-whole
premium.
The
indenture governing the senior notes contains covenants that, among other
things, limit the ability of the Company to incur additional indebtedness, make
certain payments, including dividends, make certain investments, and sell
certain assets or merge with or into other companies.
Gallatin
Loan Facility
Gallatin
entered into a non-recourse senior secured loan facility with Nedbank Limited on
December 28, 2006 (the “Gallatin Loan Facility”) to provide phase one project
financing for the construction of assets in the amount of $20,550 at an interest
rate based upon the 6-month London Interbank Offered Rate (“LIBOR”) plus an
applicable margin of 3.5% at December 31, 2007. The final maturity date is
July 26, 2016. As of December 31, 2007 Gallatin had borrowed $18,500 under the
loan facility, which is restricted for Gallatin
operations.
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Other
Indebtedness
The
Company entered into a capital lease for equipment in conjunction with the
purchase of substantially all of the assets of Moravian Run Reclamation Co.,
Inc. on April 1, 2004. The lease has a term of sixty months with monthly
payments ranging from $20 to $60 with a final balloon payment of $180 in March
2009. The effective interest rate on the capital lease is approximately 12.15%.
The capitalized cost of the leased property was $1,874 at December 31,
2007. Accumulated amortization was $1,397 and $1,049 at December 31, 2007
and 2006, respectively. Amortization expense on capital leases is included with
depreciation expense.
In the
Company's acquisition of Progress in 2006, it assumed a capital lease obligation
through Caterpillar Financial Services. The remaining lease term was 29 months
with monthly payments of $23 starting in May of 2006. The effective interest
rate on the capital lease is approximately 4.26%. The capitalized cost of the
leased property was $513 at December 31, 2007. Accumulated amortization was $171
and $68 at December 31, 2007 and 2006, respectively. Amortization expense on
capital leases is included with depreciation expense.
Future
maturities of long-term debt, including the Gallatin project financing and
capital lease obligations, are as follows as of December 31,
2007:
|
Year
ending December 31:
|
||||
|
2008
|
$
|
2,579
|
||
|
2009
|
2,938
|
|||
|
2010
|
2,056
|
|||
|
2011
|
2,056
|
|||
|
2012
|
410,181
|
|||
|
Thereafter
|
8,220
|
|||
|
Total
long-term debt
|
$
|
428,030
|
||
Following is a schedule of
future minimum lease payments under capital lease obligations together with the
present value of the net minimum lease payments as of December 31,
2007:
|
Year
ending December 31:
|
||||
|
2008
|
$
|
506
|
||
|
2009
|
190
|
|||
|
Total
future minimum lease payments
|
696
|
|||
|
Less
amount representing interest
|
9
|
|
||
|
Present
value of future minimum lease payments
|
705
|
|||
|
Less
current portion
|
(523
|
)
|
||
|
Long-term
capital lease obligation
|
$
|
182
|
||
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
|
(14)
|
Asset
Retirement Obligation
|
At
December 31, 2007 and 2006, the Company has recorded asset retirement
obligation accruals for mine reclamation and closure costs (including perpetual
water treatment in connection with the adoption of SAB 108 in 2006) totaling
$91,199 and $77,292, respectively. The portion of the costs expected to be
incurred within a year in the amount of $8,179 and $7,797, at December 31,
2007 and 2006, respectively, is included in accrued expenses and other current
liabilities. There were no assets that were legally restricted for purposes of
settling asset retirement obligations at December 31, 2007 or
2006. These regulatory obligations are secured by surety bonds in the
amount of $142,471 at December 31, 2007 and $138,013 at December 31,
2006. Changes in the reclamation obligation were as follows:
|
Total
asset retirement obligation at December 31, 2005
|
$
|
53,487
|
||
|
Accretion
for 2006
|
4,874
|
|||
|
2006
acquisitions
|
7,968
|
|||
|
Sites
added in 2006
|
6,070
|
|||
|
Revisions
in estimated cash flows
Increase
in recorded liability for perpetual water treatment (see Note
3(t))
|
1,347
7,700
|
|||
|
Expenditures
in 2006
|
(4,154
|
)
|
||
|
Total
asset retirement obligation at December 31, 2006
|
77,292
|
|||
|
Accretion
for 2007
|
6,844
|
|||
|
2007
acquisitions
|
11,636
|
|||
|
Sites
added in 2007
|
3,305
|
|||
|
Revisions
in estimated cash flows
|
(1,754
|
)
|
||
|
Expenditures
in 2007
|
(6,124
|
)
|
||
|
Total
asset retirement obligation at December 31, 2007
|
$
|
91,199
|
|
(15)
|
Other
Liabilities
|
Other
liabilities consisted of the following:
|
December
31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Fair
value of interest rate swap
|
$ | 15,590 | $ | 7,224 | ||||
|
Davis-Bacon
litigation (see Note 25(b))
|
6,125 | -- | ||||||
|
Unamortized
portion of unfavorable coal sales contract
|
2,403 | 9,430 | ||||||
|
Employee
benefits
|
1,934 | 1,840 | ||||||
|
Advance
royalties payable
|
879 | 1,100 | ||||||
|
Contractor
escrow
|
1,225 | 1,127 | ||||||
|
Long-term
deferred revenue
|
-- | 1,000 | ||||||
|
Deferred
purchase price obligation
|
538 | 701 | ||||||
|
Payable
to former sponsor
|
274 | 2,400 | ||||||
|
Other
long-term liabilities
|
1,962 | 2,015 | ||||||
|
Total
other liabilities
|
$ | 30,930 | $ | 26,837 | ||||
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
|
(16)
|
Deferred
Gains on Sales of Property
Interests
|
In
February 2003, the Company sold an overriding royalty interest in certain mining
properties for $11,850. The gain on this transaction in the amount of $850 was
deferred and is being amortized over the associated remaining term of the
mineral lease. This property interest was acquired from El Paso CGP Company
in the acquisition of the Coastal Coal properties.
In April
2003, the Company sold mineral properties for $53,625 in a sale/leaseback
transaction. These properties had originally been acquired from Pittston Coal
Company. The gain on this transaction in the amount of $7,057 was deferred and
is being amortized over the ten-year term of the lease.
|
(17)
|
Fair
Value of Financial Instruments
|
The
estimated fair values of financial instruments under
SFAS No. 107,
Disclosures About Fair Value of Financial Instruments, are determined
based on relevant market information. These estimates involve uncertainty and
cannot be determined with precision. The following methods and assumptions are
used to estimate the fair value of each class of financial
instrument.
Cash and Cash Equivalents, Trade
Accounts Receivables, Note Payable, Bank Overdraft, Trade Accounts Payable,
and Other Current Liabilities: The carrying amounts
approximate fair value due to the short maturity of these
instruments.
Notes Receivable: The
fair value approximates the carrying value as the rates associated with the
receivables are comparable to current market rates.
Long-term Debt: The fair
value of the 10% Senior notes is based on the trading price of the notes.
The fair value of debt with variable interest rates is equal to the principal
amount of the notes since the interest rates are reset periodically. The fair
value of other long-term debt is based on the current market rate of interest
offered to the Company for debt of similar maturities.
In
connection with the long-term debt the Company entered into an interest rate
swap on May 22, 2006 which is designed to reduce the volatility of the interest
being paid on a portion of the long-term debt which bears interest at a variable
rate. This interest rate swap is recorded at fair value at December 31, 2007
based on quoted market prices.
The
estimated fair values of long-term debt were as follows:
|
December
31,
|
||||||||
|
2007
|
2006
|
|||||||
|
10%
Senior notes due 2012
|
$ | 185,063 | $ | 189,875 | ||||
|
Term
loan
|
233,125 | 247,500 | ||||||
|
Capital
lease obligation
|
705 | 1,510 | ||||||
|
Project
financing
|
18,500 | -- | ||||||
|
Other
|
700 | 700 | ||||||
|
Total
long-term debt
|
$ | 438,093 | $ | 439,585 | ||||
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
|
(18)
|
Employee
Benefit Plans
|
|
(a)
|
Postretirement
Benefits Other Than Pensions
|
Three of
the Company's subsidiaries assumed collective bargaining agreements as part of
two acquisitions that require these subsidiaries to provide postretirement
medical benefits to certain employees who retire after the acquisition closing
dates. In each case, however, the sellers have retained the obligation to
provide postretirement medical benefits to employees who retired prior to the
acquisition closing dates (December 13, 2002 and March 11, 2003,
respectively) and to employees who were not retained by these subsidiaries. In
addition, the sellers retained the obligation to provide postretirement medical
benefits to a significant number of the employees who have worked for the
Company after the acquisition closing, namely, those employees who met the
eligibility criteria by December 31, 2003, even if the employees will not
retire until sometime in the future. These plans are unfunded and the
measurement date is December 31 of each year.
Effective
July 1, 2004, the Company adopted a plan offering postretirement medical
benefits to active union-free employees that will provide a credit of
$20 per month per year of service for pre-65 year old and $9 per
month per year of service for post-65 year old retirees toward the purchase
of medical benefits (as defined) from the Company. The adoption of this plan
resulted in prior service cost of $27,122. Effective April 1, 2005 and
October 3, 2005, the plan was amended to replace two union retiree medical
plans with a defined dollar benefit similar to the union-free plan, which
resulted in a prior service credit of approximately $6,167. On October 26,
2005 upon the acquisition of the Nicewonder Coal Group, the Company granted the
acquired employees up to ten years of credited service under the plan resulting
in an additional $2,020 of prior service cost. On May 1, 2006, upon the
acquisition of Progress Energy, the Company granted the acquired employees up to
ten years prior service credit under the plan resulting in an additional $1,040
of prior service cost. On June 29, 2007, upon the acquisition of
Mingo Logan, the Company granted the acquired employees up to ten years prior
service credit under the plan resulting in an additional $489 of prior service
cost. In addition, in 2007, the Company amended one of our existing
plans that resulted in an additional $508 of prior service costs.
The Company
adopted SFAS 158 effective December 31, 2006. The effect of adoption was an
increase in the liability for postretirement medical benefits of $17,534, an
increase in deferred income tax asset of $4,337 and an increase in accumulated
other comprehensive loss of $13,197. Other comprehensive income (loss) will be
adjusted in subsequent years as these amounts are later recognized into income
as components of net period benefit costs. The adoption of this pronouncement
did not affect the Company's comprehensive income for the year ended December
31, 2006.
The
components of the change in accumulated benefit obligations of the plans for
postretirement benefits other than pensions were as follows:
|
December
31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Change
in benefit obligation:
|
||||||||
|
Accumulated
benefit obligation-beginning of period:
|
$ | 50,847 | $ | 49,485 | ||||
|
Service
cost
|
3,026 | 3,734 | ||||||
|
Interest
cost
|
3,067 | 2,782 | ||||||
|
Actuarial
(gain) or loss
|
(3,024 | ) | (6,145 | ) | ||||
|
Benefits
paid
|
(129 | ) | (49 | ) | ||||
|
Plan
amendments
|
997 | 1,040 | ||||||
|
Accumulated
benefit obligation-end of period
|
$ | 54,784 | $ | 50,847 | ||||
|
Change
in plan assets:
|
||||||||
|
Employer
contributions
|
$ | (129 | ) | $ | (49 | ) | ||
|
Benefits
paid
|
129 | 49 | ||||||
|
Fair
value of plan assets at December 31
|
-- | -- | ||||||
|
Funded
status
|
$ | (54,784 | ) | $ | (50,847 | ) | ||
|
Amounts
recognized in the balance sheet:
|
||||||||
|
Current
liabilities
|
$ | (973 | ) | $ | (135 | ) | ||
|
Long-term
liabilities
|
(53,811 | ) | (50,712 | ) | ||||
| $ | (54,784 | ) | $ | (50,847 | ) | |||
|
Amounts
recognized in accumulated other comprehensive loss:
|
||||||||
|
Prior
service cost
|
$ | 16,605 | $ | 17,959 | ||||
|
Net
actuarial gain
|
(3,449 | ) | (425 | ) | ||||
| $ | 13,156 | $ | 17,534 | |||||
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The
following table details the components of the net periodic benefit cost for
postretirement benefits other than pensions:
|
Year
Ended December31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Service
cost
|
$ | 3,026 | $ | 3,734 | $ | 3,906 | ||||||
|
Interest
cost
|
3,067 | 2,782 | 2,489 | |||||||||
|
Amortization
of net (gain) or loss
|
-- | 186 | 27 | |||||||||
|
Amortization
of prior service cost
|
2,351 | 2,219 | 2,463 | |||||||||
|
Net
periodic benefit cost
|
$ | 8,444 | $ | 8,921 | $ | 8,885 | ||||||
The
following details the amounts expected to be recognized as components of net
periodic benefit cost in 2008:
|
Net
actuarial gain
|
$
|
--
|
||
|
Prior
service cost
|
2,351
|
|||
|
$
|
2,351
|
The
discount rates used in determining the benefit obligations as of
December 31, 2007, 2006, and 2005 were 6.44%, 5.92% and 5.50%,
respectively. The discount rates used in determining net periodic postretirement
benefit cost were 5.92%, 5.50% and 5.75% for the years ended December 31,
2007, 2006 and 2005, respectively. The
discount rate assumption is determined from a published yield-curve table
matched to the timing of our projected cash out flows.
The
weighted average annual rate of increase in the per capita cost of covered
benefits (i.e., health care trend rate) for medical benefits assumed is 11% for
2008, decreasing to 5% in 2015 and thereafter.
Assumed
health care trend rates have a significant effect on the amounts reported for
the health care plans. A one-percentage-point change in assumed health care
trend rates would have the following effects as of and for the year ended
December 31, 2007:
|
One-Percentage-
Point
Increase
|
One-Percentage-
Point
Decrease
|
|||||||
|
Effect
on total service and interest cost components
|
$ | 35 | $ | (94 | ) | |||
|
Effect
on accumulated postretirement benefit obligation
|
853 | (702 | ) | |||||
Employer
contributions for benefits paid for the years ended December 31, 2007 and
2006 were $129 and $49, respectively. Employee contributions are not expected to
be made and the plan is unfunded.
Estimated
future benefit payments for the fiscal years ending after December 31, 2007
are as follows:
|
Year
ending December 31:
|
||||
|
2008
|
$
|
973
|
||
|
2009
|
1,388
|
|||
|
2010
|
1,783
|
|||
|
2011
|
2,236
|
|||
|
2012
|
2,757
|
|||
|
2013-2017
|
19,328
|
|||
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Effective
December 31, 2006, the Company adopted SFAS 158 for its black lung benefit
obligation and the effect of adoption was an increase in the liability (which is
reflected in workers' compensation benefits in the consolidated balance sheet)
of $512, an increase in deferred tax assets of $127, and an increase in
accumulated other comprehensive loss of $385. The adoption of this pronouncement
did not affect the Company's comprehensive income for the year ended December
31, 2006. At December 31, 2007, 2006, and 2005, the Company's unfunded
accumulated black lung benefit obligation was $1,503, $1,034, and $468,
respectively. The net periodic benefit cost was $212, $152, and $105 for the
years ended December 31, 2007, 2006, and 2005, respectively. The discount rate
used in determining the benefit obligation at December 31, 2007 and 2006 was
5.6% and 5.6%, respectively. The discount rate used in determining net periodic
benefit cost was 5.6%, 5.3%, and 4.0%, for the years ended December 31, 2007,
2006, and 2005, respectively. The estimated future cash payments by the
Company for each of the next five years and thereafter are: $124 in 2008, $124
in 2009, $133 in 2010, $147 in 2011, $145 in 2012, and $494 from 2013 through
2017.
|
(b)
|
Savings
Plan
|
The
Company sponsors a 401(k) Savings-Investment Plan to assist its eligible
employees in providing for retirement. The Company contributes 3% of
compensation, as defined under the plan, for every employee who is eligible to
participate in the plan. Participants also receive a 50% matching contribution
from the Company on their contributions of up to 4% of their total compensation,
as defined under the plan. The effective date of the plan was February 1,
2003. Total Company contributions for the years ended December 31, 2007,
2006 and 2005, were $9,930, $9,183, and $6,418, respectively.
|
(c)
|
Self-Insured
Medical Plan
|
The
Company is principally self-insured for health insurance coverage provided for
all of its employees. The Company utilizes commercial insurance to cover
specific claims in excess of $500 ($250 prior to January 1, 2005).
Estimated liabilities for health and medical claims are recorded based on the
Company's historical experience and includes a component for incurred but not
reported claims. During the years ended December 31, 2007, 2006
and 2005, total claims expense of $31,668, $25,125 and $20,714, respectively,
was incurred, which represents claims processed and an estimate for claims
incurred but not reported.
|
(d)
|
Multi-Employer
Pension Plan
|
Three of
the Company's subsidiaries assumed collective bargaining agreements as part of
two acquisitions that require them to participate in the United Mine Workers of
America (UMWA) 1950 and 1974 pension plans. These plans are multi-employer
pension plans. The Company is required to make contributions to these
plans at rates defined by the contract. For the year ended December
31, 2007 we incurred expense of $1,238. No expenses were incurred for the years
ended December 31, 2006 and 2005.
Some of
the Company's 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 years ended December 31, 2007, 2006
and 2005 were $84, $28 and $32, respectively.
|
(e)
|
Share-Based
Compensation Awards
|
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 purchase
800,000 units of ACM to 22 members of the Company's 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 common stock and Alpha 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 this 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 agreement,
an aggregate of 1,344,930 shares of common stock held by the Company's
executives were unvested on the grant date. These shares were vested by December
31, 2006.
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 Internal Revenue Code of 1986,
as amended), stock appreciation rights, non-vested 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. The
Company currently uses authorized and unissued shares to satisfy share award
exercises.
On
February 11, 2005 the Company granted certain of its executive officers,
directors and key employee's 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 non-vested 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 non-vested shares of
stock vest ratably over a three-year period or cliff vest after three years,
depending on the recipients’ position with the company. For the year
ended December 31, 2007 and 2006, all awards granted pursuant to the Long-Term
Incentive Plan consisted of non-vested shares and performance
shares.
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Share-based
compensation expense measured in accordance with SFAS 123(R) totaled $9,681
($7,377 on a net-of-tax basis) and $20,464 ($18,488 on a net-of-tax basis) for
the years ended December 31, 2007 and 2006, respectively.
Stock
Options
Stock
option activity for the year ended December 31, 2007 is summarized in the
following table:
|
Weighted-
|
Weighted-
|
|||||||||||
|
Average
|
Average
|
|||||||||||
|
Number
of
|
Exercise
|
Remaining
|
||||||||||
|
Shares
|
Price
|
Contract
Life
|
||||||||||
|
Outstanding
at December 31, 2006
|
1,137,398 | $ | 16.64 | |||||||||
|
Exercised
|
(268,439 | ) | 14.79 | |||||||||
|
Forfeited/Canceled
|
(124,267 | ) | 15.35 | |||||||||
|
Outstanding
at December 31, 2007
|
744,692 | 17.51 | 7.07 | |||||||||
|
Exercisable
at December 31, 2007
|
210,417 | $ | 17.80 | 7.08 | ||||||||
The
aggregate intrinsic value of options outstanding at December 31, 2007 was
$11,148 and the aggregate intrinsic value of exercisable options was $3,089.
Cash received from the exercise of stock options during the years ended December
31, 2007 and 2006 was $3,969 and $954, respectively. As of December 31,
2007, $3,067 of unrecognized compensation cost related to stock options is
expected to be recognized as expense over a weighted-average period of
2.02 years.
The
weighted average grant date fair value of options outstanding at December 31,
2007 and 2006 was $7.31 and $7.51, respectively. The total intrinsic value of
options exercised during the year ended December 31, 2007 and 2006 was $3,081
and $479.
Restricted
Stock Awards
Non-vested
restricted share award activity for the year ended December 31, 2007 is
summarized in the following table:
|
Number
of
|
Weighted
Average
Grant
Date
|
|||||||
|
Shares
|
Fair
Value
|
|||||||
|
Non-vested
shares outstanding at December 31, 2006
|
471,341 | $ | 21.34 | |||||
|
Granted
|
611,863 | 12.83 | ||||||
|
Vested
|
(127,686 | ) | 21.15 | |||||
|
Forfeited
|
(75,286 | ) | 15.65 | |||||
|
Non-vested
shares outstanding at December 31, 2007
|
880,232 | $ | 15.93 | |||||
The fair
value of non-vested restricted share awards is estimated based on the closing
stock price at the date of the grant, and, for purposes of expense recognition,
the total number of awards expected to vest is adjusted for estimated
forfeitures. As of December 31, 2007, there was $8,200 of unamortized
compensation cost related to non-vested shares which is expected to be
recognized as expense over a weighted-average period of
1.64 years. As of
December 31, 2006, there was $7,292 of unamortized compensation cost related to
non-vested shares which is expected to be recognized as expense over a
weighted-average period of 2.08 years.
Performance
Share Awards
During 2007,
the Company granted 377,247 performance share awards, of which 333,492 remain
outstanding as of December 31, 2007. Recipients of these awards can receive
shares of the Company's common stock at the end of a performance period which
ends on December 31, 2009, based on the Company's actual performance against
pre-established operating income goals, strategic goals, and total shareholder
return goals. In order to receive the shares, the recipient must also be
employed by the Company on the vesting date. The performance share awards
represent the number of shares of common stock to be awarded based on the
achievement of targeted performance and may range from 0 percent to 150 percent
of the targeted amount. The grant date fair value of the awards related to
operating income targets is based on the closing price of the Company's common
stock on the New York Stock Exchange on the grant date of the award and is being
amortized over the performance period. The awards related to strategic goals do
not meet the criteria for grant date pursuant to SFAS No. 123(R). The fair value
of the awards related to total shareholder return targets is based upon a Monte
Carlo simulation and is being amortized over the performance period. The Company
reassesses at each reporting date whether achievement of each of the performance
conditions is probable, as well as estimated forfeitures, and adjusts the
accruals of compensation expense as appropriate. At December 31, 2007, the
Company has assessed the operating income and total shareholder return targets
as probable of achievement. As of December 31, 2007, there was $2,325 of
unamortized compensation cost related to the 2007 performance share awards which
is expected to be recognized over the period ending December 31,
2009.
In
2006, the Company granted 148,268 performance share awards, of which
119,186 and 133,411 remained outstanding as of December 31, 2007 and 2006,
respectively. Recipients of these awards can receive shares of Alpha common
stock at the end of a three-year performance period which ends on December 31,
2008, based on the Company's actual performance against pre-established
operating income and return on invested capital targets. In order to receive the
shares, the recipient must also be employed by the Company on the vesting date.
The performance share awards represent the number of 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 average of the high and low market price of the Company
common stock on the date of award and is being amortized over the performance
period. At December 31, 2006, the Company had determined that achievement of the
performance targets was improbable and therefore, no shares are probable of
vesting. Accordingly, the Company ceased recording compensation expense and
reversed previously recognized compensation expense for these shares as of
December 31, 2006.
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
|
(19)
|
Workers'
Compensation Benefits
|
The
Company's operations generally are fully insured for workers' compensation and
black lung claims. Insurance premium expense for the years ended
December 31, 2007, 2006 and 2005 was $20,814, $18,698 and $14,108,
respectively.
A portion
of the West Virginia operations of the Company are self-insured for workers'
compensation and state black lung claims. The liability for self-insured
workers' compensation claims is an estimate of the ultimate losses to be
incurred on such claims based on the Company's experience and published industry
data. Adjustments to the probable ultimate liability are made annually based on
an actuarial valuation and are included in operations as they are determined.
The liability for self-insured black lung benefits is an estimate of such
benefit as determined by an independent actuary at the present value of the
actuarially computed liability over the employee's applicable term of
service.
The
liability for self-insured workers compensation claims and black lung benefits
at December 31, 2007 and 2006 was $10,484 and $8,344, respectively,
including a current portion of $1,779 and $1,175, respectively. Workers'
compensation and black lung expense for the years ended December 31, 2007,
2006 and 2005 was $5,290, $6,507 and $6,940, respectively, including fees paid
to the State of West Virginia to be self-insured.
|
(20)
|
Related
Party Transactions
|
The
Company leases its Latrobe, Pennsylvania operating facility from a company
controlled by the AMCI parties and one of the Company's former Executive Vice
Presidents. As of December 31, 2006, the former Company’s Executive Vice
President was no longer a related party and as of January 3, 2007, the AMCI
parties were no longer related. Total rent expense was $186 and $263
for the years ended December 31, 2006 and 2005, respectively.
In
conjunction with the acquisition of U.S. AMCI, ANR Holdings entered into an
agreement with entities affiliated with AMCI that requires the AMCI parties to
pay reclamation and other obligations of one of the former U.S. AMCI
entities acquired by the Company (Solomons Mining Company). In April 2004, the
Company entered into an arrangement with the AMCI Parties to purchase 350
tons of coal from a third-party at a price of $54.50 per ton at various
times from April 2004 through November 2005, of which $34.50 was paid to the
producer of that coal, $12.00 per ton was payable to the AMCI Parties and
$8.00 per ton was retained by the Company to fund the remaining reclamation
obligation of Solomons Mining Company. By an agreement dated January 25,
2006, the AMCI Parties made a final settlement of all reclamation and other
obligations associated with Solomons Mining Company by a payment of $4,104 to
the Company. The payment repaid advances in the amount of $2,495 made by the
Company in excess of the amount received under the coal purchase agreement and
the estimated remaining reclamation obligation in the amount of $1,034. In
addition, the payment provided funds to pay an amount owed by Solomons Mining
Company to a third party.
In
connection with the acquisition of Coastal Coal Company, the Company acquired an
overriding royalty interest in certain properties located in Virginia and West
Virginia owned by El Paso CPG Company for $11,000 in cash. Effective
February 1, 2003, the Company sold the overriding royalty interest to
affiliates of Natural Resource Partners, L.P. (NRP) for $11,850 in cash.
Effective April 1, 2003, the Company also sold substantially all of its
fee-owned Virginia mineral properties to NRP for $53,625 in cash in a
sale/leaseback transaction. In an unrelated transaction in December 2003, a
former member of the ANR Holdings and Alpha Natural Resources, Inc. board of
directors was appointed as a member of the board of directors of GP Natural
Resource Partners, LLC, the general partner of NRP, and First Reserve became a
substantial equity owner of NRP. The Company believes the production and minimum
royalty rates contained in leases with NRP are consistent with other current
market royalty rates. As of December 31, 2006 the general partner of
NRP was no longer a Board member of the Company. Based on the
aggregate $25,966 and $21,689 that the Company paid to NRP in lease, royalty and
property tax reimbursement payments for the years ended December 31, 2006
and 2005, respectively, NRP is the Company's largest
landlord. As of December 31, 2006, the Company had $897 in accounts payable
to NRP, and as of December 31, 2007, this party is no longer related.
One of
the Company's former Executive Vice Presidents is a 50% owner of Robindale
Energy Services, Inc. (and its subsidiary) (“Robindale”). Robindale is engaged
in the business of waste coal sales and related businesses in Pennsylvania. From
time to time, Robindale has sold and purchased coal and related products the
operations of the Company's AMFIRE regional business unit in Pennsylvania. As of
December 31, 2006, the former Executive Vice President was no longer
related. For the years ended December 31, 2006 and 2005 the
Company's subsidiaries Alpha Coal Sales and AMFIRE Mining Company, LLC made
purchases $359 and $581, respectively, from Robindale for trucking services and
waste coal. For the year ended December 31, 2006, the Company had sales of
$206 to Robindale. For the years 2006 and 2005, the Company agreed that its
former Executive Vice President's continued relationship with Robindale was not
a breach of his employment agreement with Alpha, and he did not participate in
any decisions to enter into any transactions that were proposed between
Robindale and Alpha.
Since
April 2004, the Company has entered into various coal sales arrangements with
AMCI International AG, formerly, AMCI Metall & Kohle AG. Two of the ANR
Holdings and Alpha Natural Resources, Inc. former board members hold ownership
in AMCI International AG. As of January 3, 2007, none of the AMCI members were
on the Board of the Company and no transactions occurred in 2007. For
the years ended December 31, 2006 and 2005, total sales of $13,308 and
$72,121, respectively, have been made pursuant to these arrangements. The
Company also had total sales of $51,693 and $49,165 for the years ended
December 31, 2006 and 2005, respectively, to AMCI Australia Pty Ltd., an
entity owned by these former board members. American Metals and Coal
International, Inc., an entity owned by these board members, facilitated coal
transactions for an international buyer of $13,865 and $9,427 for the years
ended December 31, 2006 and 2005, respectively. The Company made coal
purchases totaling $1,030 and $13,931 during the years ended December 31,
2006 and 2005, respectively, from XCoal Energy and Resources, an entity in which
each of the former aforementioned board members each own more than a 10% equity
interest.
During
2005 and early 2006 one or more of our directors was also a director of
Foundation Coal Holdings, Inc. (“Foundation”). First Reserve Fund IX, L.P.
and an entity affiliated with AMCI previously beneficially owned in excess of 5%
of the outstanding shares of Foundation's common stock. One of the Company's
subsidiaries made coal purchases totaling $23,533 and $34,790 in the ordinary
course of business during the years ended December 31, 2006 and 2005,
respectively, from subsidiaries of Foundation. The Company had outstanding
payables due to Foundation of $675 at the end of 2006. As of December
31, 2006 and 2007, this party was no longer related.
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
|
(21)
|
Commitments
|
Operating
Leases
The
Company leases coal mining and other equipment under long-term operating leases
with varying terms. In addition, the Company leases mineral interests and
surface rights from land owners under various terms and royalty
rates.
As of
December 31, 2007, aggregate future minimum lease payments under operating
leases and minimum royalties under coal leases were as follows:
|
Facility
|
Equipment
and Other
|
Coal
Royalties
|
Total
|
|||||||||||||
|
Year
ending December 31:
|
||||||||||||||||
|
2008
|
$ | 1,577 | $ | 1,152 | $ | 13,475 | $ | 16,204 | ||||||||
|
2009
|
1,380 | -- | 9,893 | 11,273 | ||||||||||||
|
2010
|
1,301 | -- | 10,333 | 11,634 | ||||||||||||
|
2011
|
1,210 | -- | 11,929 | 13,139 | ||||||||||||
|
2012
|
1,196 | -- | 9,670 | 10,866 | ||||||||||||
|
Thereafter
|
8,301 | -- | 31,126 | 39,427 | ||||||||||||
|
Total
|
$ | 14,965 | $ | 1,152 | $ | 86,426 | $ | 102,543 | ||||||||
The above
table includes amounts due under non-cancelable leases with initial or remaining
lease terms in excess of one year.
For years
ended December 31, 2007, 2006 and 2005, net rent expense amounted to $7,566,
$8,029 and $6,972, respectively, and coal royalty expense amounted to $71,659,
$75,128 and $57,952, respectively.
Other
Commitments
As of
December 31, 2007, the Company had commitments to purchase 3,548
tons and 142 tons of coal at a cost of $187,504 and $5,479 during 2008 and
2009, respectively. As part of a coal supply tonnage buyout agreement, at
December 31, 2007, the Company had commitments to pay the customer $680
each year from 2008 to 2009, and $567 in 2010. In
addition, as of December 31, 2007, the Company had commitments to purchase
approximately $45,170 of new equipment expected to be acquired at various
dates in 2008.
|
(22)
|
Mergers
and Acquisitions
|
|
2007
Acquisition
|
Mingo
Logan
On June
29, 2007, the Company completed the acquisition of certain coal mining assets in
southern West Virginia from Arch Coal, Inc. known as Mingo Logan for $43,893
including working capital and assumed liabilities. The Mingo Logan
purchase consisted of coal reserves, two mines and a load-out and processing
plant that is managed by the Callaway business unit.
The
following table summarizes the fair values of the assets acquired and
liabilities assumed at the date of acquisition:
|
Current
assets
|
$
|
9,555
|
||
|
Property,
plant, and equipment
|
41,892
|
|||
|
Intangible
assets
|
4,182
|
|||
|
Total
assets acquired
|
55,629
|
|||
|
Asset
retirement obligation
|
(11,636
|
)
|
||
|
Other
liabilities
|
(100
|
)
|
||
|
Total
liabilities assumed
|
(11,736
|
)
|
||
|
Net
assets acquired
|
$
|
43,893
|
||
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
|
2006
Acquisitions
|
Gallatin
Materials LLC
On
December 28, 2006, our subsidiary, Palladian Lime, LLC (“Palladian”) acquired a
94% ownership interest in Gallatin Materials LLC (“Gallatin”), a start-up lime
manufacturing business in Verona, Kentucky by assuming liabilities in the amount
of $3,567 consisting of a note payable in the amount of $1,847 and accounts
payable and accrued expenses in the amount of $1,720. The liabilities assumed
were allocated to fair value of assets acquired consisting mainly of intangible
assets. In addition, Palladian agreed to and made (i) cash capital
contributions of $10,282 of which $3,300 was funded as of December 31, 2006,
(ii) a committed subordinated debt facility of up to $8,813 provided to Gallatin
by Palladian, of which $3,813 was funded as of December 31, 2007 and (iii) a
letter of credit procured for Gallatin’s benefit under our current senior credit
facility in the amount of $2,600 to cover project cost overruns. The first of
two planned rotary pre-heater lime kilns is expected to be in production in the
first quarter 2008 and will produce lime to be sold primarily to coal-burning
utilities as a scrubbing agent for removing sulfur dioxide from flue gas,
helping them to meet increasingly stringent air quality standards under the
federal Clean Air Act. The lime will also be sold to steel producers for use as
flux in electric arc and basic oxygen furnaces. The minority owners were granted
restricted member interests in Gallatin, which vest based on performance
criteria approximately three years from the closing date and which, if earned in
their entirety, would reduce our ownership to 77.5%. Approximately $22,272 was
spent on capital expenditures by Gallatin during 2007. As of December
31, 2007, Gallatin borrowed $18,500 for project financing
(Note 13).
Progress Energy
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
$28,795, including an adjustment for working capital. The Progress acquisition
consisted of the purchase of the outstanding capital stock of Diamond May Coal
Co. and Progress Land Corp. and the assets of Kentucky May Coal Co., Inc. The
operations acquired are adjacent to the Company's Enterprise business unit and
have been integrated into Enterprise.
The
following table summarizes the fair values of the assets acquired and
liabilities assumed at the date of acquisition:
|
Current
assets
|
$
|
5,261
|
||
|
Property,
plant, and equipment
|
46,983
|
|||
|
Deferred
tax asset
|
4,838
|
|||
|
Total
assets acquired
|
57,082
|
|||
|
Current
liabilities
|
(474
|
)
|
||
|
Asset
retirement obligation
|
(7,204
|
)
|
||
|
Other
noncurrent liabilities
|
(20,609
|
)
|
||
|
Total
liabilities assumed
|
(28,287
|
)
|
||
|
Net
assets acquired
|
$
|
28,795
|
Included
in liabilities assumed is $20,000 allocated to a coal sales agreement which was
below market, and is being amortized over the remaining life of the
contract.
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
|
2005
Acquisition
|
Nicewonder
Coal Group
On
October 26, 2005, the Company completed the acquisition of certain
privately held coal reserves and operations of the Nicewonder Coal Group in
southern West Virginia and southwestern Virginia (the “Nicewonder Acquisition”)
for an aggregate purchase price of $328,200, consisting of cash at closing in
the amount of $35,162, a cash payment of $1,896 made to the sellers in April
2006, transaction costs of $4,701, $221,000 principal amount of promissory
installment notes of an indirect, wholly owned subsidiary, of which $181,045 was
paid on November 2, 2005 and $39,955 was paid on January 13, 2006, a
payment on February 6, 2006 in the amount of $12,256 for working capital in
excess of the original agreed upon amount, and 2,180,233 shares of Alpha
Natural Resources, Inc. common stock valued at $53,185 for accounting purposes.
For this purpose, the value of the common stock issued was based on the average
closing prices of our common stock for the five trading days surrounding
October 20, 2005, the date the number of shares to be issued under the
terms of the acquisition agreement became fixed without subsequent revision. In
connection with the Nicewonder Acquisition, the Company also agreed to make
royalty payments to the former owners of the acquired companies in the amount of
$0.10 per ton of coal mined and sold from White Flame Energy's Surface Mine
No. 10. The Nicewonder Acquisition consisted of the purchase of the
outstanding capital stock of White Flame Energy, Inc., Twin Star Mining, Inc.
and Nicewonder Contracting, Inc., the equity interests of Powers Shop, LLC and
Buchanan Energy, LLC and substantially all of the assets of Mate Creek Energy of
W. Va., Inc. and Virginia Energy Company, and the acquisition of Premium Energy,
Inc. by merger (together referred to as the “Nicewonder Coal Group”). The
operating results of the Nicewonder Coal Group have been included in the
Company's consolidated results of operations from the date of
acquisition.
The
following table summarizes the estimated fair values, as determined by an
independent third-party valuation, of the assets acquired and liabilities
assumed at the date of acquisition:
|
Current
assets
|
$
|
22,937
|
||
|
Property,
plant, and equipment
|
311,315
|
|||
|
Intangibles
|
11,064
|
|||
|
Other
noncurrent assets
|
1,704
|
|||
|
Total
assets acquired
|
347,020
|
|||
|
Current
liabilities
|
(10,236
|
)
|
||
|
Asset
retirement obligation
|
(7,229
|
)
|
||
|
Other
noncurrent liabilities
|
(1,355
|
)
|
||
|
Total
liabilities assumed
|
(18,820
|
)
|
||
|
Net
assets acquired
|
$
|
328,200
|
The
intangible assets reflected above includes: sales contracts of $5,375, which are
being amortized on average over five years; customer relationships of $4,762,
which are being amortized over five years; and non-compete agreements of $927,
which are being amortized over three years.
Under the
tax laws, the historical tax bases of the Premium Energy, Inc. assets carried
over to the Company. The tax bases of the assets were less than the values
assigned for financial reporting purposes, resulting in a deferred tax liability
of $20,105 being recorded. An adjustment to reduce the previously recorded
valuation allowance by $20,105 due to changes in the estimate of the future
realizability of existing deferred tax assets was also recorded at the time of
the acquisition, and was included in the purchase price allocation. In addition,
in connection with the Nicewonder Acquisition, the Company recorded $3,047 in
deferred tax assets, primarily related to state income taxes, which were fully
offset with a corresponding increase in the valuation allowance against deferred
tax assets.
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The
following unaudited pro forma statement of income data for the years ended
December 31, 2005 gives effect to the following transactions as if each of
these transactions had occurred on January 1, 2005; the Nicewonder
Acquisition and related debt refinancing in October 2005 (Note 13), the
Internal Restructuring and initial public offering in February 2005
(Note 2), the issuance in May 2004 of $175,000 principal amount of
10% senior notes due 2012 (Note 13), and the entry into a $175,000
revolving credit facility in May 2004 (Note 13):
|
Year
Ended
|
||||
|
December
31, 2005
|
||||
|
Revenues
|
$
|
1,799,129
|
||
|
Income
from continuing operations
|
$
|
22,315
|
||
|
Loss
from discontinued operations
|
(266
|
)
|
||
|
Net
income
|
$
|
22,049
|
||
|
Pro
forma earnings per share data:
|
||||
|
Basic
and diluted:
|
||||
|
Income
from continuing operations
|
$
|
0.35
|
||
|
Loss
from discontinued operations
|
--
|
|||
|
Pro
Forma net income
|
$
|
0.35
|
||
|
Pro
Forma weighted average shares - basic
|
63,359,431
|
|||
|
Pro
Forma weighted average shares - diluted
|
63,895,431
|
|||
|
(23)
|
Concentrations
and Major Customers
|
The
Company markets its coal principally to electric utilities in the United States
and international and domestic steel producers. As of December 31, 2007 and
2006, trade accounts receivable from electric utilities totaled approximately
$56,478 and $55,816, respectively. Credit is extended based on an evaluation of
the customer's financial condition and collateral is generally not required.
Credit losses are provided for in the consolidated financial statements and
historically have been minimal. The Company is committed under long-term
contracts to supply coal that meets certain quality requirements at specified
prices. The prices for some multi-year contracts are adjusted based on economic
indices or the contract may include year-to-year specified price changes.
Quantities sold under some contracts may vary from year to year within certain
limits at the option of the customer. Sales to the Company's largest customer
accounted for less than 10% of total sales for each of the years ended
December 31, 2007, 2006 and 2005.
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
|
(24)
|
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 December 31, 2007,
consisted of 32 active underground mines and 26 active surface mines located in
Central Appalachia and Northern Appalachia. Coal Operations also includes the
Company's purchased coal sales function, which markets the Company's Appalachian
coal to domestic and international customers. The All Other category includes
the Company's equipment sales and repairs operations, and 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 revenues from the operation of its road construction
businesses which the Company acquired on October 26, 2005 as part of the
Nicewonder Acquisition. 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 and EBITDA, as adjusted for 2005,
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.
Segment
operating results and capital expenditures for the year ended December 31,
2007, and segment assets as of December 31, 2007 were as
follows:
|
Coal
Operations
|
All
Other
|
Corporate
and
Eliminations
|
Combined
|
|||||||||||||
|
Revenues
|
$ | 1,848,899 | $ | 64,786 | $ | (36,111 | ) | $ | 1,877,574 | |||||||
|
Depreciation,
depletion, and amortization
|
152,298 | 5,935 | 1,346 | 159,579 | ||||||||||||
|
EBITDA
|
281,966 | 11,663 | (59,812 | ) | 233,817 | |||||||||||
|
Capital
expenditures
|
101,834 | 23,184 | 1,363 | 126,381 | ||||||||||||
|
Total
assets
|
1,335,431 | 132,733 | (257,250 | ) | 1,210,914 | |||||||||||
Segment
operating results and capital expenditures for the year ended December 31,
2006, and segment assets as of December 31, 2006 were as
follows:
|
Coal
Operations
|
All
Other
|
Corporate
and
Eliminations
|
Combined
|
|||||||||||||
|
Revenues
|
$ | 1,878,646 | $ | 70,883 | $ | (38,867 | ) | $ | 1,910,662 | |||||||
|
Depreciation,
depletion, and amortization
|
131,871 | 7,134 | 1,846 | 140,851 | ||||||||||||
|
EBITDA
|
335,997 | 11,406 | (67,968 | ) | 279, 435 | |||||||||||
|
Capital
expenditures
|
124,554 | 6,208 | 1,181 | 131,943 | ||||||||||||
|
Total
assets
|
1,156,502 | 101,486 | (112,195 | ) | 1,145,793 | |||||||||||
Segment
operating results and capital expenditures for the year ended December 31,
2005, and segment assets as of December 31, 2005 were as
follows:
|
Coal
Operations
|
All
Other
|
Corporate
and
Eliminations
|
Combined
|
|||||||||||||
|
Revenues
|
$ | 1,608,821 | $ | 42,569 | $ | (24,735 | ) | $ | 1,626,655 | |||||||
|
Depreciation,
depletion, and amortization
|
70,610 | 2,393 | 119 | 73,122 | ||||||||||||
|
EBITDA,
as adjusted
|
228,565 | 4,831 | (88,104 | ) | 145,292 | |||||||||||
|
Capital
expenditures
|
118,379 | 296 | 3,667 | 122,342 | ||||||||||||
|
Total
assets
|
938,255 | 95,648 | (20,245 | ) | 1,013,658 | |||||||||||
Reconciliation of
total segment EBITDA, as adjusted for 2005, to income from continuing operations
follows:
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Total
segment EBITDA, as adjusted for 2005, from continuing
operations
|
$ | 233,817 | $ | 279,435 | $ | 145,292 | ||||||
|
Interest
expense
|
(40,215 | ) | (41,774 | ) | (29,937 | ) | ||||||
|
Interest
income
|
2,340 | 839 | 1,064 | |||||||||
|
Income
tax (expense) benefit
|
(8,629 | ) | 30,519 | (18,953 | ) | |||||||
|
Depreciation,
depletion, and amortization
|
(159,579 | ) | (140,851 | ) | (73,122 | ) | ||||||
|
Minority
interest
|
-- | -- | (2,918 | ) | ||||||||
|
Income
from continuing operations
|
$ | 27,734 | $ | 128,168 | $ | 21,426 | ||||||
The
Company markets produced, processed and purchased coal to customers in the
United States and in international markets, primarily Canada, Brazil and various
European countries. Export revenues totaled $704,178 or approximately 38% of
total revenues for the year ended December 31, 2007; $668,830 or
approximately 35% of total revenues for the year ended December 31, 2006;
and, $737,097 or approximately 45% of total revenues for the year ended
December 31, 2005. Included in total export revenues were: sales totaling
$108,464 to customers located in Canada during the year ended December 31,
2007; sales totaling $111,756 to customers located in Canada during the year
ended December 31, 2006; and sales totaling $108,037 to customers located
in Canada during the year ended December 31, 2005.
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
|
(25)
|
Contingencies
|
|
(a)
|
Guarantees
and Financial Instruments with Off-balance Sheet
Risk
|
In the
normal course of business, the Company is a party to certain guarantees and
financial instruments with off-balance sheet risk, such as bank letters of
credit and performance or surety bonds. No liabilities related to these
arrangements are reflected in the Company's consolidated balance sheets.
Management does not expect any material losses to result from these guarantees
or off-balance sheet financial instruments. The amount of bank letters of credit
outstanding as of December 31, 2007 was $82,195. The amount of surety bonds
outstanding at December 31, 2007 was $152,675, including $142,471 related
to the Company's reclamation obligations (Note 14). The Company has
provided guarantees for equipment financing obtained by certain of its contract
mining operators totaling approximately $903 as of December 31, 2007. The
estimated fair value of these guarantees is not significant.
|
(b)
|
Litigation
|
We are a
party to a number of legal proceedings incident to our normal business
activities. While we cannot predict the outcome of these proceedings, we do not
believe that any liability arising from these matters individually or in the
aggregate should have a material impact upon our consolidated cash flows,
results of operations or financial condition.
Nicewonder
Litigation
In
December 2004, prior to our Nicewonder Acquisition in October 2005, the
Affiliated Construction Trades Foundation brought an action against the West
Virginia Department of Transportation, Division of Highways (“WVDOH”) and
Nicewonder Contracting, Inc. ("NCI"), which became our wholly-owned indirect
subsidiary after the Nicewonder Acquisition, in the United States District Court
in the Southern District of West Virginia. The plaintiff sought a declaration
that the contract between NCI and the State of West Virginia related to NCI's
road construction project was illegal as a violation of applicable West Virginia
and federal competitive bidding and prevailing wage laws. The plaintiff also
sought an injunction prohibiting performance of the contract but has not sought
monetary damages.
On
September 5, 2007, the Court ruled that WVDOH and the Federal Highway
Administration (who is now a party to the suit) could not exempt a contractor,
like NCI, from paying the prevailing wages as required by the Davis-Bacon Act.
Although the Court has not yet decided what remedy it will impose, we expect a
ruling before mid-2008. We anticipate that the most likely remedy is
a directive that the contract be renegotiated for such payment. If that
renegotiation occurs, WVDOH has committed to agree and NCI has a contractual
right to insist, that additional costs resulting from the order will be
reimbursed by WVDOH and as such neither NCI nor the Company believe, at this
time, that they have any monetary expense from this ruling. As of December 31,
2007, the Company recorded a $6,125 long-term receivable for the recovery of
these costs from WVDOH and a long-term liability for the obligations under the
ruling.
|
(c)
|
Other
Contingencies
|
In
connection with the Company's acquisition of Coastal Coal Company, the seller,
El Paso CGP Company, agreed to retain and indemnify the Company for all
workers' compensation and black lung claims incurred prior to the acquisition
date of January 31, 2003. The majority of this liability relates to claims
in the state of West Virginia. If El Paso CGP Company fails to honor its
agreement with the Company, then the Company would be liable for the payment of
those claims, which were estimated in June 2007 by the West Virginia Workers'
Compensation Commission to be approximately $1,990 on an undiscounted basis
using claims data through December 31, 2006. El Paso has posted a bond with
the State of West Virginia for the required discounted amount of $1,343 for
claims incurred prior to the acquisition.
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
|
(26)
|
Discontinued
Operations
|
In the
third quarter of 2004, the Company recorded an impairment charge of $5,100 to
reduce the carrying value of the assets of its Colorado mining subsidiary,
National King Coal LLC, and related trucking subsidiary, Gallup Transportation
and Transloading Company, LLC (collectively, “NKC”) to their estimated fair
values. On April 14, 2005, the Company sold the assets of 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 NKC's 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 in the second quarter of 2005. The results of operations of NKC
for the current and prior periods have been reported as discontinued operations.
National King Coal LLC was previously reported in the Coal Operations segment
and Gallup Transportation and Transloading Company, LLC was previously reported
in the All Other segment.
The
following statement of operations data reflects the activity for the
discontinued operation for the year ended December 31, 2005:
|
Year
Ended
|
||||
|
December
31, 2005
|
||||
|
|
||||
|
Total
revenues
|
$
|
4,523
|
||
|
Total
costs and expenses (excluding impairment charge)
|
(5,607
|
)
|
||
|
Impairment
charge
|
--
|
|||
|
Gain
on sale of discontinued operations
|
704
|
|||
|
Loss
from operations
|
(380
|
)
|
||
|
Miscellaneous
income
|
2
|
|||
|
Income
tax benefit from discontinued operations
|
(93
|
)
|
||
|
Minority
interest in loss from discontinued operations
|
(72
|
)
|
||
|
Loss
from discontinued operations
|
$
|
(213
|
)
|
|
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
|
(27)
|
Supplemental
Cash Flow Disclosures
|
Cash paid
for interest (net of amounts capitalized) for the years ended December 31,
2007, 2006 and 2005 was $37,448, $40,392 and $24,269, respectively. Income taxes
paid, net of refunds, by the Company for the years ended December 31, 2007,
2006 and 2005 were $13,090, $15,524 and $19,960, respectively.
Non-cash
investing and financing activities are excluded from the consolidated statements
of cash flows.
Significant
non-cash activity for the year ended December 31, 2007
includes:
|
·
|
The
short-term financing of prepaid insurance premiums in the amount of
$18,883.
|
Significant
non-cash activity for the year ended December 31, 2006
includes:
|
·
|
The
short-term financing of prepaid insurance premiums in the amount of
$20,941.
|
Significant
non-cash activity for the year ended December 31, 2005
includes:
|
·
|
Issuance
of 2,180,233 shares of Alpha Natural Resources, Inc. common stock
valued at $53,185 for accounting purposes in connection with the
Nicewonder Acquisition.
|
|
·
|
The
short-term financing of prepaid insurance premiums in the amount of
$19,059.
|
|
·
|
Increase
in deferred gains on sales of property interests and decrease in other
liabilities of $1,169 for revisions in estimated cash flows underlying
asset retirement obligations relating to properties which had been
sold.
|
|
·
|
Various
transactions in connection with the Internal Restructuring. (See
Note 2).
|
|
(28)
|
Minority
Interest
|
In 2006,
the Company acquired a 94% ownership interest in connection with the investment
in the Gallatin subsidiary. The minority owners were granted restricted
member interests in Gallatin, which vest based on performance criteria
approximately three years from the closing date and which, if earned in their
entirety, would reduce the Company’s ownership to 77.5%.
In
connection with the Internal Restructuring on February 11, 2005
(Note 2), the minority interest holders contributed their interests in ANR
Holdings to Alpha Natural Resources, Inc. in exchange for shares of Alpha
Natural Resources, Inc. common stock, thereby eliminating the minority
interest.
|
(29)
|
Investments
|
Dominion
Terminal Associates
As part
of the Company's acquisition of its Predecessor in 2003, the Company acquired a
32.5% interest in Dominion Terminal Associates (“DTA”). DTA is a partnership
with three other companies that operates a leased coal port terminal in Newport
News, Virginia (“the Terminal”) that provides the Company a cost effective
export facility. The Company accounts for this investment under the equity
method. The Company did not ascribe any value to this partnership interest when
it was acquired. The Company has the right to use 32.5% of the throughput and
ground storage capacity of the Terminal and pay for this right based upon an
allocation of costs as determined by DTA.
For the
years ended December 31, 2007, 2006 and 2005, the Company made advances to
DTA equal to its share of allocated costs of $4,100, $4,923 and $4,056,
respectively, offset by outside revenues of $2,660, $1,677 and $1,869,
respectively, for tolling, storage, docking, and loading fees which we earned
from third party usage of the DTA facilities.
Excelven
Pty Ltd
In
September 2004, the Company, together with AMCI, entered into a subscription
deed with Excelven Pty Ltd, pursuant to which each party agreed to acquire a
24.5% interest in Excelven for a purchase price of $5,000 in cash. Excelven,
through its subsidiaries, owns the rights to the Las Carmelitas mining venture
in Venezuela and the related Palmarejo export port facility on Lake Maracaibo in
Venezuela. The Company made additional investments in Excelven totaling $263 and
$261 during the years ended December 31, 2007 and 2006, respectively. The
investment is accounted for under the equity method, and is included in other
assets. At December 31, 2007 and 2006, our investment in Excelven
was $4,884 and $5,821, respectively. In 2007, Excelven made a decision to
close the export port facility. The Company has recognized its share
of Excelven losses in 2007 and 2006 of $1,200 and $174,
respectively.
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
|
(30)
|
Income
Taxes
|
The total
income tax expense (benefit) provided on pretax income was allocated as
follows:
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Continuing
operations
|
$ | 8,629 | $ | (30,519 | ) | $ | 18,953 | |||||
|
Discontinued
operations
|
-- | -- | (93 | ) | ||||||||
| $ | 8,629 | $ | (30,519 | ) | $ | 18,860 | ||||||
Significant
components of income tax expense (benefit) from continuing operations were as
follows:
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Current
tax expense:
|
||||||||||||
|
Federal
|
$ | 8,265 | $ | 15,671 | $ | 13,841 | ||||||
|
State
|
(626 | ) | 2,530 | 1,364 | ||||||||
| 7,639 | 18,201 | 15,205 | ||||||||||
|
Deferred
tax expense (benefit):
|
||||||||||||
|
Federal
|
(716 | ) | (40,461 | ) | 3,740 | |||||||
|
State
|
1,706 | (8,259 | ) | 8 | ||||||||
| 990 | (48,720 | ) | 3,748 | |||||||||
|
Total
income tax expense (benefit):
|
||||||||||||
|
Federal
|
7,549 | (24,790 | ) | 17,581 | ||||||||
|
State
|
1,080 | (5,729 | ) | 1,372 | ||||||||
| $ | 8,629 | $ | (30,519 | ) | $ | 18,953 | ||||||
A
reconciliation of the statutory federal income tax expense at 35% to income
before income taxes and minority interest, and the actual income tax expense
(benefit) is as follows:
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Federal
statutory income tax expense
|
$ | 12,664 | $ | 34,177 | $ | 15,154 | ||||||
|
Increases
(reductions) in taxes due to:
|
||||||||||||
|
Nondeductible
stock-based compensation
|
479 | 4,472 | 16,056 | |||||||||
|
Percentage
depletion allowance
|
(9,851 | ) | (6,345 | ) | (4,625 | ) | ||||||
|
Extraterritorial
income exclusion
|
-- | (1,678 | ) | (2,381 | ) | |||||||
|
State
taxes, net of federal tax impact
|
698 | 3,859 | 2,016 | |||||||||
|
Change
in valuation allowance
|
4,040 | (67,629 | ) | (6,077 | ) | |||||||
|
Taxes
not provided for minority interest
|
63 | -- | (1,021 | ) | ||||||||
|
Taxes
not provided for pass-through entity
|
-- | -- | (142 | ) | ||||||||
|
Other,
net
|
536 | 2,625 | (27 | ) | ||||||||
|
Income
tax expense (benefit)
|
$ | 8,629 | $ | (30,519 | ) | $ | 18,953 | |||||
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Deferred
income taxes result from temporary differences between the reporting of amounts
for financial statement purposes and income tax purposes. The net deferred tax
assets and liabilities included in the consolidated financial statements include
the following amounts:
|
December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Deferred
tax assets:
|
||||||||
|
Property,
plant and equipment
|
$ | 45,812 | $ | 56,437 | ||||
|
Asset
retirement obligation
|
35,346 | 29,990 | ||||||
|
Goodwill
|
14,415 | 15,627 | ||||||
|
Postretirement
medical benefits
|
21,233 | 19,756 | ||||||
|
Workers'
compensation benefits
|
3,764 | 4,832 | ||||||
|
Deferred
gains on sales of property interests
|
1,562 | 1,898 | ||||||
|
Alternative
Minimum Tax credit carryforwards
|
23,933 | 12,126 | ||||||
|
Net
operating loss carryforwards
|
887 | -- | ||||||
|
Other
|
18,639 | 15,885 | ||||||
|
Gross
deferred tax assets
|
165,591 | 156,551 | ||||||
|
Less
valuation allowance
|
(44,368 | ) | (39,732 | ) | ||||
|
Total
net deferred tax assets
|
121,223 | 116,819 | ||||||
|
Deferred
tax liabilities:
|
||||||||
|
Prepaid
insurance and other prepaid expenses
|
(20,117 | ) | (15,258 | ) | ||||
|
Advance
mining royalties
|
(4,527 | ) | (5,296 | ) | ||||
|
Virginia
tax credit
|
(7,511 | ) | (5,701 | ) | ||||
|
Other
|
(1,691 | ) | (3,268 | ) | ||||
|
Total
deferred tax liabilities
|
(33,846 | ) | (29,523 | ) | ||||
|
Net
deferred tax asset
|
$ | 87,377 | $ | 87,296 | ||||
The
breakdown of the net deferred tax asset as recorded in the accompanying
consolidated balance sheets is as follows:
|
December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Current
liability
|
$ | (9,753 | ) | $ | (7,601 | ) | ||
|
Noncurrent
asset
|
97,130 | 94,897 | ||||||
|
Total
net deferred tax asset
|
$ | 87,377 | $ | 87,296 | ||||
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Changes
in the valuation allowance during the year ended December 31, 2007 were as
follows:
|
Valuation
allowance at December 31, 2006
|
$
|
39,732
|
||
|
Increase
in valuation allowance not affecting income tax expense
|
596
|
|||
|
Increase
in valuation allowance recorded as a reduction to income tax
expense
|
4,040
|
|||
|
Valuation
allowance at December 31, 2007
|
$
|
44,368
|
The
increase in the valuation allowance not affecting income tax expense relates to
items recorded in other comprehensive income and includes the impact of SFAS 158
($575) and the interest rate swap of $1,171. The Company's valuation allowance
of $44,368 as of December 31, 2007 includes a full valuation allowance
against the $23,933 Alternative Minimum Tax (“AMT”) credit carry-forward, which
is available for an unlimited carry-forward period to offset regular federal
income tax in excess of the AMT. The remaining valuation allowance is being
maintained primarily to account for the expectation that the Company will be a
perpetual AMT taxpayer at a 20% effective tax rate.
The gross
amount of the federal net operating loss carryforwards as of December 31, 2007,
was $1,930. The tax benefit of the federal net operating loss
carryforwards as of December 31, 2007 was $676 and will expire in 20
years. The gross amount of the state net operating loss carryforwards
as of December 31, 2007, was $5,738. The tax benefit of the state net
operating loss carryforwards as of December 31, 2007 was $211 and will expire in
20 years.
The
Company has concluded that it is more likely than not that deferred tax assets,
net of valuation allowances, currently recorded will be realized. The
amount of the valuation allowance takes into consideration the Alternative
Minimum Tax system as required by SFAS 109. The Company monitors the valuation
allowance each quarter and makes adjustments to the allowance as
appropriate.
The
Company adopted the provisions of Financial Standards Accounting Board
Interpretation No. 48 Accounting for Uncertainty in Income
Taxes (“FIN 48”) an interpretation of SFAS 109 on January 1, 2007. As a
result of the adoption of FIN 48, the Company recognized no adjustment in the
unrecognized income tax benefits that existed at December 31, 2006. Total amount
of unrecognized tax benefits that would affect our effective tax rate if
recognized is $2,466 as of December 31, 2007. This amount takes into
consideration that a valuation allowance would be recorded against certain
deferred tax assets if unrecognized tax benefits were settled. The
Company does not anticipate that total unrecognized benefits recorded as of
December 31, 2007 will significantly change during the next twelve
months.
The
Company’s policy is to classify interest and penalties related to uncertain tax
positions as part of income tax expense. As of December 31, 2007, the Company
has recorded accrued interest expense of $78. In addition, the
Company has accrued interest income of $233 for those uncertain positions where
no additional cash taxes are projected due.
The
following reconciliation illustrates the Company’s liability for uncertain tax
positions as of December 31, 2007.
|
Unrecognized
Tax Benefits – January 1, 2007
|
$
|
1,437
|
||
|
Gross
increases – tax positions in prior period
|
517
|
|||
|
Gross
decreases – tax positions in prior period
|
(857
|
)
|
||
|
Gross
increases – current-period positions
|
4,403
|
|||
|
Settlements
|
--
|
|||
|
Lapse
of statute of limitations
|
--
|
|||
|
Unrecognized
Tax Benefits - December 31, 2007
|
$
|
5,500
|
Tax years
2005 and 2006 remain open to federal and state examination. The
Internal Revenue Service initiated a corporate income tax audit during first
quarter 2007 for the Company’s 2005 tax year. The audit is still
ongoing. No adjustments have been proposed to date, and the Company
expects the examination to last through the second quarter of
2008.
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
|
(31)
|
Quarterly
Financial Information (Unaudited)
|
|
Year
Ended December 31, 2007
|
||||||||||||||||
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
|||||||||||||
|
Total
revenues
|
$ | 427,371 | $ | 434,266 | $ | 507,139 | $ | 508,798 | ||||||||
|
Income
from operations
|
20,249 | 15,266 | 20,799 | 17,838 | ||||||||||||
|
Net
income
|
8,349 | 4,747 | 8,949 | 5,689 | ||||||||||||
|
Earnings
per share, basic and diluted
|
$ | 0.13 | $ | 0.07 | $ | 0.14 | $ | 0.09 | ||||||||
Net income for the quarter ended
December 31, 2007 included a benefit related to mark-to-market adjustments of
$5,740 (after tax) for certain forward coal purchase and forward sales
contracts which are considered to be derivatives and are recorded at fair
value.
|
Year
Ended December 31, 2006
|
||||||||||||||||
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
|||||||||||||
|
Total
revenues
|
$ | 482,140 | $ | 496,511 | $ | 475,118 | $ | 456,893 | ||||||||
|
Income
from operations
|
46,639 | 42,405 | 29,840 | 19,177 | ||||||||||||
|
Net
income
|
27,212 | 23,128 | 14,544 | 63,284 | ||||||||||||
|
Earnings
per share, basic and diluted
|
$ | 0.43 | $ | 0.36 | $ | 0.23 | $ | 0.98 | ||||||||
Net
income for the quarter ended December 31, 2006 included a charge to coal revenue
of $7,000 for a contract buyout of a multi-year legacy coal supply agreement and
an income tax benefit of $55,614 for a reversal of a deferred tax asset
valuation allowance.
|
Year
Ended December31, 2005
|
||||||||||||||||
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
|||||||||||||
|
Total
revenues
|
$ | 311,987 | $ | 417,466 | $ | 397,519 | $ | 499,683 | ||||||||
|
Income
(loss) from operations
|
(14,022 | ) | 41,640 | 18,141 | 26,320 | |||||||||||
|
Income
(loss) from continuing operations
|
(25,323 | ) | 26,127 | 8,210 | 12,412 | |||||||||||
|
Income
(loss) from discontinued operations
|
(480 | ) | 267 | -- | -- | |||||||||||
|
Net
income (loss)
|
(25,801 | ) | 26,392 | 8,210 | 12,412 | |||||||||||
|
Earnings
(loss) per share, as adjusted-- basic and diluted
|
$ | (0.71 | ) | $ | 0.43 | $ | 0.13 | $ | 0.20 | |||||||
Quarterly
net income for the year ended December 31, 2005 included stock-based
compensation expense, primarily relating to the Internal Restructuring and the
Company's initial public offering in February 2005 (Note 2) as follows: first
quarter -- $36,407 second quarter -- $3,381; third quarter --
$3,381; and, fourth quarter -- $3,350 (Note 28).
The net
loss for the first quarter of 2005 included an increase for minority interest of
$2,990. Effective with the Internal Restructuring in February 2005, the minority
interest no longer existed (Note 2).
The
results of operations from the Nicewonder Coal Group were included in the
Company's consolidated results of operations from the date of the acquisition,
October 26, 2005 (Note 22).
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
|
(32)
|
Supplemental
Guarantor/Non-Guarantor Financial
Information
|
On June
28, 2007, Holdings was merged into the Company and the Company assumed the
obligations of Holdings under the Credit Agreement and related guaranty and
collateral agreement and became a parent guarantor of the Senior Notes. The
payment obligations under the Senior Notes, issued jointly by our subsidiary
Alpha Natural Resources, LLC and its wholly-owned subsidiary Alpha Natural
Resource Capital Corp. in 2004, are unsecured, but are guaranteed fully and
unconditionally on a joint and several basis by the Company and all its
subsidiaries other than the issuers of the notes and our recently formed
subsidiary, Gallatin Materials LLC. The following financial information
sets forth separate financial information with respect to the Company, the
issuers, the guarantor subsidiaries and the non-guarantor subsidiary. The
principal elimination entries eliminate investments in subsidiaries and certain
intercompany balances and transactions.
|
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
|
||||||||||||||||||
|
SUPPLEMENTAL
CONDENSED CONSOLIDATING BALANCE SHEET
|
||||||||||||||||||
|
December
31, 2007
|
||||||||||||||||||
|
Parent
|
Co-Issuers
|
Guarantors
|
Non-Guarantor
|
Eliminations
|
Consolidated
|
|||||||||||||
|
Assets:
|
||||||||||||||||||
|
Current
assets:
|
||||||||||||||||||
|
Cash
and cash equivalents
|
$ | 13 | $ | 62,991 | $ | (15,850 | ) | $ | 7,211 | $ | - | $ | 54,365 | |||||
|
Trade
accounts receivable, net
|
- | - | 184,044 | - | (75 | ) | 183,969 | |||||||||||
|
Notes
and other receivables
|
2,629 | 68,186 | 7,826 | - | (67,500 | ) | 11,141 | |||||||||||
|
Inventories
|
- | - | 70,688 | 92 | - | 70,780 | ||||||||||||
|
Due
from affiliates
|
- | - | 394,571 | - | (394,571 | ) | - | |||||||||||
|
Prepaid
expenses and other current assets
|
8,840 | 959 | 50,474 | 4 | (323 | ) | 59,954 | |||||||||||
|
Total
current assets
|
11,482 | 132,136 | 691,753 | 7,307 | (462,469 | ) | 380,209 | |||||||||||
|
Property,
plant, and equipment, net
|
- | - | 616,306 | 23,952 | - | 640,258 | ||||||||||||
|
Goodwill
|
- | - | 20,547 | - | - | 20,547 | ||||||||||||
|
Other
intangibles, net
|
- | - | 6,132 | 3,244 | - | 9,376 | ||||||||||||
|
Deferred
income taxes
|
89,806 | 7,324 | - | - | - | 97,130 | ||||||||||||
|
Other
assets
|
373,195 | 986,912 | 51,195 | 880 | (1,348,788 | ) | 63,394 | |||||||||||
|
Total
assets
|
$ | 474,483 | $ | 1,126,372 | $ | 1,385,933 | $ | 35,383 | $ | (1,811,257 | ) | $ | 1,210,914 | |||||
|
Liabilities
and Stockholder's Equity:
|
||||||||||||||||||
|
Current
liabilities:
|
||||||||||||||||||
|
Current
portion of long-term debt
|
$ | - | $ | - | $ | 68,023 | $ | 2,056 | $ | (67,500 | ) | $ | 2,579 | |||||
|
Note
payable
|
- | 18,883 | - | - | - | 18,883 | ||||||||||||
|
Bank
overdrafts
|
- | - | 160 | - | - | 160 | ||||||||||||
|
Due
to affiliates
|
81,295 | 313,172 | - | 104 | (394,571 | ) | - | |||||||||||
|
Trade
accounts payable
|
162 | 208 | 93,103 | 2,207 | (75 | ) | 95,605 | |||||||||||
|
Deferred
income tax
|
9,753 | - | - | - | - | 9,753 | ||||||||||||
|
Accrued
expenses and other current liabilities
|
2,163 | 3,604 | 89,828 | 810 | (323 | ) | 96,082 | |||||||||||
|
Total
current liabilities
|
93,373 | 335,867 | 251,114 | 5,177 | (462,469 | ) | 223,062 | |||||||||||
|
Long-term
debt, net of current portion
|
- | 408,125 | 182 | 20,957 | (3,813 | ) | 425,451 | |||||||||||
|
Workers'
compensation benefit obligations
|
- | - | 9,055 | - | - | 9,055 | ||||||||||||
|
Postretirement
medical benefit obligations
|
- | - | 53,811 | - | - | 53,811 | ||||||||||||
|
Asset
retirement obligations
|
- | - | 83,020 | - | - | 83,020 | ||||||||||||
|
Deferred
gains on sales of property interests
|
- | - | 3,176 | - | - | 3,176 | ||||||||||||
|
Other
liabilities
|
274 | 15,600 | 14,841 | 406 | (191 | ) | 30,930 | |||||||||||
|
Total
liabilities
|
93,647 | 759,592 | 415,199 | 26,540 | (466,473 | ) | 828,505 | |||||||||||
|
Minority
interest
|
- | - | - | 1,573 | - | 1,573 | ||||||||||||
|
Stockholder's
equity
|
380,836 | 366,780 | 970,734 | 7,270 | (1,344,784 | ) | 380,836 | |||||||||||
|
Total
liabilities and stockholder's equity
|
$ | 474,483 | $ | 1,126,372 | $ | 1,385,933 | $ | 35,383 | $ | (1,811,257 | ) | $ | 1,210,914 | |||||
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
|
SUPPLEMENTAL
CONDENSED CONSOLIDATING BALANCE SHEET
|
||||||||||||||||||
|
December
31, 2006
|
||||||||||||||||||
|
Parent
|
Co-Issuers
|
Guarantors
|
Non-Guarantor
|
Eliminations
|
Consolidated
|
|||||||||||||
|
Assets:
|
||||||||||||||||||
|
Current
assets:
|
||||||||||||||||||
|
Cash
and cash equivalents
|
$ | - | $ | 27,101 | $ | 5,414 | $ | 741 | $ | - | $ | 33,256 | ||||||
|
Trade
accounts receivable, net
|
- | - | 171,195 | - | - | 171,195 | ||||||||||||
|
Notes
and other receivables
|
2,568 | 67,498 | 13,680 | 20 | (77,300 | ) | 6,466 | |||||||||||
|
Inventories
|
- | - | 76,844 | - | - | 76,844 | ||||||||||||
|
Due
from affiliates
|
- | - | 226,679 | - | (226,679 | ) | - | |||||||||||
|
Prepaid
expenses and other current assets
|
3,337 | 1,437 | 46,236 | - | (117 | ) | 50,893 | |||||||||||
|
Total
current assets
|
5,905 | 96,036 | 540,048 | 761 | (304,096 | ) | 338,654 | |||||||||||
|
Property,
plant, and equipment, net
|
- | - | 637,136 | - | - | 637,136 | ||||||||||||
|
Goodwill
|
- | - | 20,547 | - | - | 20,547 | ||||||||||||
|
Other
intangibles, net
|
- | - | 7,803 | 3,917 | - | 11,720 | ||||||||||||
|
Deferred
income taxes
|
88,644 | 6,253 | - | - | - | 94,897 | ||||||||||||
|
Other
assets
|
330,982 | 848,809 | 21,273 | - | (1,158,225 | ) | 42,839 | |||||||||||
|
Total
assets
|
$ | 425,531 | $ | 951,098 | $ | 1,226,807 | $ | 4,678 | $ | (1,462,321 | ) | $ | 1,145,793 | |||||
|
Liabilities
and Stockholder's Equity:
|
||||||||||||||||||
|
Current
liabilities:
|
||||||||||||||||||
|
Current
portion of long-term debt
|
$ | - | $ | 12,300 | $ | 68,254 | $ | - | $ | (77,300 | ) | $ | 3,254 | |||||
|
Note
payable
|
- | 20,941 | - | - | - | 20,941 | ||||||||||||
|
Bank
overdrafts
|
34 | - | 23,780 | - | - | 23,814 | ||||||||||||
|
Due
to affiliates
|
69,055 | 157,624 | - | - | (226,679 | ) | - | |||||||||||
|
Trade
accounts payable
|
- | 145 | 75,533 | 308 | - | 75,986 | ||||||||||||
|
Deferred
income tax
|
7,601 | - | - | - | - | 7,601 | ||||||||||||
|
Accrued
expenses and other current liabilities
|
2,392 | 6,695 | 81,624 | - | (117 | ) | 90,594 | |||||||||||
|
Total
current liabilities
|
79,082 | 197,705 | 249,191 | 308 | (304,096 | ) | 222,190 | |||||||||||
|
Long-term
debt, net of current portion
|
- | 420,000 | 756 | 700 | - | 421,456 | ||||||||||||
|
Workers'
compensation benefit obligations
|
- | - | 7,169 | - | - | 7,169 | ||||||||||||
|
Postretirement
medical benefit obligations
|
- | - | 50,712 | - | - | 50,712 | ||||||||||||
|
Asset
retirement obligations
|
- | - | 69,495 | - | - | 69,495 | ||||||||||||
|
Deferred
gains on sales of property interests
|
- | - | 3,885 | - | - | 3,885 | ||||||||||||
|
Other
liabilities
|
2,400 | 8,676 | 15,811 | - | - | 26,887 | ||||||||||||
|
Total
liabilities
|
81,482 | 626,381 | 397,019 | 1,008 | (304,096 | ) | 801,794 | |||||||||||
|
Minority
interest
|
- | - | - | (50 | ) | - | (50 | ) | ||||||||||
|
Stockholder's
equity
|
344,049 | 324,717 | 829,788 | 3,720 | (1,158,225 | ) | 344,049 | |||||||||||
|
Total
liabilities and stockholder's equity
|
$ | 425,531 | $ | 951,098 | $ | 1,226,807 | $ | 4,678 | $ | (1,462,321 | ) | $ | 1,145,793 | |||||
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
|
SUPPLEMENTAL
CONDENSED CONSOLIDATING STATEMENT OF INCOME
|
||||||||||||||||||
|
Year
Ended December 31, 2007
|
||||||||||||||||||
|
Parent
|
Co-Issuers
|
Guarantors
|
Non-Guarantor
|
Eliminations
|
Consolidated
|
|||||||||||||
|
Revenues:
|
||||||||||||||||||
|
Coal
revenues
|
$ | - | $ | - | $ | 1,639,322 | $ | - | $ | (75 | ) | $ | 1,639,247 | |||||
|
Freight
and handling revenues
|
- | - | 205,086 | - | - | 205,086 | ||||||||||||
|
Other
revenues
|
- | - | 33,241 | - | - | 33,241 | ||||||||||||
|
Total
revenues
|
- | - | 1,877,649 | - | (75 | ) | 1,877,574 | |||||||||||
|
Costs
and expenses:
|
||||||||||||||||||
|
Cost
of coal sales
|
- | - | 1,354,411 | - | (75 | ) | 1,354,335 | |||||||||||
|
Freight
and handling costs
|
- | - | 205,086 | - | - | 205,086 | ||||||||||||
|
Cost
of other revenues
|
- | - | 22,715 | 3,102 | - | 25,817 | ||||||||||||
|
Depreciation,
depletion and amortization
|
- | - | 159,574 | 5 | - | 159,579 | ||||||||||||
| Selling, general and administrative expenses |
|
|||||||||||||||||
| (exclusive of depreciation and amortization |
|
|||||||||||||||||
|
shown
separately above)
|
923 | 6,499 | 51,063 | 120 | - | 58,605 | ||||||||||||
|
Total
costs and expenses
|
923 | 6,499 | 1,792,848 | 3,226 | (75 | ) | 1,803,422 | |||||||||||
|
Income
(loss) from operations
|
(923 | ) | (6,499 | ) | 84,801 | (3,226 | ) | - | 74,152 | |||||||||
|
Other
income (expense):
|
||||||||||||||||||
|
Interest
expense
|
(1 | ) | (40,566 | ) | (261 | ) | (38 | ) | 651 | (40,215 | ) | |||||||
|
Interest
income
|
150 | 1,810 | 956 | 75 | (651 | ) | 2,340 | |||||||||||
|
Equity
earnings
|
37,137 | 83,590 | (3,011 | ) | - | (117,717 | ) | - | ||||||||||
|
Miscellaneous
income (expense), net
|
- | (1,198 | ) | 1,105 | - | - | (93 | ) | ||||||||||
|
Total
other income (expense), net
|
37,286 | 43,636 | (1,211 | ) | 37 | (117,717 | ) | (37,968 | ) | |||||||||
|
Income
(loss) from continuing operations
|
|
|||||||||||||||||
|
before
income taxes
|
||||||||||||||||||
|
and
minority interest
|
36,363 | 37,137 | 83,590 | (3,189 | ) | (117,717 | ) | 36,184 | ||||||||||
|
Income
tax expense
|
8,629 | - | - | - | - | 8,629 | ||||||||||||
|
Minority
interest
|
- | - | - | (179 | ) | - | (179 | ) | ||||||||||
|
Net
income (loss)
|
$ | 27,734 | $ | 37,137 | $ | 83,590 | $ | (3,011 | ) | $ | (117,717 | ) | $ | 27,734 | ||||
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
|
SUPPLEMENTAL
CONDENSED CONSOLIDATING STATEMENT OF INCOME
|
||||||||||||||||||
|
Year
Ended December 31, 2006
|
||||||||||||||||||
|
Parent
|
Co-Issuers
|
Guarantors
|
Non-Guarantor
|
Eliminations
|
Consolidated
|
|||||||||||||
|
Revenues:
|
||||||||||||||||||
|
Coal
revenues
|
$ | - | $ | - | $ | 1,687,553 | $ | - | $ | - | $ | 1,687,553 | ||||||
|
Freight
and handling revenues
|
- | - | 188,366 | - | - | 188,366 | ||||||||||||
|
Other
revenues
|
- | - | 34,743 | - | - | 34,743 | ||||||||||||
|
Total
revenues
|
- | - | 1,910,662 | - | - | 1,910,662 | ||||||||||||
|
Costs
and expenses:
|
||||||||||||||||||
|
Cost
of coal sales
|
- | - | 1,352,450 | - | - | 1,352,450 | ||||||||||||
|
Freight
and handling costs
|
- | - | 188,366 | - | - | 188,366 | ||||||||||||
|
Cost
of other revenues
|
- | - | 22,982 | - | - | 22,982 | ||||||||||||
|
Depreciation,
depletion and amortization
|
- | - | 140,851 | - | - | 140,851 | ||||||||||||
| Selling, general and administrative expenses |
|
|||||||||||||||||
| (exclusive of depreciation and amortization |
|
|||||||||||||||||
|
shown separately above)
|
1,126 | 7,204 | 59,622 | - | - | 67,952 | ||||||||||||
|
Total
costs and expenses
|
1,126 | 7,204 | 1,764,271 | - | - | 1,772,601 | ||||||||||||
|
Income
(loss) from operations
|
(1,126 | ) | (7,204 | ) | 146,391 | - | - | 138,061 | ||||||||||
|
Other
income (expense):
|
||||||||||||||||||
|
Interest
expense
|
- | (41,850 | ) | (294 | ) | - | 370 | (41,774 | ) | |||||||||
|
Interest
income
|
192 | 498 | 519 | - | (370 | ) | 839 | |||||||||||
|
Equity
earnings
|
98,583 | 147,313 | - | - | (245,896 | ) | - | |||||||||||
|
Miscellaneous
income (expense), net
|
- | (174 | ) | 697 | - | - | 523 | |||||||||||
|
Total
other income (expense), net
|
98,775 | 105,787 | 922 | - | (245,896 | ) | (40,412 | ) | ||||||||||
| Income (loss) from continuing operations |
|
|||||||||||||||||
|
before
income taxes
|
||||||||||||||||||
|
and
minority interest
|
97,649 | 98,583 | 147,313 | - | (245,896 | ) | 97,649 | |||||||||||
|
Income
tax expense
|
(30,519 | ) | - | - | - | - | (30,519 | ) | ||||||||||
|
Minority
interest
|
- | - | - | - | - | - | ||||||||||||
|
Net
income (loss)
|
$ | 128,168 | $ | 98,583 | $ | 147,313 | $ | - | $ | (245,896 | ) | $ | 128,168 | |||||
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
|
SUPPLEMENTAL
CONDENSED CONSOLIDATING STATEMENT OF INCOME
|
||||||||||||||||||
|
Year
Ended December 31, 2005
|
||||||||||||||||||
|
Parent
|
Co-Issuers
|
Guarantors
|
Non-Guarantor
|
Eliminations
|
Consolidated
|
|||||||||||||
|
Revenues:
|
||||||||||||||||||
|
Coal
revenues
|
$ | - | $ | - | $ | 1,413,174 | $ | - | $ | - | $ | 1,413,174 | ||||||
|
Freight
and handling revenues
|
- | - | 185,555 | - | - | 185,555 | ||||||||||||
|
Other
revenues
|
- | - | 27,926 | - | - | 27,926 | ||||||||||||
|
Total
revenues
|
- | - | 1,626,655 | - | - | 1,626,655 | ||||||||||||
|
Costs
and expenses:
|
||||||||||||||||||
|
Cost
of coal sales
|
- | - | 1,184,092 | - | - | 1,184,092 | ||||||||||||
|
Freight
and handling costs
|
- | - | 185,555 | - | - | 185,555 | ||||||||||||
|
Cost
of other revenues
|
- | - | 23,675 | - | - | 23,675 | ||||||||||||
|
Depreciation,
depletion and amortization
|
- | - | 73,122 | - | - | 73,122 | ||||||||||||
|
Selling,
general and administrative expenses
|
2,814 | 10,163 | 75,155 | - | - | 88,132 | ||||||||||||
| (exclusive of depreciation and amortization |
|
|||||||||||||||||
|
shown
separately above)
|
||||||||||||||||||
|
Total
costs and expenses
|
2,814 | 10,163 | 1,541,599 | - | - | 1,554,576 | ||||||||||||
|
Income
(loss) from operations
|
(2,814 | ) | (10,163 | ) | 85,056 | - | - | 72,079 | ||||||||||
|
Other
income (expense):
|
||||||||||||||||||
|
Interest
expense
|
(290 | ) | (30,101 | ) | - | - | 454 | (29,937 | ) | |||||||||
|
Interest
income
|
37 | 787 | 694 | - | (454 | ) | 1,064 | |||||||||||
|
Equity
earnings
|
45,981 | 85,458 | - | - | (131,439 | ) | - | |||||||||||
|
Miscellaneous
income (expense), net
|
- | - | 91 | - | - | 91 | ||||||||||||
| Total other income (expense), net |
|
|||||||||||||||||
|
Income
(loss) from continuing operations
|
45,728 | 56,144 | 785 | - | (131,439 | ) | (28,782 | ) | ||||||||||
|
before
income taxes
|
||||||||||||||||||
|
and
minority interest
|
42,914 | 45,981 | 85,841 | - | (131,439 | ) | 43,297 | |||||||||||
|
Income
tax expense
|
18,948 | - | 5 | - | - | 18,953 | ||||||||||||
|
Minority
interest
|
2,918 | - | - | - | - | 2,918 | ||||||||||||
|
Net
income (loss)
|
21,048 | 45,981 | 85,836 | - | (131,439 | ) | 21,426 | |||||||||||
|
Discontinued
operations:
|
||||||||||||||||||
|
Loss
from continuing operations
|
- | - | (378 | ) | - | - | (378 | ) | ||||||||||
|
Income
tax benefit
|
(93 | ) | - | - | - | - | (93 | ) | ||||||||||
|
Minority
interest
|
(72 | ) | - | - | - | - | (72 | ) | ||||||||||
|
Income
(loss) from discontinued operations
|
165 | - | (378 | ) | - | - | (213 | ) | ||||||||||
|
Net
income (loss)
|
$ | 21,213 | $ | 45,981 | $ | 85,458 | $ | - | $ | (131,439 | ) | $ | 21,213 | |||||
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
|
SUPPLEMENTAL
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
|
||||||||||||||||||
|
Year
Ended December 31, 2007
|
||||||||||||||||||
|
Parent
|
Co-Issuers
|
Guarantors
|
Non-Guarantor
|
|
Eliminations
|
Consolidated
|
||||||||||||
| Cash flows from operating activities: | ||||||||||||||||||
|
Net cash flows by operating activities
|
$
|
(1,799
|
)
|
$
|
71,469
|
$
|
156,609
|
$
|
(538
|
)
|
$
|
-
|
$
|
225,741
|
||||
|
Cash
flows used in investing activities:
|
||||||||||||||||||
|
Capital
expenditures
|
-
|
-
|
(104,109
|
)
|
(22,272
|
)
|
-
|
(126,381
|
)
|
|||||||||
|
Purchase
of net assets of acquired companies
|
-
|
-
|
(43,893
|
)
|
-
|
-
|
(43,893
|
)
|
||||||||||
|
Other,
net
|
-
|
(263
|
)
|
(1,633
|
)
|
(15
|
)
|
6,982
|
5,071
|
|||||||||
|
Net cash flows used in investing activities
|
-
|
(263
|
)
|
(149,635
|
)
|
(22,287
|
)
|
6,982
|
(165,203
|
)
|
||||||||
| Cash flows (used in) provided by financing activities: |
|
|||||||||||||||||
|
Net
draws (repayments) of notes payable
|
-
|
(20,941
|
)
|
(3,813
|
)
|
3,813
|
-
|
(20,941
|
)
|
|||||||||
|
Proceeds
from issuance of long-term debt
|
-
|
400
|
-
|
18,500
|
-
|
18,900
|
||||||||||||
|
Decrease
in bank overdraft
|
-
|
-
|
(23,654
|
)
|
-
|
-
|
(23,654
|
)
|
||||||||||
|
Capital
contributions from parent
|
-
|
-
|
-
|
6,982
|
(6,982
|
)
|
-
|
|||||||||||
|
Other,
net
|
1,846
|
(14,775
|
)
|
(805
|
)
|
-
|
-
|
(13,734
|
)
|
|||||||||
| Net cash (used in) provided by financing activities |
|
1,846
|
(35,316
|
)
|
(28,272
|
)
|
29,295
|
(6,982
|
)
|
(39,429
|
)
|
|||||||
|
Net
increase (decrease) in cash and cash equivalents
|
|
47
|
35,890
|
(21,300
|
)
|
6,472
|
-
|
21,109
|
||||||||||
|
Cash
and cash equivalents at beginning of year
|
(34
|
)
|
27,101
|
5,448
|
741
|
-
|
33,256
|
|||||||||||
|
Cash
and cash equivalents at end of year
|
$
|
13
|
$
|
62,991
|
$
|
(15,850
|
)
|
$
|
7,211
|
$
|
-
|
$
|
54,365
|
|||||
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
|
SUPPLEMENTAL
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
|
||||||||||||||||||
|
Year
Ended December 31, 2006
|
||||||||||||||||||
|
Parent
|
Co-Issuers
|
Guarantors
|
Non-Guarantor
|
Eliminations
|
Consolidated
|
|||||||||||||
| Cash flows from operating activities: | ||||||||||||||||||
| Net cash flows by operating activities | $ | 1,452 | $ | 42,643 | $ | 165,986 | $ | - | $ | - | $ | 210,081 | ||||||
|
Cash
flows used investing activities:
|
||||||||||||||||||
|
Capital
expenditures
|
- | - | (131,943 | ) | - | - | (131,943 | ) | ||||||||||
| Purchase of net assets of acquired companies | - | - | (28,273 | ) | (3,259 | ) | - | (31,532 | ) | |||||||||
|
Other,
net
|
- | (86 | ) | 215 | - | 3,300 | 3,429 | |||||||||||
| Net cash flows used in investing activities | - | (86 | ) | (160,001 | ) | (3,259 | ) | 3,300 | (160,046 | ) | ||||||||
| Cash flows (used in) provided by financing activities: | ||||||||||||||||||
| Net draws (repayments) of notes payable | - | (58,315 | ) | - | - | - | (58,315 | ) | ||||||||||
| Proceeds from issuance of long-term debt | - | 286,121 | - | 700 | - | 286,821 | ||||||||||||
| Net draws (repayments) on long-term debt | - | (289,931 | ) | (279 | ) | - | - | (290,210 | ) | |||||||||
|
Capital
contributions from parent
|
- | - | - | 3,300 | (3,300 | ) | - | |||||||||||
|
Other,
net
|
(1,446 | ) | - | 6,749 | - | - | 5,303 | |||||||||||
| Net cash (used in) provided by financing activities | (1,446 | ) | (62,125 | ) | 6,470 | 4,000 | (3,300 | ) | (56,401 | ) | ||||||||
| Net increase (decrease) in cash and cash equivalents | (28 | ) | (19,568 | ) | 12,455 | 741 | - | (6,366 | ) | |||||||||
| Cash and cash equivalents at beginning of year | (6 | ) | 46,669 | (7,041 | ) | - | - | 39,622 | ||||||||||
|
Cash
and cash equivalents at end of year
|
$ | - | $ | 27,101 | $ | 5,414 | $ | 741 | $ | - | $ | 33,256 | ||||||
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS -- (Continued)
|
SUPPLEMENTAL
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
|
||||||||||||||||||
|
Year
Ended December 31, 2005
|
||||||||||||||||||
|
Parent
|
Co-Issuers
|
Guarantors
|
Non-Guarantor
|
Eliminations
|
Consolidated
|
|||||||||||||
| Cash flows from operating activities: | ||||||||||||||||||
|
Net cash flows by operating activities
|
$ | 1,888 | $ | (172,023 | ) | $ | 319,778 | $ | - | $ | - | $ | 149,643 | |||||
|
Cash
flows used in investing activities:
|
||||||||||||||||||
|
Capital
expenditures
|
- | - | (122,342 | ) | - | - | (122,342 | ) | ||||||||||
|
Purchase
of net assets of acquired companies
|
- | - | (221,869 | ) | - | - | (221,869 | ) | ||||||||||
|
Other,
net
|
- | (952 | ) | 5,776 | - | - | 4,824 | |||||||||||
|
Net cash flows used in investing activities
|
- | (952 | ) | (338,435 | ) | - | - | (339,387 | ) | |||||||||
|
Cash
flows (used in) provided by financing activities:
|
||||||||||||||||||
|
Net
draws (repayments) of notes payable
|
- | (15,228 | ) | - | - | - | (15,228 | ) | ||||||||||
|
Proceeds
from issuance of long-term debt
|
- | 323,000 | - | - | - | 323,000 | ||||||||||||
|
Net
draws (repayments) on long-term debt
|
- | (82,743 | ) | - | - | - | (82,743 | ) | ||||||||||
|
Proceeds
from initial public offering, net of offering costs
|
598,066 | - | - | - | - | 598,066 | ||||||||||||
|
Repayment
of restructuring notes payable
|
(517,692 | ) | - | - | - | - | (517,692 | ) | ||||||||||
|
Distributions
to original shareholders of Alpha NR Holding
|
(82,467 | ) | - | - | - | - | (82,467 | ) | ||||||||||
|
Other,
net
|
199 | (8,201 | ) | 7,041 | - | (961 | ) | |||||||||||
| Net cash (used in) provided by financing activities | (1,894 | ) | 216,828 | 7,041 | - | - | 221,975 | |||||||||||
|
Net
increase (decrease) in cash and cash equivalents
|
(6 | ) | 43,853 | (11,616 | ) | - | - | 32,231 | ||||||||||
|
Cash
and cash equivalents at beginning of year
|
- | 2,816 | 4,575 | - | - | 7,391 | ||||||||||||
|
Cash
and cash equivalents at end of year
|
$ | (6 | ) | $ | 46,669 | $ | (7,041 | ) | $ | - | $ | - | $ | 39,622 | ||||
None.
|
Item 9A.
|
Evaluation of disclosure controls
and procedures. The Company's Disclosure Committee has responsibility for
ensuring that there is an adequate and effective process for establishing,
maintaining and evaluating disclosure controls and procedures that are designed
to ensure that information required to be disclosed by the Company in its SEC
reports is timely recorded, processed, summarized and reported. In addition, the
Company has established a Code of Business Ethics designed to provide a
statement of the values and ethical standards to which the Company requires its
employees and directors to adhere. The Code of Business Ethics provides the
framework for maintaining the highest possible standards of professional
conduct. The Company also maintains an ethics hotline for employees. There are
inherent limitations to the effectiveness of any system of disclosure controls
and procedures, including the possibility of human error and the circumvention
or overriding of the controls and procedures. Accordingly, even effective
disclosure controls and procedures can only provide reasonable assurance of
achieving their control objectives.
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.
Management's
Report on Internal Control Over Financial Reporting
The
Company's management is responsible for establishing and maintaining
adequate internal control over financial reporting. Our internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles.
The
Company's internal control over financial reporting includes policies and
procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect transactions and dispositions
of assets; (2) provide reasonable assurances that transactions are recorded
as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures are
being made only in accordance with authorizations of management and the
directors of Alpha; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition
of the Company's assets that could have a material effect on our financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Management
assessed the effectiveness of the Company's internal control over
financial reporting as of December 31, 2007. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control-Integrated
Framework. Based on our assessment and those criteria, management has concluded
that we maintained effective internal control over financial reporting as of
December 31, 2007.
Report of Independent
Registered Public Accounting Firm
The Board
of Directors and Stockholders
Alpha
Natural Resources, Inc.:
We have
audited Alpha Natural Resources, Inc.’s internal control over financial
reporting as of December 31, 2007, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Alpha Natural Resources, Inc.’s management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management’s Report on Internal Control
over Financial Reporting. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our
opinion, Alpha Natural Resources, Inc. maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2007,
based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Alpha
Natural Resources, Inc. as of December 31, 2007 and 2006, and the related
consolidated statements of income, stockholders’ equity and partners’ capital
and comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 2007, and our report dated February 29, 2008 expressed
an unqualified opinion on those consolidated financial statements.
/s/KPMG
LLP
Roanoke,
Virginia
February
29, 2008
Changes
in internal controls over financial reporting
There
were no changes that occurred during the fourth quarter of the fiscal year
covered by this Annual Report on Form 10-K that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
|
Item 9B.
|
None.
PART III
Incorporated
herein by reference from the Proxy Statement.
The Board
of Directors of Alpha Natural Resources, Inc. has adopted a code of ethics that
applies to our principal executive officers, principal financial officer,
and principal accounting officer, as well as other employees. A copy of
this code of ethics has been posted on our Internet website at www.alphanr.com.
Any amendments to, or waivers from, a provision of our code of ethics that
applies to our principal executive officer, principal financial officer,
controller, or persons performing similar functions and that relates to any
element of the code of ethics enumerated in paragraph (b) of
Item 406 of Regulation S-K shall be disclosed by posting such
information on our website.
Additional
Information
We file
annual, quarterly and current reports, proxy statements and other information
with the Securities and Exchange Commission (“SEC”). You may access and read our
SEC filings through our website, at www.alphanr.com, or the SEC's website, at
www.sec.gov. You may also read and copy any document we file at the SEC's public
reference room located at 100 F Street, N.E., Washington, D.C.
20549. Please call the SEC at 1-800-SEC-0330 for further information on the
public reference room. You may also request copies of our filings, at no cost,
by telephone at (276) 619-4410 or by mail at: Alpha Natural Resources,
Inc., One Alpha Place, P.O. Box 2345, Abingdon, Virginia 24212, attention:
Investor Relations.
Our Audit
Committee Charter, Compensation Committee Charter, Nominating and Corporate
Governance Committee Charter, Corporate Governance Practices and Policies, and
Code of Business Ethics are also available on our website and available in print
to any stockholder who requests them.
|
Item 11.
|
Incorporated
herein by reference from the Proxy Statement.
|
Item 12.
|
Incorporated
herein by reference from the Proxy Statement.
Incorporated
herein by reference from the Proxy Statement.
Incorporated
herein by reference from the Proxy Statement.
PART IV
Pursuant
to the rules and regulations of the Securities and Exchange Commission, the
Company has filed certain agreements as exhibits to this Annual Report on Form
10-K. These agreements may contain representations and warranties by the
parties. These warranties have been made solely for the benefit of the other
party or parties to such agreements and (i) may been qualified by disclosure
made to such other party or parties, (ii) were made only as of the date of such
agreements or such other date(s) as may be specified in such agreements and are
subject to more recent developments, which may not be fully reflected in such
Company's public disclosure, (iii) may reflect the allocation of risk among the
parties to such agreements and (iv) may apply materiality standards different
from what may be viewed as material to investors. Accordingly, these
representations and warranties may not describe the Company's actual state of
affairs at the date hereof and should not be relied upon.
(a) Documents
filed as part of this annual report:
(1) The
following financial statements are filed as part of this annual report under
Item 8:
Alpha
Natural Resources, Inc. and Subsidiaries
Reports
of Independent Registered Public Accounting Firm
Consolidated
Balance Sheets, December 31, 2007 and 2006
Consolidated
Statements of Income, years ended December 31, 2007, 2006 and
2005
Consolidated
Statements of Stockholders' Equity and Partners' Capital and Comprehensive
Income, years ended December 31, 2007, 2006 and 2005
Consolidated
Statements of Cash Flows, years ended December 31, 2007, 2006 and
2005
Notes to
Consolidated Financial Statements
(2) Financial
Statement Schedules. All schedules for which provision is made in the applicable
accounting regulations of the SEC are not required under the related
instructions, are inapplicable or not material, or the information called for
thereby is otherwise included in the consolidated financial statements and
therefore has been omitted.
(3) Listing
of Exhibits. See Exhibit Index following the signature page of this annual
report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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:
|
/s/
David C. Stuebe
|
|||
|
Name:
|
David
C. Stuebe
|
|||
|
Title:
|
Vice
President and Chief Financial Officer
|
|||
Date:
February 29, 2008
KNOW ALL
PERSONS BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints David C. Stuebe and Vaughn R. Groves, and each of them,
his or her true and lawful attorneys-in-fact, each with full power of
substitution, for him or her in any and all capacities, to sign any amendments
to this report on Form 10-K and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact or their substitute or substitutes may do or cause to be done
by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
|
Signature
|
Date
|
Title
|
||
|
/s/ Michael J. Quillen
|
February
29, 2008
|
Chairman
of the Board of Directors and Chief Executive Officer (Principal Executive
Officer)
|
||
|
Michael
J. Quillen
|
||||
|
/s/ David C. Stuebe
|
February
29, 2008
|
Vice
President, Treasurer, and Chief Financial Officer (Principal Financial
Officer)
|
||
|
David
C. Stuebe
|
||||
|
/s/ Eddie W. Neely
|
February
29, 2008
|
Vice
President, Assistant Secretary and Controller (Principal Accounting
Officer)
|
||
|
Eddie
W. Neely
|
||||
|
/s/ Mary Ellen Bowers
|
February
29, 2008
|
Director
|
||
|
Mary
Ellen Bowers
|
||||
|
/s/ John S. Brinzo
|
February
29, 2008
|
Director
|
||
|
John
S. Brinzo
|
||||
|
/s/ Kevin S. Crutchfield
|
February
29, 2008
|
Director
and President
|
||
|
Kevin
S. Crutchfield
|
||||
|
/s/ E. Linn Draper, Jr.
|
February
29, 2008
|
Director
|
||
|
E.
Linn Draper, Jr.
|
||||
|
/s/ Glenn A. Eisenberg
|
February
29, 2008
|
Director
|
||
|
Glenn
A. Eisenberg
|
||||
|
/s/ John W. Fox, Jr.
|
February
29, 2008
|
Director
|
||
|
John
W. Fox, Jr.
|
||||
|
/s/ Ted G. Wood
|
February
29, 2008
|
Director
|
||
|
Ted
G. Wood
|
||||
10-K
EXHIBIT INDEX
|
Exhibit
No.
|
Description
of Exhibit
|
||
|
2.1
|
Asset
Purchase Agreement by and between Pittston Coal Company and
Dickenson-Russell Coal Company, LLC, dated as of October 29, 2002, as
amended (Incorporated by reference to the Registration Statement on
Form S-1 of Alpha Natural Resources, Inc. (File No. 333-121002)
filed on December 6, 2004.)
|
||
|
2.2
|
Asset
Purchase Agreement by and between Pittston Coal Company and Paramont Coal
Company Virginia, LLC, dated as of October 29, 2002, as amended
(Incorporated by reference to the Registration Statement on Form S-1
of Alpha Natural Resources, Inc. (File No. 333-121002) filed on
December 6, 2004.)
|
||
|
2.3
|
Asset
Purchase Agreement by and between Pittston Coal Company and Alpha Land and
Reserves, LLC, dated as of October 29, 2002, as amended (Incorporated
by reference to the Registration Statement on Form S-1 of Alpha
Natural Resources, Inc. (File No. 333-121002) filed on
December 6, 2004.)
|
||
|
2.4
|
Asset
Purchase Agreement by and between Pittston Coal Company and Alpha Coal
Sales Co., LLC, dated as of October 29, 2002, as amended
(Incorporated by reference to the Registration Statement on Form S-1
of Alpha Natural Resources, Inc. (File No. 333-121002) filed on
December 6, 2004.)
|
||
|
2.5
|
Asset
Purchase Agreement by and between Pittston Coal Company and Alpha Terminal
Company, LLC, dated as of October 29, 2002, as amended (Incorporated
by reference to the Registration Statement on Form S-1 of Alpha
Natural Resources, Inc. (File No. 333-121002) filed on
December 6, 2004.)
|
||
|
2.6
|
Asset
Purchase Agreement by and between Pittston Coal Company and Maxxim Rebuild
Co., LLC, dated as of October 29, 2002, as amended (Incorporated by
reference to the Registration Statement on Form S-1 of Alpha Natural
Resources, Inc. (File No. 333-121002) filed on December 6,
2004.)
|
||
|
2.7
|
Purchase
and Sale Agreement by and among El Paso CGP Company and AMFIRE, LLC
dated as of November 14, 2002, as amended (Incorporated by reference
to the Registration Statement on Form S-1 of Alpha Natural Resources,
Inc. (File No. 333-121002) filed on December 6,
2004.)
|
||
|
2.8
|
Contribution
Agreement among the FRC Parties, the AMCI Parties, ANR Holdings, LLC and
the Additional Persons listed on the signature pages dated as of
March 11, 2003, as amended (Incorporated by reference to the
Registration Statement on Form S-1 of Alpha Natural Resources, Inc.
(File No. 333-121002) filed on December 6,
2004.)
|
||
|
2.9
|
Purchase
and Sale Agreement made and entered into as of January 31, 2003 by
and among Alpha Land and Reserves, LLC and CSTL, LLC (Incorporated by
reference to the Registration Statement on Form S-1 of Alpha Natural
Resources, Inc. (File No. 333-121002) filed on December 6,
2004.)
|
||
|
2.10
|
Purchase
and Sale Agreement dated as of April 9, 2003 by and between Alpha
Land and Reserves, LLC and CSTL LLC (Incorporated by reference to the
Registration Statement on Form S-1 of Alpha Natural Resources, Inc.
(File No. 333-121002) filed on December 6,
2004.)
|
||
|
2.11
|
Purchase
and Sale Agreement dated as of April 9, 2003 by and between
Dickenson-Russell Coal Company, LLC and WBRD LLC (Incorporated by
reference to the Registration Statement on Form S-1 of Alpha Natural
Resources, Inc. (File No. 333-121002) filed on December 6,
2004.)
|
||
|
2.12
|
Letter
agreement dated April 9, 2003 among Alpha Natural Resources, LLC,
Dickenson-Russell Company, LLC, Alpha Land and Reserves, LLC, CSTL LLC,
WBRD LLC, and Natural Resources Partners L.P. (Incorporated by reference
to the Registration Statement on Form S-1 of Alpha Natural Resources,
Inc. (File No. 333-121002) filed on December 6,
2004.)
|
||
|
2.13
|
Asset
Purchase Agreement by and among S&M Mining, S&M Mining, Inc. and
AMFIRE Mining Company, LLC dated October 29, 2003, as amended
(Incorporated by reference to the Registration Statement on Form S-1
of Alpha Natural Resources, Inc. (File No. 333-121002) filed on
December 6, 2004.)
|
||
|
2.14
|
Asset
Purchase Agreement by and among DLR Coal Co., DLR Mining, Inc. and AMFIRE
Mining Company, LLC dated October 29, 2003, as amended (Incorporated
by reference to the Registration Statement on Form S-1 of Alpha
Natural Resources, Inc. (File No. 333-121002) filed on
December 6, 2004.)
|
||
|
2.15
|
Asset
Purchase Agreement by and between Mears Enterprises, Inc. and AMFIRE
Mining Company, LLC dated October 29, 2003, as amended (Incorporated
by reference to the Registration Statement on Form S-1 of Alpha
Natural Resources, Inc. (File No. 333-121002) filed on
December 6, 2004.)
|
||
|
2.16
|
Internal
Restructuring Agreement dated as of February 11, 2005 by and among
Alpha Natural Resources, Inc., Alpha NR Ventures, Inc., ANR Holdings, LLC,
the FRC Parties named therein, the AMCI Parties named therein, Madison
Capital Funding LLC, Alpha Coal Management, LLC and the Management Members
named therein (Incorporated by reference to Exhibit 2.16 to the
Annual Report on Form 10-K of Alpha Natural Resources, Inc. (File
No. 1-32423) filed on March 30,
2005.)
|
||
| * |
Filed
herewith.
|
| † |
Confidential
treatment has been granted with respect to portions of the exhibit.
Confidential portions have been omitted from this public filing and have
been filed separately with the Securities and Exchange
Commission.
|
| ‡ |
Management
contract or compensatory plan or
arrangement.
|
10-K EXHIBIT INDEX -
Continued
|
Exhibit
No.
|
Description
of Exhibit
|
|||
|
2.17
|
Sixth
Amendment to Contribution Agreement by and among the FRC Parties, the AMCI
Parties, ANR Holdings, LLC and Alpha Natural Resources, Inc. (Incorporated
by reference to Exhibit 2.17 to the Annual Report on Form 10-K
of Alpha Natural Resources, Inc. (File No. 1-32423) filed on
March 30, 2005.)
|
|||
|
2.18
|
Asset
Purchase Agreement dated April 14, 2005, by and among Gallup
Transportation and Transloading Company, LLC, NATIONAL KING COAL LLC and
NKC Acquisition, LLC (Incorporated by reference to Exhibit 2.1 to the
Current Report on Form 8-K of Alpha Natural Resources, Inc. (File
No. 1-32423) filed on April 15, 2005.)
|
|||
|
2.19
|
Acquisition
Agreement dated as of September 23, 2005 among Alpha Natural
Resources, LLC, Mate Creek Energy of W. Va., Inc., Virginia Energy
Company, the unitholders of Powers Shop, LLC, and the shareholders of
White Flame Energy, Inc., Twin Star Mining, Inc. and Nicewonder
Contracting, Inc. (the “Acquisition Agreement”) (Incorporated by reference
to Exhibit 2.1 to the Current Report on Form 8-K of Alpha
Natural Resources, Inc. (File No. 1-32423) filed on
September 26, 2005.)
|
|||
|
2.20
|
Membership
Unit Purchase Agreement dated as of September 23, 2005 among Premium
Energy, LLC and the unitholders of Buchanan Energy Company, LLC (the
“Membership Unit Purchase Agreement”) (Incorporated by reference to
Exhibit 2.2 to the Current Report on Form 8-K of Alpha Natural
Resources, Inc. (File No. 1-32423) filed on September 26,
2005.)
|
|||
|
2.21
|
Agreement
and Plan of Merger dated as of September 23, 2005 among Alpha Natural
Resources, Inc., Alpha Natural Resources, LLC, Premium Energy, LLC,
Premium Energy, Inc. and the shareholders of Premium Energy, Inc. (the
“Premium Energy Shareholders”) (the “Merger Agreement”) (Incorporated by
reference to Exhibit 2.3 to the Current Report on Form 8-K of
Alpha Natural Resources, Inc. (File No. 1-32423) filed on
September 26, 2005.)
|
|||
|
2.22
|
Indemnification
Agreement dated as of September 23, 2005 among Alpha Natural
Resources, Inc., Alpha Natural Resources, LLC, Premium Energy, LLC, the
other parties to the Acquisition Agreement, the Premium Energy
Shareholders, and certain of the unitholders of Buchanan Energy Company,
LLC (Incorporated by reference to Exhibit 2.4 to the Current Report
on Form 8-K of Alpha Natural Resources, Inc. (File No. 1-32423)
filed on September 26, 2005.)
|
|||
|
2.23
|
Letter
Agreement dated of as September 23, 2005 among Alpha Natural
Resources, Inc., Alpha Natural Resources, LLC, Premium Energy, LLC and the
other parties to the Acquisition Agreement, the Membership Unit Purchase
Agreement and the Merger Agreement (Incorporated by reference to
Exhibit 2.5 to the Current Report on Form 8-K of Alpha Natural
Resources, Inc. (File No. 1-32423) filed on September 26,
2005.)
|
|||
|
2.24
|
Letter
Agreement dated October 26, 2005 (the “Letter Agreement”) among Alpha
Natural Resources, Inc., Alpha Natural Resources, LLC, Premium Energy,
LLC, Premium Energy, Inc. and the Sellers Representative named therein
amending certain provisions of (i) the Acquisition Agreement dated
September 23, 2005, among certain parties to the Letter Agreement and
certain other parties named therein, (ii) the Agreement and Plan of
Merger dated September 23, 2005, among the parties to the Letter
Agreement and certain other parties named therein and (iii) the
Indemnification Agreement dated September 23, 2005, among the parties
to the Letter Agreement and certain other parties named therein.
(Incorporated by reference to Exhibit 2.1 to the Current Report on
Form 8-K of Alpha Natural Resources, Inc. (File No. 1-32423)
filed on October 31, 2005.)
|
|||
|
2.25
|
Assignment
of Rights Under Certain Agreements executed as of October 26, 2005
among Alpha Natural Resources, LLC, Mate Creek Energy, LLC, Callaway
Natural Resources, Inc., Premium Energy, LLC and Virginia Energy Company,
LLC (Incorporated by reference to Exhibit 2.2 to the Current Report
on Form 8-K of Alpha Natural Resources, Inc. (File No. 1-32423)
filed on October 31, 2005.)
|
|||
|
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 1,
2007.)
|
|||
|
4.1
|
Form
of certificate of Alpha Natural Resources, Inc. common stock (Incorporated
by reference to Amendment No. 3 to the Registration Statement on
Form S-1 of Alpha Natural Resources, Inc. (File No. 333-121002)
filed on February 10, 2005.)
|
|||
|
4.2
|
Indenture
dated as of May 18, 2004 among Alpha Natural Resources, LLC, Alpha
Natural Resources Capital Corp., the Guarantors named therein and Wells
Fargo Bank, N.A., as Trustee (Incorporated by reference to
Exhibit 10.5 to the Registration Statement on Form S-1 of Alpha
Natural Resources, Inc. (File No. 333-121002) filed on
December 6, 2004.)
|
|||
|
4.3
|
First
Supplemental Indenture dated as of February 1, 2005 among Alpha
Natural Resources, LLC, Alpha Natural Resources Capital Corp., the
Guarantors party thereto and Wells Fargo Bank, N.A., as Trustee
(Incorporated by reference to Exhibit 4.3 to the Annual Report on
Form 10-K of Alpha Natural Resources, Inc. (File No. 1-32423)
filed on March 30, 2005.)
|
|||
|
4.4
|
Second
Supplemental Indenture dated as of March 30, 2005 among Alpha Natural
Resources, LLC, Alpha Natural Resources Capital Corp., Alpha NR Holding,
Inc., Alpha NR Ventures, Inc., ANR Holdings, LLC, the Guarantors party
thereto and Wells Fargo Bank, N.A., as Trustee (Incorporated by reference
to Exhibit 4.4 to the Annual Report on Form 10-K of Alpha
Natural Resources, Inc. (File No. 1-32423) filed on March 30,
2005.)
|
|||
|
4.5
|
Third
Supplemental Indenture dated as of October 26, 2005 among Alpha
Natural Resources, LLC, Alpha Natural Resources Capital Corp., Alpha NR
Holding, Inc., ANR Holdings, LLC, the Guarantors party thereto, the
Guaranteeing Subsidiaries party thereto and Wells Fargo Bank, N.A., as
Trustee (Incorporated by reference to Exhibit 10.3 to the Current
Report on Form 8-K of Alpha Natural Resources, Inc. (File
No. 1-32423) filed on October 31,
2005.)
|
|||
| * |
Filed
herewith.
|
| † |
Confidential
treatment has been granted with respect to portions of the exhibit.
Confidential portions have been omitted from this public filing and have
been filed separately with the Securities and Exchange
Commission.
|
| ‡ |
Management
contract or compensatory plan or
arrangement.
|
10-K EXHIBIT INDEX -
Continued
|
Exhibit
No.
|
Description
of Exhibit
|
||
|
4.6
|
Fourth
Supplemental Indenture dated as of January 3, 2006 among Alpha
Natural Resources, LLC, Alpha Natural Resources Capital Corp., Alpha NR
Holding, Inc., the Guarantors party thereto, the Guaranteeing Subsidiaries
party thereto and Wells Fargo Bank, N.A., as Trustee (Incorporated by
reference to Exhibit 4.6 to the Registration Statement on
Form S-1 of Alpha Natural Resources, Inc. (File No. 333-129030)
filed on January 9, 2006.)
|
||
|
4.7
|
Fifth
Supplemental Indenture dated as of May 1, 2006 among Alpha Natural
Resources, LLC, Alpha Natural Resources Capital Corp. , the existing
Guarantors, Wells Fargo Bank, N.A., as Trustee, and Progress Land
Corporation (Incorporated by reference to Exhibit 4.1 to the Quarterly
Report on Form 10-Q of Alpha Natural Resources, Inc. (File No. 1-32423)
filed on August 18, 2006.)
|
||
|
4.8
|
Sixth
Supplemental Indenture dated as of January 10, 2007 among Alpha Natural
Resources, LLC, Alpha Natural Resources Capital Corp., the existing
Guarantors, Wells Fargo Bank, N.A., as Trustee, Palladian Holdings, LLC
and Palladian Lime, LLC (Incorporated by reference to Exhibit 4.8 to the
Annual Report on Form 10-K of Alpha Natural Resources, Inc. (File No.
1-32423) filed on March 1, 2007.)
|
||
|
10.1
|
Credit
Agreement dated as of October 26, 2005, among Alpha NR Holding, Inc.,
Alpha Natural Resources, LLC, the Lenders and Issuing Banks party thereto
from time to time, Citicorp North America, Inc., as administrative agent
and as collateral agent for the Lenders and Issuing Banks, UBS Securities
LLC as syndication agent, the co-documentation agents party thereto,
Citigroup Global Markets Inc. and UBS Securities LLC, as joint lead
arrangers and joint book managers. (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 October 31,
2005.)
|
||
|
10.2
|
Guarantee
and Collateral Agreement, dated as of October 26, 2005, made by each
of the Grantors as defined therein, in favor of Citicorp North America,
Inc., as administrative agent and as collateral agent for the banks and
other financial institutions or entities from time to time parties to the
Credit Agreement and the other Secured Parties, as defined therein.
(Incorporated by reference to Exhibit 10.2 to the Current Report on
Form 8-K of Alpha Natural Resources, Inc. (File No. 1-32423)
filed on October 31, 2005.)
|
||
|
10.3
|
Waiver
and Consent dated as of August 14, 2006 to Credit Agreement among Alpha NR
Holding, Inc., Alpha Natural Resources, LLC, the Lenders and Issuing Banks
party thereto from time to time, and Citicorp North America, Inc., as
administrative agent and as collateral agent for the Lenders and Issuing
Banks (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 18, 2006.)
|
||
|
10.4
|
Amendment
and Consent, dated as of December 22, 2006, to Credit Agreement, among
Alpha NR Holding, Inc., Alpha Natural Resources, LLC, the Lenders and
Issuing Banks party thereto from time to time, and Citicorp North America,
Inc., as administrative agent and as collateral agent for the Lenders and
Issuing Banks (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 December 29, 2006.)
|
||
|
10.5
|
Second
Amendment and Consent to Credit Agreement dated June 28, 2007
(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 July 5,
2007.)
|
||
|
10.6‡
|
Third
Amended and Restated Employment Agreement between Alpha Natural Resources
Services, LLC and Michael J. Quillen dated March 22, 2006
(Incorporated by reference to Exhibit 10.3 to the Annual Report on Form
10-K of Alpha Natural Resources, Inc. (File No. 1-32423) filed on March
28, 2006.)
|
||
|
10.7‡
|
First
Amendment to Third Amended and Restated Employment Agreement between Alpha
Natural Resources Services, LLC and Michael J. Quillen dated February 26,
2007 (Incorporated by reference to Exhibit 10.6 to the Annual Report on
Form 10-K of Alpha Natural Resources, Inc. (File No. 1-32423) filed on
March 1, 2007.)
|
||
|
10.8‡
|
Employment
Agreement between Alpha Natural Resources, LLC and D. Scott Kroh dated
January 1, 2003, as amended (Incorporated by reference to
Exhibit 10.7 to the Registration Statement on Form S-1 of Alpha
Natural Resources, Inc. (File No. 333-121002) filed on
December 6, 2004.)
|
||
|
10.9‡
|
Letter
Agreement dated September 1, 2006 among Alpha Natural Resources, Inc. and
D. Scott Kroh setting forth terms of employment with Alpha Natural
Resources, Inc and its subsidiaries (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 September 1, 2006.)
|
||
|
10.10‡
|
First
Amended and Restated Employment Agreement between Alpha Natural Resources
Services, LLC and Kevin S. Crutchfield, dated February 26, 2007
(Incorporated by reference to Exhibit 10.9 to the Annual Report on Form
10-K of Alpha Natural Resources, Inc. (File No. 1-32423) filed on March 1,
2007.)
|
||
|
10.11
|
Amended
and Restated Stockholder Agreement dated as of October 26, 2005, by
and among Alpha Natural Resources, Inc., the FRC Parties named therein,
the AMCI Parties named therein, Madison Capital Funding LLC, the
Nicewonder Parties named therein, and the other stockholders named
therein. (Incorporated by reference to Exhibit 10.5 to the Current
Report on Form 8-K of Alpha Natural Resources, Inc. (File
No. 1-32423) filed on October 31, 2005.)
|
||
|
10.12
|
Letter
agreement dated October 25, 2005, by the FRC Parties named therein
and the AMCI Parties named therein, amending certain provisions of the
Stockholder Agreement. (Incorporated by reference to Exhibit 10.4 to
the Current Report on Form 8-K of Alpha Natural Resources, Inc. (File
No. 1-32423) filed on October 31, 2005.)
|
||
|
10.13
|
Letter
agreement dated December 8, 2005, by the FRC Parties named therein
and the AMCI Parties named therein and Alpha Natural Resources, Inc.,
amending certain provisions of the Stockholder Agreement (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
December 12, 2005.)
|
| * |
Filed
herewith.
|
| † |
Confidential
treatment has been granted with respect to portions of the exhibit.
Confidential portions have been omitted from this public filing and have
been filed separately with the Securities and Exchange
Commission.
|
| ‡ |
Management
contract or compensatory plan or
arrangement.
|
10-K EXHIBIT INDEX -
Continued
|
Exhibit
No.
|
Description
of Exhibit
|
|||
|
10.14
|
Letter
Agreement dated November 7, 2006, by the AMCI Parties named therein and
Alpha Natural Resources, Inc., amending certain provisions of the
Stockholder Agreement (Incorporated by reference to Exhibit 10.2 to the
Quarterly Report on Form 10-Q of Alpha Natural Resources, Inc. (File No.
1-32423) filed November 9, 2006.)
|
|||
|
10.15
|
Agreement
to Terminate the Amended and Restated Stockholder Agreement dated as of
May 23, 2007 (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 May 29, 2007.)
|
|||
|
Alpha
Natural Resources, Inc. Annual Incentive Bonus (AIB) Plan (Restated
as of November 20, 2007.)
|
||||
|
Alpha
Natural Resources, Inc. Amended and Restated 2004 Long-Term Incentive Plan
(Restated as of November 8, 2007.)
|
||||
|
Alpha
Natural Resources, Inc. and Subsidiaries Deferred Compensation Plan
(Amended and Restated on November 20, 2007.)
|
||||
|
Alpha
Natural Resources, Inc. 2005 Long-Term Incentive Plan (Restated as
of November 8, 2007.)
|
||||
|
10.20‡
|
Form
of Alpha Natural Resources, Inc. Grantee Stock Option Agreement under the
Alpha Natural Resources, Inc. Amended and Restated 2004
Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.2
to the Quarterly Report on Form 10-Q of Alpha Natural Resources, Inc.
(File No. 1-32423) filed on August 9, 2007.)
|
|||
|
Form
of Alpha Natural Resources, Inc. Grantee Stock Option Agreement under the
2005 Long-Term Incentive Plan (Amended and Restated as of November 8,
2007.)
|
||||
|
10.22‡
|
Form
of Alpha Natural Resources, Inc. Restricted Stock Agreement for Alpha
Natural Resources, Inc. 2005 Long-Term Incentive Plan (for grants on or
prior to March 3, 2006) (Incorporated by reference to
Exhibit 4.7 to the Registration Statement on Form S-8 of Alpha
Natural Resources, Inc. (File No. 333-127528) filed on
August 15, 2005.)
|
|||
|
Form
of Alpha Natural Resources, Inc. Restricted Stock Agreement under the
Alpha Natural Resources, Inc. 2005 Long-Term Incentive Plan (For
Employees) (for grants after March 3, 2006 to employees) (Restated as
of November 8, 2007)
|
||||
|
Form
of Alpha Natural Resources, Inc. Restricted Stock Agreement under the
Alpha Natural Resources, Inc. 2005 Long-Term Incentive Plan (For
Non-Employee Directors) (Restated as of November 8,
2007.)
|
||||
|
Form
of Alpha Natural Resources, Inc. Performance Share Award Agreement under
the Alpha Natural Resources, Inc. 2005 Long-Term Incentive Plan (For
Employees) (Restated as of January 15, 2008.)
|
||||
|
10.26†
|
Coal
Mining Lease dated April 9, 2003, effective as of April 1, 2003,
by and between CSTL LLC (subsequently renamed ACIN LLC) and Alpha Land and
Reserves, LLC, as amended (the “ACIN Lease”) (Incorporated by reference to
Exhibit 10.12 to Amendment No. 1 to the Registration Statement
on Form S-1 of Alpha Natural Resources, Inc. (File
No. 333-121002) filed on January 12, 2005.)
|
|||
|
10.27
|
Two
Partial Surrender Agreements and Fourth Amendment to Coal Mining Lease,
each dated September 1, 2005, by and between ACIN LLC and Alpha Land
and Reserves, LLC, amending the ACIN Lease (Incorporated by reference to
Exhibit 10.17 to the Annual Report on Form 10-K of Alpha Natural
Resources, Inc. (File No. 1-32423) filed on March 28,
2006.)
|
|||
|
10.28
|
Partial
Surrender Agreement dated November 1, 2005, by and between ACIN LLC
and Alpha Land and Reserves, LLC, amending the ACIN Lease (Incorporated by
reference to Exhibit 10.18 to the Annual Report on Form 10-K of Alpha
Natural Resources, Inc. (File No. 1-32423) filed on March 28,
2006.)
|
|||
|
10.29
|
Amendment
to Coal Mining Lease dated January 1, 2006, by and between ACIN LLC and
Alpha Land and Reserves, LLC, amending the ACIN Lease (Incorporated by
reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q of Alpha
Natural Resources, Inc. (File No. 1-32423) filed on May 12,
2006.)
|
|||
| * |
Filed
herewith.
|
| † |
Confidential
treatment has been granted with respect to portions of the exhibit.
Confidential portions have been omitted from this public filing and have
been filed separately with the Securities and Exchange
Commission.
|
| ‡ |
Management
contract or compensatory plan or
arrangement.
|
10-K EXHIBIT INDEX -
Continued
|
Exhibit
No.
|
Description
of Exhibit
|
|||
|
10.30
|
Agreement
dated February 17, 2006, between ACIN LLC and Alpha Land and Reserves, LLC
and Virginia Electric and Power Company for mutual interests as to
parties’ rights and obligations with regard to certain land (Incorporated
by reference to Exhibit 10.4 to the Quarterly Report on Form 10-Q of Alpha
Natural Resources, Inc. (File No. 1-32423) filed on May 12,
2006.)
|
|||
|
10.31‡
|
Performance
period and payout methodology for performance share award grants during
2006 under the Alpha Natural Resources, Inc. 2005 Long-Term Incentive Plan
as reported on Alpha Natural Resources, Inc.’s Current Report on
Form 8-K filed on March 9, 2006 and incorporated by this
reference.
|
|||
|
10.32‡
|
Description
of Compensation Payable to Independent Directors (Incorporated by
reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q
of Alpha Natural Resources, Inc. (File No. 1-32423) filed on November
7, 2007.)
|
|||
|
10.33‡
|
Performance
goals and target bonuses set for 2005 under the AIB Plan for Alpha Natural
Resources, Inc.’s executive officers as reported on Alpha Natural
Resources, Inc.’s Current Report on Form 8-K filed on April 27, 2005
and incorporated by this reference.
|
|||
|
10.34‡
|
Summary
of Retention Compensation Plan approved for certain executive officers of
Alpha Natural Resources, Inc. (Incorporated by reference to
Exhibit 10.27 to the Registration Statement on Form S-1 of Alpha
Natural Resources, Inc. (File No. 333-129030) filed on
December 2, 2005.)
|
|||
|
Plan
Document and Summary Plan Description of the Alpha Natural Resources, Inc.
Key Employee Separation Plan (As Amended and Restated Effective November
20, 2007.)
|
||||
|
Form
of Director Deferred Compensation Agreement under the Alpha Natural
Resources, Inc. 2005 Long-Term Incentive Plan (Amended and Restated on
November 8, 2007.)
|
||||
|
10.37‡
|
Letter
of Agreement with Michael D. Brown dated May 23, 2007 (Incorporated by
reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q of Alpha
Natural Resources, Inc. (File No. 1-32423) filed on August 9,
2007.)
|
|||
|
List
of Subsidiaries
|
||||
|
Consent
of KPMG LLP
|
||||
|
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
|
||||
|
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
|
||||
|
Certification
Pursuant to 18 U.S.C. §1350, As Adopted Pursuant to §906 of the
Sarbanes-Oxley Act of 2002
|
||||
|
Certification
Pursuant to 18 U.S.C. §1350, As Adopted Pursuant to §906 of the
Sarbanes-Oxley Act of 2002
|
||||
| * |
Filed
herewith.
|
| † |
Confidential
treatment has been granted with respect to portions of the exhibit.
Confidential portions have been omitted from this public filing and have
been filed separately with the Securities and Exchange
Commission.
|
| ‡ |
Management
contract or compensatory plan or
arrangement.
|