e10vk
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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(Mark One) |
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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, 2005 |
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OR |
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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 |
Commission File No. 1-32423
ALPHA NATURAL RESOURCES, INC.
(Exact name of registrant as specified in its charter)
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Delaware |
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02-0733940 |
(State or other jurisdiction of
incorporation or organization) |
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(I.R.S. Employer
Identification Number) |
One Alpha Place, P.O. Box 2345, Abingdon, Virginia |
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24212 |
(Address of principal executive offices) |
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(Zip Code) |
Registrants telephone number, including area code:
(276) 619-4410
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 |
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 o
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 o 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 o
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
registrants 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. Yes o No 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).
o Large accelerated
filer o Accelerated
filer þ
Non-accelerated filer
Indicate by check mark whether the registrant is a shell company
(as defined in Exchange Act
Rule 12b-2). Yes o No þ
The aggregate market value of the Common Stock held by
non-affiliates of the registrant on June 30, 2005, was
approximately $785,629,529 based on the last sales price
reported that date on the New York Stock Exchange of
$23.88 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 1, 2006 64,422,510 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates certain information by reference from
the registrants definitive proxy statement for the 2006
annual meeting of stockholders, which proxy statement will be
filed no later than 120 days after the close of the
registrants fiscal year ended December 31, 2005.
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 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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market demand for coal, electricity and steel; |
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future economic or capital market conditions; |
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weather conditions or catastrophic weather-related damage; |
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our production capabilities; |
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the consummation of financing, acquisition or disposition
transactions and the effect thereof on our business; |
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our ability to successfully integrate the operations we acquired
in the Nicewonder Acquisition with our existing operations, and
to successfully operate NCIs highway construction business; |
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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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timing of changes in customer coal inventories; |
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long-term coal supply arrangements; |
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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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competition in coal markets; |
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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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our assumptions concerning economically recoverable coal reserve
estimates; |
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employee workforce factors; |
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regulatory and court decisions; |
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future legislation and changes in regulations, governmental
policies or taxes; |
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changes in postretirement benefit obligations; |
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our liquidity, results of operations and financial
condition; and |
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other factors, including the other factors discussed in
Item 1A, Risk Factors of this report. |
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.
2005 ANNUAL REPORT ON
FORM 10-K
TABLE OF CONTENTS
1
PART I
Overview
We are a leading Appalachian coal producer. Our reserves
primarily consist of high Btu, low sulfur steam coal that is
currently in high demand in U.S. coal markets and
metallurgical coal that is currently in high demand in both U.S.
and international coal markets. We produce, process and sell
steam and metallurgical coal from eight regional business units,
which, as of February 1, 2006, are supported by 44 active
underground mines, 25 active surface mines and 11 preparation
plants located throughout Virginia, West Virginia, Kentucky, and
Pennsylvania, as well as a highway construction business in West
Virginia that produces 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 63% of our 2005 coal sales volume.
The majority of our steam coal sales volume in 2005 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 37% of our
2005 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.
Under current market conditions, we are able to market a
significant portion of our higher quality steam coal as
metallurgical coal.
During 2005, we sold a total of 26.7 million tons of steam
and metallurgical coal and generated revenues of
$1,627.3 million, EBITDA, as adjusted, of
$145.2 million and net income of $21.2 million. We
define and reconcile EBITDA, as adjusted, and explain its
importance, in note (3) under Selected Financial
Data. Our coal sales during 2005 consisted of
20.6 million tons of produced and processed coal, including
1.5 million tons purchased from third parties and processed
at our processing plants or loading facilities prior to resale,
and 6.1 million tons of purchased coal that we resold
without processing. Approximately 67% of the purchased coal in
2005 was blended with coal produced from our mines prior to
resale. Approximately 45% of our sales revenue in 2005 was
derived from sales made outside the United States, primarily in
Canada, Japan, Brazil, Korea and several countries in Europe.
As of December 31, 2005, we owned or leased
489.5 million tons of proven and probable coal reserves. Of
our total proven and probable reserves, approximately 89% are
low sulfur reserves, with approximately 63% having sulfur
content below 1.0%. Approximately 92% of our total proven and
probable reserves have a high 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 23 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 highway
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 highway 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
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business of ANR Holdings in a series of internal restructuring
transactions which 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 Brinks 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 NKCs coal inventory, and
the assumption by the buyer of certain liabilities of NKC.
On October 26, 2005, we acquired the Nicewonder Coal
Groups coal reserves and operations in southern West
Virginia and southwestern Virginia. 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, consisting of cash at closing in the
amount of $35.2 million, a cash payment of
$1.9 million to be 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
$39.9 million was paid on January 13, 2006), a final
payment for working capital in the
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amount of $12.3 million paid on February 6, 2006, 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 Energys Surface Mine No. 10.
The operations we acquired from the Nicewonder Coal Group
constitute our new eighth business unit, Callaway Natural
Resources.
Mining Methods
We produce coal using two mining methods: underground room and
pillar mining using continuous mining equipment, and surface
mining, which are explained as follows:
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 2005,
approximately 76% of our coal production volume from mines
operated by our subsidiaries employees 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 are used to transport coal 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, as
much coal as is feasible 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
seam recovery ranges from 35% to 70%, with higher seam recovery
rates applicable where retreat mining is combined with room and
pillar mining. Productivity for continuous room and pillar
mining in the United States averages 3.5 tons per employee
per hour, according to the U.S. Energy Information
Administration (EIA).
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 2005, approximately 24% of our coal
production volume from mines operated by our subsidiaries
employees 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, rubber-tired diesel loaders. Seam recovery
for surface mining is typically 90% or more. Productivity
depends on equipment, geological composition and mining ratios
and averages 4.8 tons per employee per hour in eastern
regions of the United States, according to the EIA.
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.
4
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. All of our coal is 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
489.5 million tons of proven and probable reserves,
approximately 92% 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. Demand for low sulfur coal has increased, and is
expected to continue to increase, as generators of electricity
strive to reduce sulfur dioxide emissions to comply with
increasingly stringent emission standards in environmental laws
and regulations. Approximately 89% 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 Acts 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 coals weight.
Coking Characteristics. The coking characteristics of
metallurgical coal are typically measured by the coals
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, including two
in Virginia, four predominately in West Virginia, one in
Pennsylvania, and one in Kentucky. As of February 1, 2006,
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 69 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, 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 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 2005, most of our preparation plants
also processed coal
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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 February 1, 2006:
Regional Business Units
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Number and Type of | |
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Mines as of | |
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February 1, 2006 | |
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2005 | |
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Production of | |
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Preparation plant(s) as of |
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Under- | |
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Saleable Tons | |
Regional Business Unit |
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Location |
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February 1, 2006 |
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ground | |
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Surface | |
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Total | |
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Railroad | |
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(in 000s)(1) | |
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Paramont
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Virginia |
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Toms Creek |
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9 |
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5 |
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14 |
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NS |
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5,679 |
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Dickenson-Russell
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Virginia |
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McClure River and Moss #3 |
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6 |
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1 |
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7 |
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CSX, NS |
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2,056 |
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Kingwood
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West Virginia |
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Whitetail |
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1 |
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0 |
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1 |
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CSX |
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1,546 |
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Brooks Run
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West Virginia |
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Erbacon |
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3 |
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1 |
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4 |
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CSX |
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2,298 |
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Welch
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West Virginia |
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Litwar, Kepler and Herndon |
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15 |
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0 |
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15 |
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NS |
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2,542 |
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AMFIRE
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Pennsylvania |
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Clymer and Portage |
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6 |
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12 |
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18 |
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NS |
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4,291 |
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Enterprise
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Kentucky |
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Roxana |
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4 |
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3 |
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7 |
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CSX |
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1,525 |
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Callaway
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West Virginia/ Virginia |
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0 |
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3 |
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3 |
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NS |
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665 |
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Total |
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44 |
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25 |
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69 |
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20,602 |
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(1) |
Includes coal purchased from third-party producers that was
processed at our subsidiaries preparation plants in 2005.
Excludes 457,000 tons of coal produced in 2004 by NKC. We sold
NKC on April 14, 2005. |
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, environmental permit
timing and preparation plant capacity. We have obtained permits
for and are currently in the process of developing Deep Mine 35
in Virginia which is operated by our Paramont business unit,
Madison deep mine in Pennsylvania which is operated by our
AMFIRE business unit, Seven Pines surface mine in West Virginia
which is operated by our Brooks Run business unit and Cucumber
deep mine in West Virginia which is operated by our Welch
business unit. We spent approximately $54.0 million
developing these mines during 2005. All four of these new mines
have begun production and we expect them to reach full
production capacity of approximately 2.8 million tons by
the end of 2006, some of which is intended to replace existing
production from contract-operated deep mines in Virginia and
West Virginia that are being depleted or decommissioned. We
expect the majority of this new production to be metallurgical
coal.
The following provides a brief description of our business units
as of February 1, 2006.
Paramont. Our Paramont business unit produces coal from
nine underground mines using continuous miners and the room and
pillar mining method. Two of the underground mines are operated
by independent contractors. The coal from these underground
mines 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 five
truck/loader surface mines. Three of these surface mines are
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 2005, Paramont purchased
approximately 200,000 tons of coal from third parties that was
blended with Paramonts coal and shipped to our customers.
As of February 1, 2006, the Paramont business unit was
operating at a capacity to ship approximately six million tons
per year.
6
Dickenson-Russell. Our Dickenson-Russell business unit
produces coal from six underground mines using continuous miners
and the room and pillar mining method. Two of the underground
mines are operated by independent contractors. The coal from
these underground mines 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 2005, Dickenson-Russell purchased approximately
82,000 tons of coal from third parties that was blended with
Dickenson-Russells coal and shipped to our customers. As
of February 1, 2006, the Dickenson-Russell business unit
was operating at a capacity to ship approximately two million
tons per year.
Kingwood. Our Kingwood business unit produces coal from
one underground mine using continuous miners and the room and
pillar mining method. The Kingwood operation is staffed and
operated by Kingwood employees. 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.
The Kingwood business unit has no surface mining operations.
During 2005, Kingwood purchased approximately 33,000 tons of
coal from third parties that was blended with Kingwoods
coal and shipped to our customers. As of February 1, 2006,
the Kingwood business unit was operating at a capacity to ship
approximately one and one-half million tons per year.
Brooks Run. Our Brooks Run business unit produces coal
from three underground mines using continuous miners and the
room and pillar mining method. All of the mining operations at
the Brooks Run business unit are staffed and operated by Brooks
Run employees. The coal is transported by truck to the Erbacon
preparation plant operated by Brooks Run where it is cleaned,
blended and loaded onto rail for shipment to customers. The
Brooks Run business unit has one surface mine operated with
Brooks Run employees. Brooks Run purchased no coal from third
parties in 2005. As of February 1, 2006, the Brooks Run
business unit was operating at a capacity to ship approximately
two and one-half million tons per year.
Welch. Our Welch business unit produces coal from fifteen
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 coal preparation plants operated by Welch where it
is cleaned, blended and loaded onto rail for shipment to
customers. The Welch business unit has no active surface mining
operations as of February 1, 2006. During 2005, the Welch
business unit purchased approximately 743,000 tons of coal from
third parties that was blended with other coals and shipped to
our customers. As of February 1, 2006, the Welch business
unit was operating at a capacity to ship approximately three and
one-quarter million tons per year.
AMFIRE. Our AMFIRE business unit produces coal from six
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 twelve
truck/loader surface mines, five 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 2005, AMFIRE purchased approximately
345,000 tons of coal from third parties that was blended with
AMFIREs coal and shipped to our customers. As of
February 1, 2006, the AMFIRE business unit was operating at
a capacity to ship approximately four million tons per year.
Enterprise. Our Enterprise business unit produces coal
from four underground mines using continuous miners and the room
and pillar mining method. All of the underground mining
operations at Enterprise are staffed and operated by Enterprise
employees. The coal from these underground mines 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 which are operated by independent contractors. The
coal produced by the surface mines is transported to the Roxana
preparation plant where it is blended and loaded onto rail for
shipment to customers. During 2005, Enterprise purchased
7
approximately 69,000 tons of coal from third parties that was
blended with Enterprises coal and shipped to our
customers. As of February 1, 2006, the Enterprise business
unit was operating at a capacity to ship approximately one and
one-half million tons per year.
Callaway. The operations we acquired in the Nicewonder
Acquisition constitute our new eighth business unit, which we
have named Callaway. This new business unit produces coal from
three surface mining operations operated by our Callaway
employees and also recovers coal from the highway construction
business operated by our subsidiary Nicewonder Contracting Inc.
(NCI). Coal from our White Flame Surface mine and the coal
recovered by NCI is trucked to our Mate Creek load-out where it
is blended and loaded onto rail for shipment to customers. Coal
from the Premium Energy Surface mine is currently trucked and
sold to Arch Coal Inc.s Mingo Logan mining complex. Coal
from the Twin Star surface mine is trucked to our Virginia
Energy load-out where it is loaded onto rail cars for transport
to customers. The Callaway business unit has no active
underground operations and did not purchase any coal from third
parties during 2005. As of February 1, 2006, the Callaway
business unit was operating at a capacity to ship approximately
four million tons per year, including coal recovered by NCI as
part of its highway construction business.
Marketing, Sales and Customer Contracts
Our marketing and sales force, which is principally based in
Latrobe, Pennsylvania, included 34 employees as of
December 31, 2005, 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 customers
individual needs and specifications, as opposed to simply
selling our production inventory. By offering coal of both steam
and metallurgical grades blended 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 who have
been customers of ours or our Predecessor and acquired companies
for decades.
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, 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 1.5 million tons of our
2005 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
25.3 million tons of coal in 2004, consisting of
18.9 million tons of produced and processed coal and
6.4 million tons of purchased coal that we resold without
processing. Of our total purchased coal sales of
7.3 million tons in 2004, approximately 5.9 million
tons were blended prior to resale. Approximately
0.9 million tons of our 2004 purchased coal sales were
processed by us. We sold a total of 21.6 million tons of
coal in 2003, consisting of 17.7 million tons of produced
and processed coal and 3.9 million tons of purchased coal
that we resold without processing. Of our total purchased coal
sales of 5.4 million tons in 2003, approximately
1.5 million tons were processed prior to resale. The
breakdown of tons sold by market served for 2005, 2004 and 2003
is set forth in the table below:
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|
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|
|
|
|
|
|
|
Steam Coal Sales(1) | |
|
Metallurgical Coal Sales | |
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| |
|
| |
Year |
|
Tons | |
|
% of Total Sales | |
|
Tons | |
|
% of Total Sales | |
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| |
|
| |
|
| |
|
| |
|
|
(In millions, except percentages) | |
2005
|
|
|
16.7 |
|
|
|
63 |
% |
|
|
10.0 |
|
|
|
37 |
% |
2004
|
|
|
15.8 |
|
|
|
63 |
% |
|
|
9.5 |
|
|
|
37 |
% |
2003
|
|
|
15.3 |
|
|
|
71 |
% |
|
|
6.3 |
|
|
|
29 |
% |
8
|
|
(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 5% of total sales in 2005, 2004 and
2003, respectively. |
We sold coal to over 110 different customers in 2005. Our top
ten customers in 2005 accounted for approximately 38% of 2005
revenues and our largest customer during 2005 accounted for
approximately 6% of 2005 revenues. The following table provides
information regarding our exports (including to Canada) in 2005,
2004 and 2003 by revenues and tons sold:
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|
Export Tons | |
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|
|
Export Sale | |
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|
Sold as a | |
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|
|
Revenues as a | |
|
|
Export Tons | |
|
Percentage of | |
|
Export Sale | |
|
Percentage of | |
Year |
|
Sold | |
|
Total Coal Sales | |
|
Revenues (1) | |
|
Total Revenues | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In millions, except percentages) | |
2005
|
|
|
8.4 |
|
|
|
31 |
% |
|
$ |
737.1 |
|
|
|
45 |
% |
2004
|
|
|
8.1 |
|
|
|
32 |
% |
|
$ |
597.9 |
|
|
|
48 |
% |
2003
|
|
|
4.9 |
|
|
|
22 |
% |
|
$ |
220.8 |
|
|
|
28 |
% |
|
|
(1) |
Export sale revenues in 2005 and 2004 include approximately
$0.6 million and $4.0 million, respectively, in
equipment export sales. All other export sale revenues are coal
sales revenues and freight and handling revenues. |
Our export shipments during 2005, 2004 and 2003 serviced
customers in 16, 18 and 11 countries, respectively, across
North America, Europe, South America, Asia and Africa. Canada
was our largest export market in 2005 with sales to Canada
accounting for approximately 15% of export revenues and 7% of
total revenues. Japan was our largest export market in 2004
accounting for approximately 23% of export revenues and
approximately 11% of total revenues, while Canada was our
largest export market in 2003, with sales to Canada accounting
for approximately 40% of export revenues and approximately 11%of
total revenues. 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. During 2003, most of our contracts to
supply metallurgical coal were entered into on a one-year
rolling basis or on a current market or spot basis. However, due
to market conditions, the majority of the metallurgical coal
sales contracts we entered into during 2004 and 2005 were
long-term contracts. During 2005, approximately 86% and 75% of
our steam and metallurgical coal sales volume, respectively, was
delivered pursuant to long-term contracts and during 2004,
approximately 83% and 55% of our steam and metallurgical coal
sales volume, respectively, was delivered pursuant to long-term
contracts.
As of February 22, 2006, we had contracts to sell 91% of
our planned 2006 production, 46% of our planned 2007 production,
and 25% of our planned 2008 production. At December 31,
2005, we had commitments to purchase 4.5 million tons
of coal during 2006 and 0.5 million tons in 2007.
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.
9
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 customers needs. Our coal sales of
26.7 million tons during 2005 were loaded from our 11
preparation plants and in certain cases directly from our mines
and, in the case of purchased coal, 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
80% of total shipments of coal volume produced and processed
coal from our mines to the preparation plant to the customer in
2005. The balance was shipped from our preparation plants,
loadout facilities or mines via truck. In 2005, approximately
11% of our coal sales were ultimately delivered to customers
through transport on the Great Lakes, approximately 13% 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, 4% was moved through the export terminal at
Baltimore, Maryland, and approximately 2% was moved through an
export terminal at 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. Of the 3.3 million tons of coal sold by
the Nicewonder Coal Group in 2005 prior to our acquisition of
that business, 50% was shipped via the Norfolk Southern Rail,
and the remaining 50% was delivered via truck to other coal
companies for resale
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. In
2004, only 2.5% of total U.S. coal consumption 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 91% of domestic coal consumption over the last
five years. 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
2005 and 2004 we largely competed with producers from Australia,
Canada, and other international producers of metallurgical coal.
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.
10
Other Operations
We have other operations and activities in addition to our
normal coal production, processing and sales business, including:
Highway Construction Business. NCI operates a highway
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
highway in West Virginia over the next five to six 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.
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
$29.3 million for 2005, of which approximately 41% was
generated by services provided to our other subsidiaries and
approximately 2% was generated by equipment sales 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
state of the art unloading/transloading equipment with ground
storage capability, providing producers with the ability to
custom blend export products without disrupting mining
operations. During 2005, we shipped a total of 1.5 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 2005 were
$4.1 million, partially offset by payments received in 2005
of $1.9 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%). Alpha Terminal
Company and its other interested partners are currently pursuing
an investment of approximately $35.0 million in the
construction of a new coal import facility at the terminal.
Engineering and permitting work on the project has been
completed, and construction is expected to begin in the second
half of 2006. The parties are currently in the process of
determining which partners will participate in the investment.
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 95% of our coal production in 2005 came from mines
operated by union-free employees, and as of December 31,
2005, over 92% of our subsidiaries approximately 3,309
employees were union-free. We believe our employee relations are
good and there have been no material work stoppages at any of
our subsidiaries 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 availability. These
regulations and legislation have had, and will continue to have,
a significant effect on our production costs and our competitive
position. Future legislation, regulations or orders, as well as
future interpretations and more rigorous enforcement of existing
laws, regulations or orders, may require substantial increases
in equipment and operating costs to us and delays,
interruptions, or a termination of operations, the extent of
which we cannot predict. We intend to respond to these
regulatory requirements at the appropriate time by implementing
necessary modifications to facilities or
11
operating procedures. Future legislation, regulations or orders
may also cause coal to become a less attractive fuel source,
thereby reducing coals share of the market for fuels used
to generate electricity. As a result, future legislation,
regulations or orders may adversely affect our mining
operations, cost structure or the ability of our customers to
use coal.
We endeavor 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, violations occur from time to time. None of the
violations or the monetary penalties assessed upon us since our
inception in 2002 has been material. Nonetheless, we expect that
future liability under or compliance with environmental 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, may be imposed under the laws
described below. Monetary sanctions and, in severe
circumstances, criminal sanctions may be imposed for failure to
comply with these laws.
As of December 31, 2005, we had accrued $53.5 million
for reclamation liabilities and mine closures, including
$7.2 million of current liabilities.
Mining Permits and Approvals. Numerous governmental
permits or approvals are required for mining operations. When we
apply for these permits and approvals, we may be required to
present data to federal, state or local authorities pertaining
to the effect or impact that any proposed production or
processing of coal may have upon the environment. The
authorization, permitting and/or implementation requirements
imposed by any of these authorities may be costly and time
consuming and may delay commencement or continuation of mining
operations. Regulations also provide that a mining permit or
modification can be delayed, refused or revoked if an officer,
director or a stockholder with a 10% or greater interest in the
entity is affiliated with or is in a position to control another
entity that has outstanding permit violations. Thus, past or
ongoing violations of federal and state mining laws could
provide a basis to revoke existing permits and to deny the
issuance of additional permits.
In order to obtain mining permits and approvals from state
regulatory authorities, mine operators, including us, must
submit a reclamation plan for restoring, upon the completion of
mining operations, the mined property to its prior or better
condition, productive use or other permitted condition.
Typically, we submit our necessary permit applications several
months, or even years, before we plan to begin mining a new
area. Although permits may take six months or longer to obtain,
in the past we have generally obtained our mining permits
without significant delay. However, we cannot be sure that we
will not experience difficulty in obtaining mining permits in
the future.
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. A state agency may
achieve primacy if the state regulatory agency develops a mining
regulatory program that is no less stringent than the federal
mining regulatory program under SMCRA. States in which we have
active mining operations have achieved primacy and a state
agency is the regulatory authority for SMCRA permitting and
enforcement activities.
SMCRA permit provisions include a complex set of requirements
which include, but are not limited to: 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; and
re-vegetation.
The mining permit application process is initiated by collecting
baseline data to adequately characterize the pre-mine
environmental condition of the permit area. This work includes,
but is not limited to, surveys and/or assessments of the
following: cultural and historical resources; geology, including
soils; existing vegetation; benthics; wildlife; potential for
endangered species; surface and ground water hydrology; climatol-
12
ogy; streams; and wetlands. The geologic data is used to define
and model the soil and rock structures that will be encountered
during the mining process. The geologic data and data from the
other surveys and/or assessments are used to develop the mining
and reclamation plans presented in the permit application. The
mining and reclamation plans incorporate the provisions and
performance standards of the states equivalent SMCRA
regulatory program, and are also used to support applications
for other authorizations and/or permits required to conduct coal
mining activities. Also included in the permit application is
information used for documenting surface and mineral ownership,
variance requests, access roads, bonding information, mining
methods, mining phases, other agreements that may relate to
coal, other minerals, oil and gas rights, water rights,
permitted areas, and ownership and control information required
to determine compliance with OSMs Applicant Violator
System, including the mining and compliance history of officers,
directors and principal owners of the entity.
Once a permit application is prepared and submitted to the
regulatory agency, it goes through an administrative
completeness review and a thorough technical review. Also,
before a SMCRA permit is issued, a mine operator must submit a
bond or otherwise secure the performance of all reclamation
obligations. After the application is submitted, a public notice
or advertisement of the proposed permit is required to be given,
which begins a notice period that is followed by a public
comment period before a permit can be issued. It is not uncommon
for a SMCRA mine permit application to take over a year to
prepare, depending on the size and complexity of the mine, and
anywhere from six months to two years or even longer for the
permit to be issued. The variability in time frame required to
prepare the permit and issue the permit can be attributed
primarily to the various regulatory authorities discretion
in the handling of comments and objections relating to the
project received from the general public and other agencies.
Also, it is not uncommon for a permit to be delayed as a result
of litigation related to the specific permit or another related
companys permit.
In addition to the bond requirement for an active or proposed
permit, the Abandoned Mine Land Fund, which was created by
SMCRA, requires a fee on all coal produced. The current fee is
$0.35 per ton on surface-mined coal and $0.15 per ton
on deep-mined coal, but tax rate revisions are currently
pending. The main purpose of the fee proceeds is to fund the
reclamation of mine lands closed or abandoned prior to
SMCRAs adoption in 1977. On April 4, 2005, the United
States Court of Federal Claims ruled that this fee is
unconstitutional to the extent it is levied on exported coal. We
do not know whether the U.S. government will appeal this
ruling.
SMCRA stipulates 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).
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. Although surety
bonds are usually noncancelable during their term, many of these
bonds are renewable on a yearly basis. The costs of these bonds
have increased in recent years while the market terms of surety
bonds have generally become more unfavorable to mine operators.
These changes in the terms of the bonds have been accompanied by
a decrease in recent years in the number of companies willing to
issue surety bonds. 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. As of December 31, 2005, we have
posted an aggregate of $116.7 million in reclamation bonds
and $8.3 million of other types of bonds under this
facility.
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
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electricity generating plants. Continued tightening of the
already stringent regulation of emissions from coal-fired power
plants could eventually reduce the demand for coal.
Clean Air Act requirements that may directly or indirectly
affect our operations include 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. Although we cannot accurately predict the
future effect of this Clean Air Act provision on our operations,
we believe that implementation of Phase II has resulted in,
and will continue to result in, an upward pressure on the price
of lower sulfur coals, as coal-fired power plants continue to
comply with the more stringent restrictions of Title IV. |
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Fine Particulate Matter. The Clean Air Act requires the
U.S. Environmental Protection Agency (the 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 2.5 microns, or
PM2.5. The 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. 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. |
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Ozone. Significant additional emissions control
expenditures will be required at coal-fired power plants to meet
the current NAAQS for ozone. Nitrogen oxides, which are a
by-product of coal combustion, are classified as an ozone
precursor. Accordingly, emissions control requirements for new
and expanded coal-fired power plants and industrial boilers will
continue to become more demanding in the years ahead. For
example, in November 2005 EPA issued a final rule, called the
Phase 2 Ozone Rule, describing the action that states must
take to reduce ground level ozone. The EPA designated counties
in 32 states as non-attainment areas under the new
standard. These states will have until June 2007 to develop
plans, referred to as state implementation plans or SIPs, for
pollution control measures that allow them to comply with the
standards. |
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NOx SIP Call. The NOx SIP Call program was established by
the EPA in October of 1998 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 is
designed to reduce nitrous oxide emissions by one million tons
per year in 22 eastern states and the District of Columbia.
Installation of additional control measures, such as selective
catalytic reduction devices, required under the final rules will
make it more costly to operate coal-fired electricity generating
plants, thereby making coal a less attractive fuel. |
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Clear Skies Initiative. The Bush Administration has
proposed a plan, commonly referred to as the Clear Skies
Initiative, that could result in dramatic reductions in nitrous
oxide, sulfur dioxide, and mercury emissions by power plants
through cap-and-trade programs similar to the
existing Acid Rain regulations and current NOx budget programs.
It is currently not possible to predict what, if any, new
regulatory requirements will ultimately evolve out of this
initiative. |
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Clean Air Interstate Rule. The EPA finalized the Clean
Air Interstate Rule (CAIR) on March 10, 2005. The new
CAIR calls for power plants in 29 eastern states and the
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emission levels of sulfur dioxide and nitrous oxide. The rule
requires states to regulate power plants under a cap and trade
program similar to the system now in effect for acid deposition
control and to that proposed by the Clear Skies Initiative. When
fully implemented, this rule is expected to reduce regional
sulfur dioxide emissions by over 70% and nitrogen oxides
emissions by over 60% from 2003 levels. The stringency of the
cap may require many coal-fired electricity generation plants to
install additional pollution control equipment, such as wet
scrubbers, to comply, which could decrease the demand for low
sulfur coal at these plants and thereby potentially reduce
market prices for low sulfur coal. Emissions are permanently
capped and cannot increase. On December 3, 2005, the EPA
published a notice that it was reconsidering four specific
issues that are involved in this rule and was accepting public
comment until January 13, 2006. The rule is also subject to
judicial challenge, which makes its impact difficult to assess. |
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Clean Air Mercury Rule. On March 15, 2005, the EPA
issued the Clean Air Mercury Rule to permanently cap and reduce
mercury emissions from coal-fired power plants. The Clean Air
Mercury Rule establishes mercury emissions limits from new and
existing coal-fired power plants and creates a market-based
cap-and-trade program that is expected to reduce nationwide
utility emissions of mercury in two phases. Several states and
environmental groups have filed suits in the U.S. Court of
Appeals for the District of Columbia challenging the EPAs
decision to allow emissions trading and its decision to reverse
a regulatory finding in 2000 that would have required emission
limits for mercury based maximum achievable control technology
under section 112 of the Clean Air Act. Many of the
challenges seek to impose more stringent rules. In addition,
efforts have commenced in Congress to legislatively disapprove
the rules. The EPA recently announced that it is seeking further
public comment on the Clean Air Mercury Rule and is
reconsidering the decision not to regulate mercury and other
pollutants from coal-fired power plants under the Clean Air
Acts hazardous air pollution program. Stricter limitations
on mercury emissions from power plants may adversely affect the
demand for coal. |
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Carbon Dioxide. In February 2003, a number of states
notified the EPA that they planned to sue the agency to force it
to set new source performance standards for utility emissions of
carbon dioxide and to tighten existing standards for sulfur
dioxide and particulate matter for utility emissions. In June
2003, three of these states sued the EPA seeking a court order
requiring the EPA to designate carbon dioxide as a criteria
pollutant and to issue a new NAAQS for carbon dioxide. If these
lawsuits result in the issuance of a court order requiring the
EPA to set emission limitations for carbon dioxide and/or lower
emission limitations for sulfur dioxide and particulate matter,
it could reduce the amount of coal our customers would purchase
from us. |
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Regional Emissions Trading. Eleven Northeast and
Mid-Atlantic states are working cooperatively to develop a
regional cap and trade program that would initially cover carbon
dioxide emissions from power plants in the region. No formal
model rule has been made public to date. There are a number of
uncertainties regarding this initiative, including the
applicable baseline of emissions to be permitted, initial
allocations, required emissions reductions, availability of
offsets, the extent to which states will adopt the program,
whether it will be linked with programs in other states or in
Canadian provinces, and the timing for implementation of the
program. There can be no assurance at this time that a carbon
dioxide cap and trade program, if implemented by the states
where our customers operate, will not affect the future market
for coal in this region. |
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Regional Haze. The 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. This program restricts the construction of
new coal-fired power plants whose operation may impair
visibility at and around federally protected areas. Moreover,
this program may require certain existing 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. These
limitations could affect the future market for coal. |
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Clean Water Act. The Clean Water Act of 1972 (the
CWA) and comparable state laws that regulate waters
of the United States (Jurisdictional waters) can
affect coal mining operations both directly and indirectly. One
of the direct impacts on coal mining and processing operations
is Clean Water Act permitting requirements relating to the
discharge of pollutants into Jurisdictional Waters. Indirect
impacts of the CWA include discharge limits placed on coal-fired
power plant ash handling facilities discharges. Continued
litigation of CWA issues could eventually reduce the demand for
coal.
Clean Water Act requirements that may directly or indirectly
affect our operations include, but are not limited to, the
following:
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Section 402 of the Clean Water Act. Section 402
of the CWA establishes in-stream water quality criteria and
treatment standards for wastewater discharge through the
National Pollutant Discharge Elimination System
(NPDES). Regular monitoring and compliance with
reporting requirements and performance standards are
preconditions for the issuance and renewal of NPDES permits that
govern the discharge of pollutants into water. 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. |
Total Maximum Daily Load (TMDL) regulations
established a process by which states designate stream segments
as impaired (not meeting present water quality standards).
Industrial dischargers, including coal mines, will be required
to meet new TMDL effluent standards for these stream segments.
Some of our operations currently discharge effluents into stream
segments that have been designated as impaired. 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.
Under the CWA, states must conduct an anti-degradation review
before approving permits for the discharge of pollutants to
waters that have been designated as high quality. A states
anti-degradation regulations would prohibit the diminution of
water quality in these streams. Several environmental groups and
individuals recently challenged, and in part successfully, West
Virginias anti-degradation policy. In general, waters
discharged from coal mines to high quality streams will be
required to meet or exceed new high quality
standards. This could cause increases in the costs, time and
difficulty associated with obtaining and complying with NPDES
permits, and could adversely affect our coal production.
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Section 404 of the Clean Water Act. Permits under
Section 404 of the CWA 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.
Jurisdictional waters typically include ephemeral, intermittent,
and perennial streams and may in certain instances include
man-made conveyances that have a hydrologic connection to a
stream or wetland. |
The Army Corps of Engineers (the COE) is empowered
to issue nationwide permits for specific categories
of filling activities 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 CWA in promulgating this permit. Although
Alpha had no operations that were interrupted, the lower
courts decision required us to convert certain ongoing 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 other lawsuits may be filed in
other states where Alpha operates.
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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 tragedies
in West Virginia, additional regulatory scrutiny and legislative
activities targeting mine safety at both the state and federal
levels have occurred. 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 2005, we
recorded $12.2 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 and counterpart state legislation protect species threatened
with possible extinction. Protection of threatened and
endangered species may 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. A number of species
indigenous to the areas in which we operate are protected under
the Endangered Species Act. Based on the species that have been
identified to date and the current application of applicable
laws and regulations, however, we do not believe there are any
species protected under the Endangered Species Act that would
materially and adversely affect our ability to mine coal from
our properties in accordance with current mining plans.
Resource Conservation and Recovery Act. The RCRA may
affect coal mining operations by establishing requirements for
the treatment, storage, and disposal of hazardous wastes.
Currently, certain coal mine wastes, such as overburden and coal
cleaning wastes, are exempted from hazardous waste management.
Subtitle C of RCRA exempted fossil fuel combustion wastes from
hazardous waste regulation until the EPA completed a report to
Congress and made a determination on whether the wastes should
be regulated as hazardous. In a 1993 regulatory determination,
the EPA addressed some high volume-low toxicity coal combustion
wastes generated at electric utility and independent power
producing facilities, such as coal ash. In May 2000, the EPA
concluded that coal combustion wastes do not warrant regulation
as hazardous under RCRA. The EPA is retaining the hazardous
waste exemption for these wastes. However, the 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. The
agency also concluded 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
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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.
Due to the hazardous waste exemption for coal combustion waste
such as ash, much coal combustion waste is currently put to
beneficial use. For example, in one Pennsylvania mine from which
we have the right to receive coal, we have used some ash as mine
fill. The ash we use for this purpose is mixed with lime and
serves to help alleviate the potential for acid mine drainage.
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, mining operations may have reporting
obligations under the Emergency Planning and Community Right to
Know Act and the Superfund Amendments and Reauthorization Act.
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. In
November 2004, Russia ratified the Kyoto Protocol to the 1992
Framework Convention on Global Climate Change (the
Protocol), which establishes a binding set of
emission targets for greenhouse gases. With Russias
accedence, the Protocol now has sufficient support and became
binding on all those countries that have ratified it on
February 16, 2005. Four industrialized nations have refused
to ratify the Protocol Australia, Liechtenstein,
Monaco, and the United States. Although the targets vary from
country to country, if the United States were to ratify the
Protocol our nation would be required to reduce greenhouse gas
emissions to 93% of 1990 levels from 2008 to 2012. Canada, which
accounted for 6% of our sales volume in 2004, ratified the
Protocol in 2002. Under the Protocol, Canada will be required to
cut greenhouse gas emissions to 6% below 1990 levels in 2008 to
2012, either in direct reductions in emissions or by obtaining
credits through the Protocols market mechanisms. This
could result in reduced demand for coal by Canadian electric
power generators.
Future regulation of greenhouse gases in the United States could
occur pursuant to future U.S. treaty obligations, statutory
or regulatory changes under the Clean Air Act, state adoption of
a greenhouse regulatory scheme, or otherwise. The Bush
Administration has proposed a package of voluntary emission
reductions for greenhouse gases reduction targets which provide
for certain incentives if targets are met. Some states, such as
Massachusetts, have already issued regulations regulating
greenhouse gas emissions from large power plants. Further, in
2002, the Conference of New England Governors and Eastern
Canadian Premiers adopted a Climate Change Action Plan, calling
for reduction in regional greenhouse emissions to 1990 levels by
2010, and a further reduction of at least 10% below 1990 levels
by 2020. Increased efforts to control greenhouse gas emissions,
including the future ratification of the Protocol by the U.S.,
could result in reduced demand for coal.
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
SECs website, at www.sec.gov. You may also read and copy
any document we file at the SECs public reference room
located at 450 Fifth Street, N.W., 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 it.
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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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the proximity to, capacity of, and cost of transportation
facilities; |
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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; and |
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the effect of worldwide energy conservation measures. |
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.
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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. |
Our coal mining operations are conducted, in large part, in
underground mines and, to a lesser extent, 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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delays and difficulties in acquiring, maintaining or renewing
necessary permits or mining or surface rights; |
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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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interruptions due to transportation delays; |
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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 termination of material contracts by state or other
governmental authorities; |
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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, in 2004 we experienced mine roof
stability issues at our Kingwood underground mine, which
resulted in a 23% decrease in production at this mine for 2004
as compared to 2003 full-year production (including production
in 2003 prior to our acquisition of the mine). In addition,
Hurricanes Katrina and Rita, which struck the Gulf Coast in
August and September 2005, resulted in delayed shipments of our
coal to our customers.
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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 63% of our coal sales
volume during 2005 and 2004. The majority of our sales of steam
coal for 2005 and 2004 were to U.S. and Canadian electric power
generators. Domestic electric power generation accounted for
approximately 92% of all U.S. coal consumption in 2004,
according to the EIA. 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 37% of our coal sales volume during 2005 and 2004.
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. Although prices for some U.S. steel
products increased moderately after the Bush administration
imposed steel import tariffs and quotas in March 2002, those
tariffs and quotas were lifted in December 2003. Furthermore,
recent reports by the American Iron and Steel Institute indicate
that the volume of shipments by U.S. steel mills in
September 2005 was down 3.4% from the previous month and 6.5%
from September 2004 and that, based on preliminary data for
October 2005, U.S. steel imports for October 2005 and the
ten months ended October 31, 2005 were approximately 28%
and 10% lower, respectively, than in the applicable prior year
periods, which may be leading indicators of declining demand in
the U.S. steel industry generally. 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. In the
international market for metallurgical coal, there are
indications that coal prices may have begun to level off or
decline from their current, historically high levels. In a
report issued at the end of November, the EIA reported that 2005
steel production in China has been well above projections,
resulting in a glut of steel despite Chinas current
position as the worlds largest consumer of steel. Despite
the restrictions on metallurgical coal exports announced by
China in 2003, the EIA noted reports of Chinese producers
offering coke for export at Chinese ports. 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
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for it could decrease, thereby reducing our revenues and
adversely impacting our earnings and the value of our coal
reserves.
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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 managements
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. During 2004, we
believe that we sold approximately 8% of our produced and
processed coal as metallurgical coal that we would have sold as
steam coal in the market conditions prevalent during 2003. We
believe that we generated approximately $65.0 million in
additional revenues by selling this production as metallurgical
coal rather than steam coal during 2004, based on a comparison
of the actual sales price and volume versus the then-prevailing
market price for steam coal and the volume of coal that we would
have sold if the coal had been mined, processed and marketed as
steam coal. 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.
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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 four 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 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. For
example, in combining our Predecessor and acquired companies, we
have incurred significant expenses to develop unified reporting
systems and standardize our accounting functions. Additionally,
we were unable to profitably operate NKC, which we acquired in
connection with our acquisition of AMCI. In September 2004, we
recorded an impairment charge of $5.1 million to reduce the
carrying value of the assets of NKC to their estimated fair
value, and we sold the assets of NKC on April 14, 2005.
The recently completed Nicewonder Acquisition has increased the
size of our operations. Our ability to integrate the operations
of the Nicewonder Coal Group with our own is important to our
future success. If we are unable to realize the anticipated
benefits of the Nicewonder Acquisition due to our inability to
address the challenges of integrating the Nicewonder Coal Group
or for any other reason, it could have a material adverse effect
on our business and financial and operating results and require
significant additional time on the part of our senior management
dedicated to resolving integration issues.
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, 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, 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.
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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
Acquisition, 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.
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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 highway construction business under
a contract with the State of
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West Virginia. Pursuant to the contract, NCI is building
approximately 11 miles of rough grade highway in West
Virginia over the next six 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.
This road construction operation is in its early stages and the
State of West Virginia has only approved funding for the first
phases of highway construction. If West Virginia does not fund
the remaining sections of the highway project, it would
adversely affect NCIs earnings. Even if West Virginia
funds the remainder of this project through the next six years,
we are uncertain whether the state will fund any similar
projects in the future. In addition, we have no current
experience conducting and completing road projects and will rely
on the expertise of the existing employees of NCI in order to
operate the project, and other road projects we may undertake,
profitably. Furthermore, litigation has been filed against NCI
and the State of West Virginia claiming that the project
violated competitive bidding and prevailing wage laws and
regulations. If successful, the litigation could make the
project considerably less advantageous to NCI or restrict or
prohibit NCI from completing the project.
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The loss of, or significant reduction in, purchases by our
largest customers could adversely affect our revenues and
profitability. |
Our largest customer during 2005 accounted for approximately 6%
of our total revenues. We derived approximately 38% of our 2005
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.
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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 82% of our 2005
sales volume was sold under long-term coal supply agreements. At
December 31, 2005, our long-term coal supply agreements had
remaining terms of up to 11 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 February 22, 2006, approximately 9%, 54% and 75%,
respectively, of our planned production for 2006, 2007 and 2008
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.
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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.
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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 that we can 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 7.6 million tons of coal
purchased from third parties during 2005, representing
approximately 28% of our total sales during 2005. We believe
that approximately 67% of our purchased coal sales in 2005 was
blended with coal produced from our mines prior to resale, and
approximately 6% of our total sales in 2005 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.
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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 31% of our sales in 2005. 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.
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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 during 2005,
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, and
other events could temporarily impair our ability to supply coal
to our customers,
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resulting in decreased shipments. Certain shipments of our coal
to customers were delayed by the recent hurricanes in the Gulf
Coast. In some cases, this delay will affect the timing of our
recognition of revenue from these sales. 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 2005, 80% of our produced and processed coal volume was
transported from the preparation plant to the customer by rail.
Beginning in the Spring of 2004, 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. The states of West Virginia and Kentucky
have recently increased enforcement of weight limits on coal
trucks on their public roads. It is possible that other states
in which our coal is transported by truck 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.
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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,
2005, we owned or leased 489.5 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.
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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
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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 coal prices, operating costs, capital expenditures,
severance and excise taxes, royalties and development and
reclamation costs; |
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future mining technology improvements; |
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the effects of regulation by governmental agencies; and |
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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. |
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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, which could adversely affect our
profitability.
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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.
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Our work force could become increasingly unionized in the
future, which could adversely affect the stability of our
production and reduce our profitability. |
Approximately 95% of our 2005 coal production came from mines
operated by union-free employees. As of December 31, 2005,
over 92% of our subsidiaries approximately 3,309 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.
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Our unionized work force could strike in the future, which
could disrupt production and shipments of our coal and increase
costs. |
One of our subsidiaries has two negotiated wage agreements with
the United Mine Workers of America (UMWA). These
agreements, covering approximately 252 employees as of
December 31, 2005, expire on December 31, 2009. Two of
our other subsidiaries have negotiated wage agreements with the
UMWA covering an aggregate of 30 employees as of
December 31, 2005 that will expire in December 2006. Some
or all of the affected employees at each location could strike,
which would adversely affect our productivity, increase our
costs, and disrupt shipments of coal to our customers.
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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.
During 2005, we had $25,000 of bad debt expense. 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.
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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. |
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
the recent mine tragedies in West Virginia, additional
regulatory scrutiny and legislative activities targeting mine
safety at both the state and federal levels have occurred, and
compliance with any new resulting 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.
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Extensive environmental regulations affect our customers
and could reduce the demand for coal as a fuel source and cause
our sales to decline. |
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. Such regulations will require significant emissions
control expenditures for many coal-fired power plants 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.
Various new and proposed laws and regulations may require
further reductions in emissions from coal-fired utilities. For
example, under the new Clean Air Interstate Rule issued on
March 10, 2005, the EPA will further regulate sulfur
dioxide and nitrogen oxides from coal-fired power plants. When
fully implemented, this rule is expected to reduce sulfur
dioxide emissions in affected states by over 70% and nitrogen
oxides emissions by over 60% from 2003 levels. The stringency of
this cap may require many coal-fired sources to install
additional pollution control equipment, such as wet scrubbers,
to comply. Installation of additional pollution control
equipment required by this rule could result in a decrease in
the demand for low sulfur coal (because sulfur would be removed
by the new emissions control equipment), potentially driving
down prices for low sulfur coal. In addition, under the Clean
Air Act, coal-fired power plants will be required to control
hazardous air pollution emissions by no later than 2009, which
likely will require significant new investment in
pollution-control devices by power plant operators. Further, on
March 15, 2005, the EPA finalized the Clean Air Mercury
Rule intended to control mercury emissions from power plants,
which could require coal-fired power plants to install new
pollution controls or comply with a mandatory, declining cap on
the total mercury emissions allowed from coal-fired power plants
nationwide. Both the Clean Air Mercury Rule and the Clean Air
Interstate Rule are subject to administrative reconsideration
and judicial challenge. These standards and future standards
could have the effect of making coal-fired plants unprofitable,
thereby decreasing demand for 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
purchasers plant or results in specified increases in the
cost of coal or its use.
Several proposals are pending in Congress and various states
that are designed to further reduce emissions of sulfur dioxide,
nitrogen oxides and mercury from power plants, and certain ones
could regulate additional air pollutants. If such initiatives
are enacted into law, power plant operators could choose fuel
sources other than coal to meet their requirements, thereby
reducing the demand for coal. Current and possible future
governmental programs are or may be in place to require the
purchase and trading of allowances associated with the emission
of various substances such as sulfur dioxide, nitrous oxide,
mercury and carbon dioxide. Changes in the markets for and
prices of allowances could have a material effect on demand for
and prices received for our coal.
A regional haze program initiated by the EPA to protect and to
improve visibility at and around national parks, national
wilderness areas and international parks restricts the
construction of new coal-fired power plants whose operation may
impair visibility at and around federally protected areas, and
may require some existing coal-fired power plants, and certain
thermal dryers, to install additional control measures designed
to limit haze-causing emissions.
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. In November 2004, Russia
ratified the Kyoto Protocol to the 1992 Framework Convention on
Global Climate Change (the Protocol), which
establishes a binding set of emission targets for greenhouse
gases. With Russias accedence, the Protocol now has
sufficient support and became binding on all those countries
that have ratified it on February 16, 2005. Four
industrialized nations have refused to ratify the
Protocol Australia, Liechtenstein, Monaco, and the
United States. Although the targets vary from country to
country, if the United States were to ratify the Protocol, our
nation would be required to reduce greenhouse gas emissions to
93% of 1990 levels in a series of phased reductions from 2008 to
2012. Canada, which accounted for approximately 7% of our 2005
sales volume,
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ratified the Protocol in 2002. Under the Protocol, Canada will
be required to cut greenhouse gas emissions to 6% below 1990
levels in a series of phased reductions from 2008 to 2012,
either in direct reductions in emissions or by obtaining credits
through the Protocols market mechanisms. This could result
in reduced demand for coal by Canadian electric power generators.
Future regulation of greenhouse gases in the United States could
occur pursuant to future U.S. treaty obligations, statutory
or regulatory changes under the Clean Air Act, or otherwise. The
Bush Administration has proposed a package of voluntary emission
reductions for greenhouse gases reduction targets which provide
for certain incentives if targets are met. Some states, such as
Massachusetts, have already issued regulations regulating
greenhouse gas emissions from large power plants. Further, in
2002, the Conference of New England Governors and Eastern
Canadian Premiers adopted a Climate Change Action Plan, calling
for reduction in regional greenhouse emissions to 1990 levels by
2010, and a further reduction of at least 10% below 1990 levels
by 2020. Increased efforts to control greenhouse gas emissions,
including the future ratification of the Protocol by the United
States, could result in reduced demand for our coal. See
Environmental and Other Regulatory Matters.
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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, releasing large volumes of
coal slurry. Structural failure of an impoundment can result in
extensive damage to the environment and natural resources, such
as streams or bodies of water that the coal slurry reaches, as
well as liability for related personal injuries and property
damages, and injuries to wildlife. 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.
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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 even impossible, thereby precluding continuing or
future mining operations. Private individuals and the public
have certain rights to comment upon, submit objections to, and
otherwise engage in the permitting process, including through
court intervention. Accordingly, the permits we need may not be
issued, maintained or renewed, or may not be issued or renewed
in a timely fashion, or may involve requirements that restrict
our ability to conduct our
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mining operations. An inability to conduct our mining operations
pursuant to applicable permits would 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 courts 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.
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We may not be able to implement required public-company
internal controls over financial reporting in the required time
frame or with adequate compliance, and implementation of the
controls will increase our costs. |
Our current operations consist primarily of the assets of our
Predecessor and the other operations we have acquired, each of
which had different historical operating, financial, accounting
and other systems. Due to our rapid growth and limited history
operating our acquired operations as an integrated business, our
internal control over financial reporting may not currently meet
all the standards contemplated by Section 404 of the
Sarbanes-Oxley Act that we will be required to meet as of
December 31, 2006. Several areas of deficiency in our
internal control over financial reporting have been identified
in the past, including such items as documentation of controls
and procedures; segregation of duties; timely reconciliation of
accounts; methods of reconciling fixed asset accounts, the
structure of our general ledger and the level of experience of
our accounting and finance staff related to public company
reporting. The following additional deficiencies were identified
by our evaluation of our internal control systems and through
the audit of our financial statements as of and for the year
ended December 31, 2005: inconsistent practices in applying
our accounting procedures, insufficient second reviews,
insufficient verification and updating of data used in our
accounting procedures, and inadequate controls over information
technology such as access to data and changes to software. Many
improvements in these and other areas have been implemented,
although our evaluation of our internal control systems is
on-going, as are our efforts to further enhance these systems.
Certain of these deficiencies have previously resulted in
out-of-period
adjustments to our financial statements. Although we have
determined that such adjustments have been immaterial and
several improvements have been made to the related accounting
processes, continued deficiencies in our internal control over
financial reporting may result in future
out-of-period
adjustments, which could be material and require us to restate
our financial statements. If we are not able to successfully
meet the requirements of Section 404 in a timely manner or
with adequate compliance, our independent auditors may not be
able to attest as to the adequacy of our internal controls over
financial reporting. This result may subject us to adverse
regulatory consequences, and there could also be a negative
reaction in the financial markets due to a loss of confidence in
the reliability of our financial statements. We could also
suffer a loss of confidence in the reliability of our financial
statements if our auditors were to report a material weakness in
our internal controls. We have incurred, and will continue to
incur, incremental costs in order to comply with
Section 404, including increased consulting, auditing and
legal fees and costs associated with hiring additional
accounting and administrative staff with experience managing
public companies.
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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 successful integration of the
Nicewonder Coal Group also requires us to, among other things,
retain key employees. Our future performance depends, in part,
on our ability to successfully integrate these new employees
into our company. 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.
Certain of our subsidiaries have entered into employment
agreements with three of our executive officers
Michael J. Quillen, our President and Chief Executive Officer,
and D. Scott Kroh and Kevin S. Crutchfield, our Executive Vice
Presidents. Each of our other executive officers are employed on
an at-will basis. The current terms of the employment agreements
between Messrs. Quillen, Kroh and Crutchfield and our
subsidiaries end on December 31, 2006, with respect to
Messrs. Quillen and Crutchfield, and March 11, 2007,
in the case of Mr. Kroh, with automatic renewals for
successive one year terms unless the executive or our employing
subsidiary provides advance notice of non-renewal. When the
terms of these agreements expire, we may not be able to renew or
extend these employment agreements on terms acceptable to us. In
addition, the employment agreements with Mr. Quillen and
Mr. Crutchfield provide that if either executive resigns
for good reason (as defined in the applicable
agreement) or our employing subsidiary terminates either
executive without employer cause (as defined in the
applicable agreement), the vesting of all stock options,
restricted stock and other equity rights of the employee awarded
after the date of his employment agreement will be fully
accelerated, and we will be required to pay the executive his
earned but unpaid salary through the date of termination, any
bonuses payable for prior years, the pro rata portion of his
bonus payable for the current year, and an amount equal to 200%
of his then current base salary and target annual bonus in
installments over the following twenty-four months in the case
of Mr. Quillen or 150% his then current base salary and
target annual bonus in installments over the following twelve
months in the case of Mr. Crutchfield, except that if the
resignation by executive for good cause or termination by our
employing subsidiary without employer cause occurs during the
90 days prior to or on or within one year after a
change in control (as defined in the applicable
agreement), then we will be required to pay the executive an
amount equal to 300% (instead of 200%) of his then current base
salary and target annual bonus in the case of Mr. Quillen,
or 200% (instead of 150%) of his then current base salary and
target annual bonus in the case of Mr. Crutchfield, and we
will also be required to pay the executive an amount equal to
the difference between the present value of his accrued benefits
on the termination date under our defined benefit plans and
supplemental retirement plan and the present value of benefits
to which he would have been entitled had he continued to
participate in such plans for an additional three years, in the
case of Mr. Quillen, or two years, in the case of
Mr. Crutchfield. The employment agreement with
Mr. Kroh provides that if he resigns for employee
cause (as defined in the applicable agreement), we will be
required to pay him his earned but unpaid salary through the
date of termination, and to continue to pay his then current
base salary for the following twelve months, and he would be
entitled to receive any bonuses payable for prior years, plus
the pro rata bonus payable for the current year, at the same
time as bonuses are paid to similarly situated employees. The
employment agreement with Mr. Kroh provides that a
resignation by him for employee cause includes,
among other things, his resignation during the period beginning
three months, and ending nine months following the liquidation
or sale by First Reserve of more than 75% of its ownership in
ANR Holdings and its affiliates, which liquidation or sale
occurred pursuant to First Reserves sale of shares of our
common stock in a secondary offering completed on
January 24, 2006 pursuant to our registration statement on
Form S-1 (file no.
333-129030).
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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
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miners in the Appalachian region has caused us to operate
certain units without full staff, which decreases our
productivity and increases our costs. For example, during the
year of 2005, production at our contractor operations was
running approximately 25% behind plan, primarily due to
shortages in the supply of labor. 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.
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Our significant 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. |
We are a highly leveraged company. Our financial performance
could be affected by our significant indebtedness. At
December 31, 2005, we had approximately $486.0 million
of indebtedness outstanding, representing 70% of our total
capitalization. This indebtedness consisted of
$175.0 million principal of our 10% senior notes due
2012, a $250.0 million term loan under new credit facility
and $60.8 million of other indebtedness, including the
second installment of the Nicewonder Coal Group acquisition note
of $39.9 million, $1.5 million of capital lease
obligations extending through March 2009, $0.3 million
principal amount in variable rate term notes maturing in April
2006 that we incurred in connection with equipment financing and
$19.1 million payable to an insurance premium finance
company. In addition, under our credit facility we had
$65.5 million of letters of credit outstanding at
December 31, 2005.
In connection with the Nicewonder Acquisition, we refinanced all
outstanding indebtedness under our prior credit facility with a
new credit facility, which provides for up to
$525.0 million of borrowings, including a
$275.0 million revolving credit facility and a
$250.0 million term loan. In addition, under the terms of
the Nicewonder Acquisition, one of our indirect, wholly-owned
subsidiaries issued $221.0 million in promissory
installment notes, payable in two installments of which
$181.1 million was paid on November 2, 2005 and
$39.9 million was paid on January 13, 2006. We may
also incur additional indebtedness in the future.
This level of indebtedness could have important consequences to
our business. For example, it could:
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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. |
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 new
credit facility and the indenture
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under which our 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 new credit facility.
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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. The terms of our new credit facility and the
indenture governing our senior notes do not prohibit us from
doing so. Our new credit facility provides for a revolving line
of credit of up to $275.0 million, of which
$209.5 million was available as of December 31, 2005.
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.
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The covenants in our credit facility and the indenture
governing the notes impose restrictions that may limit our
operating and financial flexibility. |
Our new credit facility and the indenture governing our 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 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.
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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. |
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
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ability to obtain additional financing to fund future
working capital, capital expenditure or other general corporate
requirements.
At December 31, 2005, we had $65.5 million of letters
of credit in place, of which $58.3 million served as
collateral for reclamation surety bonds and $7.2 million
secured miscellaneous obligations. Our new 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.
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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, 2005, included
$24.5 million of postretirement medical obligations and
$6.9 million of self-insured workers compensation and
black lung obligations, and our accumulated postretirement
benefit obligation at December 31, 2005 is
$49.5 million. 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. See
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.
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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 cash flow and profits have been, and may
continue to be, negatively impacted. Lower than expected sales
by us during this period could have a material adverse effect on
the timing of our cash flows and therefore our ability to
service our obligations with respect to our existing and future
indebtedness.
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Our earnings will be reduced in future periods as a result
of our issuance of shares of our common stock to members of
management as part of the Internal Restructuring. |
As part of the 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 received by us
from the underwriters as a result of the underwriters
exercise of their over-allotment option in connection with the
IPO. As a result, we recorded stock-based compensation expense
equal to the fair value of the vested shares issued and
distributions paid in the amount of $45.8 million for 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 into options to purchase up to
596,985 shares of our common stock in connection with the
Internal Restructuring (the ACM Converted Options),
we recorded stock-based compensation of $0.7 million for
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
at December 31, 2005 of $15.6 million, consisting
primarily of $12.8 million and $2.6 million associated
with the unvested portions of shares issued in the 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. The amortization of the deferred
stock-based compensation relating to the unvested shares issued
in the Internal Restructuring and the ACM converted options over
the applicable two-year and five- year vesting periods will
result in a non-cash amortization expense in these periods,
thereby reducing our earnings in those periods.
|
|
|
The AMCI Parties may have significant influence on our
company and may have conflicts of interest with us or you in the
future. |
Persons affiliated with AMCI (the AMCI Parties)
beneficially owned approximately 17.62% of our common stock as
of February 28, 2006. The AMCI Parties are in the business
of making investments in companies and they may from time to
time acquire and hold interests in businesses that compete
directly or indirectly with us. For example, the AMCI Parties
held a combined 3.3% ownership interest in Foundation Coal
Holdings, Inc. (Foundation) as of December 31,
2005. These other investments may create competing financial
demands on the AMCI Parties, potential conflicts of interest and
require efforts consistent with applicable law to keep the other
businesses separate from our operations. The AMCI Parties may
also pursue acquisition opportunities that may be complementary
to our business, and as a result, those acquisition
opportunities may not be available to us. Additionally, our
amended and restated certificate of incorporation provides that
the AMCI Parties may compete with us. The designees of the
persons affiliated with AMCI on our board of directors will not
be required to offer corporate opportunities to us and may take
any such opportunities for themselves, other than any
opportunities offered to the designees solely in their capacity
as one of our directors. So long as the AMCI Parties continue to
own a significant amount of our equity, even if such amount is
less than 50%, they will continue to be able to strongly
influence or effectively control our decisions. For example, the
AMCI Parties could cause us to make acquisitions that increase
our amount of indebtedness or sell revenue-generating assets.
|
|
|
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
36
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.
Coal Reserves
We estimate that, as of December 31, 2005, we had total
proven and probable reserves of approximately 489.5 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 2,700 feet apart.
Probable reserves are those for which reliable data points are
spaced 2,700 feet to 7,900 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. The most recent of these
reviews for our operations other than the Callaway reserves was
completed in November 2004, and we obtained an independent third
party review of the Callaway reserves that was completed in
September 2005. These reviews included 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. Geological Survey Circular
891. Reserve estimates were developed using criteria to assure
that the basic geologic characteristics of the reserves (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 mine operation capabilities on our various
properties. As a result of the November 2004 review, we
increased our reserve estimate from 326.5 million tons as
of January 1, 2004 to 514.5 million tons as of
October 15, 2004.
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. A small portion 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 $3.02 per ton in 2005,
representing 4.1% of our 2005 coal sales revenue.
37
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, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoverable | |
|
Sulfur Content | |
|
Average Btu | |
|
|
|
|
Reserves Proven & | |
|
| |
|
| |
Regional Business Unit |
|
State | |
|
Probable(1) | |
|
<1% | |
|
1.0%-1.5% | |
|
>1.5% | |
|
>12,500 | |
|
<12,500 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
(In millions of tons) | |
|
|
|
|
|
|
|
|
|
|
(In millions of tons) | |
|
(In millions of tons) | |
Paramont/ Alpha Land and Reserves(2)
|
|
|
Virginia |
|
|
|
153.3 |
|
|
|
110.1 |
|
|
|
31.4 |
|
|
|
11.8 |
|
|
|
150.7 |
|
|
|
2.6 |
|
Dickenson-Russell
|
|
|
Virginia |
|
|
|
30.9 |
|
|
|
30.9 |
|
|
|
0 |
|
|
|
0 |
|
|
|
30.9 |
|
|
|
0 |
|
Kingwood
|
|
|
West Virginia |
|
|
|
29.2 |
|
|
|
0 |
|
|
|
17.7 |
|
|
|
11.6 |
|
|
|
29.2 |
|
|
|
0 |
|
Brooks Run
|
|
|
West Virginia |
|
|
|
25.4 |
|
|
|
7.1 |
|
|
|
18.3 |
|
|
|
0 |
|
|
|
10.5 |
|
|
|
14.9 |
|
Welch
|
|
|
West Virginia |
|
|
|
96.4 |
|
|
|
96.4 |
|
|
|
0 |
|
|
|
0 |
|
|
|
96.4 |
|
|
|
0 |
|
AMFIRE
|
|
|
Pennsylvania |
|
|
|
65.5 |
|
|
|
14.7 |
|
|
|
21.8 |
|
|
|
29.0 |
|
|
|
56.9 |
|
|
|
8.6 |
|
Enterprise
|
|
|
Kentucky |
|
|
|
63.7 |
|
|
|
24.8 |
|
|
|
37.2 |
|
|
|
1.6 |
|
|
|
62.3 |
|
|
|
1.4 |
|
Callaway
|
|
West Virginia and Virginia |
|
|
25.1 |
|
|
|
25.1 |
|
|
|
0 |
|
|
|
0 |
|
|
|
10.9 |
|
|
|
14.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
|
|
|
|
489.5 |
|
|
|
309.1 |
|
|
|
126.4 |
|
|
|
54.0 |
|
|
|
447.8 |
|
|
|
41.7 |
|
Percentages
|
|
|
|
|
|
|
|
|
|
|
63 |
% |
|
|
26 |
% |
|
|
11 |
% |
|
|
92 |
% |
|
|
8 |
% |
|
|
(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 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 as of
December 31, 2005. 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. |
38
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, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoverable | |
|
Total Tons | |
|
Total Tons | |
|
|
|
|
|
|
Reserves Proven & | |
|
| |
|
| |
|
|
Regional Business Unit |
|
State | |
|
Probable(1) | |
|
Assigned(2) | |
|
Unassigned(2) | |
|
Owned | |
|
Leased | |
|
Coal Type(3) |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
(In millions of tons) | |
|
|
|
|
|
|
|
|
|
|
|
|
(In millions of tons) | |
|
(In millions of | |
|
|
|
|
|
|
|
|
|
|
tons) | |
|
|
Paramont/ Alpha Land and Reserves(4)
|
|
|
Virginia |
|
|
|
153.3 |
|
|
|
71.0 |
|
|
|
82.3 |
|
|
|
0 |
|
|
|
153.3 |
|
|
Steam and Metallurgical |
Dickenson-Russell
|
|
|
Virginia |
|
|
|
30.9 |
|
|
|
28.7 |
|
|
|
2.2 |
|
|
|
0 |
|
|
|
30.9 |
|
|
Steam and Metallurgical |
Kingwood
|
|
|
West Virginia |
|
|
|
29.2 |
|
|
|
20.8 |
|
|
|
8.4 |
|
|
|
0 |
|
|
|
29.2 |
|
|
Steam and Metallurgical |
Brooks Run
|
|
|
West Virginia |
|
|
|
25.4 |
|
|
|
12.6 |
|
|
|
12.8 |
|
|
|
2.9 |
|
|
|
22.5 |
|
|
Steam and Metallurgical |
Welch
|
|
|
West Virginia |
|
|
|
96.4 |
|
|
|
50.8 |
|
|
|
45.6 |
|
|
|
1.3 |
|
|
|
95.1 |
|
|
Steam and Metallurgical |
AMFIRE
|
|
|
Pennsylvania |
|
|
|
65.5 |
|
|
|
62.4 |
|
|
|
3.1 |
|
|
|
3.4 |
|
|
|
62.1 |
|
|
Steam and Metallurgical |
Enterprise
|
|
|
Kentucky |
|
|
|
63.7 |
|
|
|
10.8 |
|
|
|
52.9 |
|
|
|
7.1 |
|
|
|
56.6 |
|
|
Steam |
Callaway
|
|
West Virginia and Virginia |
|
|
25.1 |
|
|
|
22.9 |
|
|
|
2.2 |
|
|
|
1.1 |
|
|
|
24.0 |
|
|
Steam and Metallurgical |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
|
|
|
|
489.5 |
|
|
|
280.0 |
|
|
|
209.5 |
|
|
|
15.8 |
|
|
|
473.7 |
|
|
|
Percentages
|
|
|
|
|
|
|
|
|
|
|
57 |
% |
|
|
43 |
% |
|
|
3 |
% |
|
|
97 |
% |
|
|
|
|
(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 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 as of
December 31, 2005. 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. |
39
The following map shows the locations of Alphas
properties, including the number of mines and preparation plants
as of February 1, 2006 and 2005 production of saleable tons
for each of our eight regional business units:
See Item 1. Business, of this report for additional
information regarding our coal operations and properties.
40
|
|
Item 3. |
Legal Proceedings |
General. The Company is a party to a number of legal
proceedings incident to their 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 the consolidated cash flows, results of operations or
financial condition of the Company.
Nicewonder Litigation. The Affiliated Construction Trades
Foundation brought an action against Nicewonder Contracting,
Inc. (NCI) and the West Virginia Department of
Transportation, Division of Highways in the United States
District Court in the Southern District of West Virginia. (The
Affiliated Construction Trades Foundation v. West Virginia
Department of Transportation and Nicewonder Contracting Inc.,
(SDWV CA No. 2:04-1344)). The plaintiff seeks a declaration
that the contract between NCI and the State of West Virginia
related to NCIs road construction project is illegal as a
violation of applicable West Virginia and federal competitive
bidding and prevailing wage laws. The plaintiff also is seeking
an injunction prohibiting performance of the contract but has
not sought monetary damages. The sellers in the Nicewonder
Acquisition have agreed to indemnify us for any losses we may
incur as a result of this litigation, net of the net revenues of
NCI from post-acquisition coal sales and the value of certain
reserves, surface property and mining equipment of NCI.
|
|
Item 4. |
Submission of Matters to a Vote of Security Holders |
There were no matters submitted to a vote of security holders of
Alpha Natural Resources, Inc. through a solicitation of proxies
or otherwise during the fourth quarter of the Companys
fiscal year ended December 31, 2005.
PART II
|
|
Item 5. |
Market for Registrants Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities |
The initial public offering of our common stock commenced on
February 15, 2005. The Companys 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.
|
|
|
|
|
|
|
|
|
2005 |
|
High | |
|
Low | |
|
|
| |
|
| |
First Quarter
|
|
$ |
30.50 |
|
|
$ |
21.65 |
|
Second Quarter
|
|
|
29.50 |
|
|
|
22.00 |
|
Third Quarter
|
|
|
32.73 |
|
|
|
23.83 |
|
Fourth Quarter
|
|
|
30.47 |
|
|
|
18.70 |
|
As of March 15, 2006, there were approximately 44
registered holders of record of our common stock. 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. We expect
to consider a policy of paying quarterly dividends beginning
sometime in 2006 to the holders of our common stock. If adopted,
we would expect our board to commence and continue this dividend
policy for the foreseeable future subject to (1) our
results of operations and the amount of our surplus available to
be distributed, (2) dividend availability and
41
restrictions under our credit facility and indenture,
(3) the dividend rate being paid by comparable companies in
the coal industry, (4) our liquidity needs and financial
condition, (5) the level of cash investments we may make in
connection with potential future acquisitions and (6) other
factors that our board of directors may deem relevant. The terms
of our new credit facility and the indenture governing our
senior notes restrict our ability to pay dividends to our
stockholders. See Item 1A Risk Factors
Our ability to pay regular dividends to our stockholders is
subject to the discretion of our board of directors and may be
limited by our holding company structure, the covenants in our
debt instruments and applicable provisions of Delaware
law, and Risk Factors The covenants in
our credit facility and the indenture governing our senior notes
impose restrictions that may limit our operating and financial
flexibility.
Equity Compensation Plan Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c) Number of securities | |
|
|
|
|
(b) Weighted- | |
|
remaining available for | |
|
|
(a) Number of | |
|
average exercise | |
|
future issuance under | |
|
|
securities to be issued | |
|
price of | |
|
equity compensation | |
|
|
upon exercise of | |
|
outstanding | |
|
plans (excluding | |
|
|
outstanding options, | |
|
options, warrants | |
|
securities reflected in | |
Plan Category |
|
warrants and rights | |
|
and rights | |
|
column (a)) | |
|
|
| |
|
| |
|
| |
Equity compensation plans approved by security holders
|
|
|
1,265,593 |
|
|
$ |
16.71 |
|
|
|
2,654,632 |
(1) |
Equity compensation plans not approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,265,593 |
|
|
$ |
16.71 |
|
|
|
2,654,632 |
|
|
|
(1) |
The Alpha Natural Resources, Inc. 2005 Long-Term Incentive Plan
has 2,654,632 shares of common stock available for future
issuance to qualified participants as of December 31, 2005
(refer to column (c)). |
|
|
Item 6. |
Selected Financial Data |
The following table presents selected financial and other data
about us and our Predecessor for the most recent five fiscal
periods. The selected financial data as of December 31,
2005 and for the year then ended have been derived from the
audited consolidated financial statements and related notes of
Alpha Natural Resources, Inc. and subsidiaries included in this
annual report. The selected historical financial data as of
December 31, 2004, 2003, and for the period from
December 14, 2002 to December 31, 2002 and for the
years ended December 31, 2004 and 2003 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,
included elsewhere in this annual report, which have been
audited by KPMG LLP (KPMG), an independent
registered public accounting firm. The selected historical
financial data as of December 31, 2002 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. The selected historical
financial data for the period from January 1, 2002 through
December 13, 2002 (the Predecessor Period) have
been derived from our Predecessors combined financial
statements not included in this annual report, which have been
audited by KPMG. The selected historical financial data as of
December 31, 2001, and for the year ended December 31,
2001 have been derived from our Predecessors audited
combined financial statements 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 Managements 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.
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alpha Natural | |
|
ANR Fund IX Holdings, L.P. and Alpha NR | |
|
|
|
|
Resources, Inc. | |
|
Holding, Inc. and Subsidiaries | |
|
Predecessor | |
|
|
| |
|
| |
|
| |
|
|
|
|
|
|
December 14, | |
|
January 1, | |
|
|
|
|
Year Ended | |
|
Year Ended | |
|
Year Ended | |
|
2002 to | |
|
2002 to | |
|
Year Ended | |
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
December 13, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2002 | |
|
2001 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except per share amounts) | |
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coal revenues
|
|
$ |
1,414,513 |
|
|
$ |
1,079,733 |
|
|
$ |
694,591 |
|
|
$ |
6,260 |
|
|
$ |
154,715 |
|
|
$ |
227,237 |
|
|
Freight and handling revenues
|
|
|
185,555 |
|
|
|
141,100 |
|
|
|
73,800 |
|
|
|
1,009 |
|
|
|
17,001 |
|
|
|
25,808 |
|
|
Other revenues
|
|
|
27,267 |
|
|
|
31,869 |
|
|
|
13,458 |
|
|
|
101 |
|
|
|
6,031 |
|
|
|
8,472 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,627,335 |
|
|
|
1,252,702 |
|
|
|
781,849 |
|
|
|
7,370 |
|
|
|
177,747 |
|
|
|
261,517 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of coal sales (exclusive of items shown separately below)
|
|
|
1,184,092 |
|
|
|
920,359 |
|
|
|
626,265 |
|
|
|
6,268 |
|
|
|
158,924 |
|
|
|
219,545 |
|
|
Freight and handling costs
|
|
|
185,555 |
|
|
|
141,100 |
|
|
|
73,800 |
|
|
|
1,009 |
|
|
|
17,001 |
|
|
|
25,808 |
|
|
Cost of other revenues
|
|
|
23,675 |
|
|
|
22,994 |
|
|
|
12,488 |
|
|
|
120 |
|
|
|
7,973 |
|
|
|
8,156 |
|
|
Depreciation, depletion and amortization
|
|
|
73,122 |
|
|
|
55,261 |
|
|
|
35,385 |
|
|
|
274 |
|
|
|
6,814 |
|
|
|
7,866 |
|
|
Selling, general and administrative expenses (exclusive of
depreciation and amortization shown separately above)
|
|
|
88,812 |
|
|
|
43,881 |
|
|
|
21,926 |
|
|
|
471 |
|
|
|
8,797 |
|
|
|
9,370 |
|
|
Costs to exit business
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,274 |
|
|
|
3,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
1,555,256 |
|
|
|
1,183,595 |
|
|
|
769,864 |
|
|
|
8,142 |
|
|
|
224,783 |
|
|
|
274,245 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refund of federal black lung excise tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,049 |
|
|
|
16,213 |
|
Other operating income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,430 |
|
|
|
94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
72,079 |
|
|
|
69,107 |
|
|
|
11,985 |
|
|
|
(772 |
) |
|
|
(43,557 |
) |
|
|
3,579 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(29,937 |
) |
|
|
(20,041 |
) |
|
|
(7,848 |
) |
|
|
(203 |
) |
|
|
(35 |
) |
|
|
|
|
|
Interest income
|
|
|
1,064 |
|
|
|
531 |
|
|
|
103 |
|
|
|
6 |
|
|
|
2,072 |
|
|
|
1,993 |
|
|
Miscellaneous income
|
|
|
91 |
|
|
|
722 |
|
|
|
574 |
|
|
|
|
|
|
|
|
|
|
|
1,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net
|
|
|
(28,782 |
) |
|
|
(18,788 |
) |
|
|
(7,171 |
) |
|
|
(197 |
) |
|
|
2,037 |
|
|
|
3,243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and minority interest
|
|
|
43,297 |
|
|
|
50,319 |
|
|
|
4,814 |
|
|
|
(969 |
) |
|
|
(41,520 |
) |
|
|
6,822 |
|
Income tax expense (benefit)
|
|
|
18,953 |
|
|
|
5,150 |
|
|
|
898 |
|
|
|
(334 |
) |
|
|
(17,198 |
) |
|
|
(1,497 |
) |
Minority interest
|
|
|
2,918 |
|
|
|
22,781 |
|
|
|
1,164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
21,426 |
|
|
|
22,388 |
|
|
|
2,752 |
|
|
|
(635 |
) |
|
|
(24,322 |
) |
|
|
8,319 |
|
Loss from discontinued operations
|
|
|
(213 |
) |
|
|
(2,373 |
) |
|
|
(490 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
21,213 |
|
|
$ |
20,015 |
|
|
$ |
2,262 |
|
|
$ |
(635 |
) |
|
$ |
(24,322 |
) |
|
$ |
8,319 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alpha Natural | |
|
ANR Fund IX Holdings, L.P. and Alpha NR | |
|
|
|
|
Resources, Inc. | |
|
Holding, Inc. and Subsidiaries | |
|
Predecessor | |
|
|
| |
|
| |
|
| |
|
|
|
|
|
|
December 14, | |
|
January 1, | |
|
|
|
|
Year Ended | |
|
Year Ended | |
|
Year Ended | |
|
2002 to | |
|
2002 to | |
|
Year Ended | |
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
December 13, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2002 | |
|
2001 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except per share amounts) | |
Earnings per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share, as adjusted(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$ |
0.38 |
|
|
$ |
1.52 |
|
|
$ |
0.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
|
|
|
|
|
(0.16 |
) |
|
|
(0.04 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per basic and diluted share
|
|
$ |
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet data (at period end):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
39,622 |
|
|
$ |
7,391 |
|
|
$ |
11,246 |
|
|
$ |
8,444 |
|
|
$ |
88 |
|
|
$ |
175 |
|
Operating and working capital
|
|
|
35,074 |
|
|
|
56,257 |
|
|
|
32,714 |
|
|
|
(12,223 |
) |
|
|
(4,268 |
) |
|
|
(22,958 |
) |
Total assets
|
|
|
1,013,658 |
|
|
|
477,121 |
|
|
|
379,336 |
|
|
|
108,442 |
|
|
|
156,328 |
|
|
|
139,467 |
|
Notes payable and long-term debt, including current portion
|
|
|
485,803 |
|
|
|
201,705 |
|
|
|
84,964 |
|
|
|
25,743 |
|
|
|
|
|
|
|
|
|
Stockholders equity and partners capital (deficit)
|
|
|
212,765 |
|
|
|
45,933 |
|
|
|
86,367 |
|
|
|
23,384 |
|
|
|
(132,997 |
) |
|
|
(136,593 |
) |
Statement of cash flows data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$ |
149,643 |
|
|
$ |
106,776 |
|
|
$ |
54,104 |
|
|
$ |
(295 |
) |
|
$ |
(13,816 |
) |
|
$ |
10,655 |
|
|
Investing activities
|
|
|
(339,387 |
) |
|
|
(86,202 |
) |
|
|
(100,072 |
) |
|
|
(38,893 |
) |
|
|
(22,054 |
) |
|
|
(9,203 |
) |
|
Financing activities
|
|
|
221,975 |
|
|
|
(24,429 |
) |
|
|
48,770 |
|
|
|
47,632 |
|
|
|
35,783 |
|
|
|
(1,462 |
) |
Capital expenditures
|
|
|
122,342 |
|
|
|
72,046 |
|
|
|
27,719 |
|
|
|
960 |
|
|
|
21,866 |
|
|
|
10,218 |
|
Other financial data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA, as adjusted(3)
|
|
$ |
145,197 |
|
|
$ |
119,327 |
|
|
$ |
47,663 |
|
|
$ |
(498 |
) |
|
|
|
|
|
|
|
|
|
|
(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
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) |
44
|
|
|
per share, as adjusted, the pro forma adjustment for income
taxes only applies to the percentage interest owned by ANR
Fund IX Holding, L.P., the non-taxable FR Affiliate. No pro
forma adjustment for income taxes is required for the percentage
interest owned by Alpha NR Holding, Inc., the taxable FR
Affiliate, because income taxes have already been recorded in
the historical results of operations. Furthermore, no pro forma
adjustment to reported net income (loss) is necessary subsequent
to February 11, 2005 because Alpha is subject to income
taxes. |
|
|
The denominator for purposes of computing basic net income
(loss) per share, as adjusted, 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. |
45
|
|
|
The computations of basic and diluted net income (loss) per
share, as adjusted, are set forth below: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(in thousands, except share and 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, as adjusted, is defined as net income (loss) plus
interest expense, income tax expense (benefit), depreciation,
depletion and amortization, less interest income, and adjusted
for minority interest. EBITDA, as adjusted, is 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, as
adjusted, is not calculated identically by all companies, our
calculation may not be comparable to similarly titled measures
of other companies. |
EBITDA, as adjusted, is calculated as follows (unaudited, in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 14, | |
|
|
|
|
2002 to | |
|
|
Year Ended December 31, | |
|
December 31, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
Net income (loss)
|
|
$ |
21,213 |
|
|
$ |
20,015 |
|
|
$ |
2,262 |
|
|
$ |
(635 |
) |
Interest expense
|
|
|
29,937 |
|
|
|
20,041 |
|
|
|
7,848 |
|
|
|
203 |
|
Interest income
|
|
|
(1,064 |
) |
|
|
(531 |
) |
|
|
(103 |
) |
|
|
(6 |
) |
Income tax expense (benefit)
|
|
|
18,860 |
|
|
|
3,960 |
|
|
|
668 |
|
|
|
(334 |
) |
Depreciation, depletion and amortization
|
|
|
73,405 |
|
|
|
56,012 |
|
|
|
36,054 |
|
|
|
274 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
142,351 |
|
|
|
99,497 |
|
|
|
46,729 |
|
|
|
(498 |
) |
Minority interest
|
|
|
2,846 |
|
|
|
19,830 |
|
|
|
934 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA, as adjusted
|
|
$ |
145,197 |
|
|
$ |
119,327 |
|
|
$ |
47,663 |
|
|
$ |
(498 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
46
|
|
Item 7. |
Managements Discussion and Analysis of Financial
Condition and Results of Operations |
You should read the following discussion and analysis in
conjunction with our financial statements and related notes 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, 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 for periods from
and after the completion of our Internal Restructuring.
Overview
We produce, process and sell steam and metallurgical coal from
eight regional business units, which, as of February 1,
2006, are supported by 44 active underground mines, 25 active
surface mines and 11 preparation plants located throughout
Virginia, West Virginia, Kentucky, and Pennsylvania, as well as
a highway construction business in West Virginia that produces
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 2005 and 2004 accounted for
approximately 63% of our annual coal sales volume, and our sales
of metallurgical coal in 2005 and 2004, which generally sells at
a premium over steam coal, accounted for approximately 37% of
our annual coal sales volume. Our sales of steam coal during
2005 and 2004 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 several countries in Europe,
Asia and South America. Approximately 45% of our sales revenue
in 2005 and 48% of our sales revenue in 2004 was derived from
sales made outside the United States, primarily in Japan,
Canada, Brazil, Korea and several countries in Europe.
In addition, we generate other revenues from equipment and parts
sales, equipment repair, highway 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
highway construction operations. These revenues and costs
included in our Coal Operations segment are reported by us in
our coal revenues and cost of coal sales, except for the
revenues and costs from rentals, commissions, and coal handling
and processing operations, which we report in our other revenues
and cost of other revenues, respectively.
Predecessor and 2003 Acquisitions. On December 13,
2002, we acquired our Predecessor, the majority of the Virginia
coal operations of Pittston Coal Company, from The Brinks
Company (formerly known as The Pittston Company), for
$62.9 million. On January 31, 2003, we acquired
Coastal Coal Company for $67.8 million. In connection with
our acquisition of Coastal Coal Company, we acquired an
overriding royalty interest in certain properties located in
Virginia and West Virginia owned by El Paso CPG Company for
$11.0 million in cash. Effective February 1, 2003, we
sold the overriding royalty interest to affiliates of Natural
Resource Partners, L.P. (NRP) for $11.8 million
in cash. Effective April 1, 2003, we also sold substantially
47
all of our fee-owned Virginia mineral properties to NRP for
approximately $53.6 million in cash in a sale/leaseback
transaction. On March 11, 2003, we acquired AMCI for
$121.3 million and on November 17, 2003, we acquired
the assets of Mears for $38.0 million in cash. We refer to
the acquisitions of Coastal Coal Company, AMCI and Mears,
collectively, as the 2003 Acquisitions.
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 have not incurred
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 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 are payable in five
equal installments on the dates for which estimated income tax
payments are due in each of April 2005, June 2005, September
2005, January 2006 and April 2006. The first four of these
payments were made on April 15, 2005, June 15, 2005,
September 15, 2005 and January 13, 2006, in the amount
of $1.2 million each in cash. The Tax Distributions to
First Reserve Fund IX, L.P. will be paid in three
installments of approximately $2.1 million,
$2.1 million and $0.3 million on December 15,
2007, 2008 and 2009, respectively. We will pay the Tax
Distributions 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 NKCs 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 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.
48
Giving effect to this disposition as if it had occurred on
January 1, 2005, our revenues would have been reduced by
$4.5 million and our net income would have increased by
$0.2 million. We recorded a gain on this sale of
$0.7 million and are reporting NKC as discontinued
operations for all periods presented herein. Our historical
financial statements have been reissued to report the
disposition of NKC as discontinued operations and the components
of the operating results included in discontinued operations are
shown in Note 25 to our consolidated financial statements
included elsewhere in this annual report.
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 to be
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 $39.9 million was paid on
January 13, 2006), a final 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 Energys 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, we entered into a new
$525.0 million credit facility consisting of a $250.0 term
loan facility and a $275.0 revolving credit facility. 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.
|
|
|
Coal Pricing Trends and Uncertainties |
During 2005 and 2004, prices for our coal increased due to a
combination of conditions in the United States and
internationally, including an improving U.S. economy and
robust economic growth in Asia, relatively low customer
stockpiles, limited availability of high-quality coal from
competing producers in Central Appalachia, capacity constraints
of U.S. nuclear-powered electricity generators, high
current and forward prices for natural gas and oil, and
increased international demand for U.S. coal. This strong
coal pricing environment has contributed to our growth in
revenues during 2005 and 2004. 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 strong coal pricing environment will continue. As of
February 22, 2006, approximately 9%, 54% and 75%,
respectively, of our planned production for 2006, 2007 and 2008,
including production from the operations we acquired in the
Nicewonder Acquisition, was uncommitted and was not yet priced.
For the tons for which we have firm commitments in 2006, the
average price for steam coal is $47.16 per ton and the
average price for metallurgical coal is $73.72 per ton.
During 2005 and 2004, we experienced increased costs for
purchased coal which have risen with coal prices generally, and
increased operating costs for steel manufactured equipment and
supplies, employee wages and salaries and contract mining and
trucking. We anticipate that cost pressures will persist in
2006, including higher costs for purchased coal, contractor
mining, trucking and general mining supplies. Variable costs
such as royalties and severance taxes are also expected to rise
in 2006 in parallel with rising sales volumes and prices. We
also experienced disruptions in railroad service beginning in
the second half of 2004 and continuing through 2005, which
caused delays in delivering products to customers and increased
our internal coal handling costs at our operations. We expect
disruptions in railroad service to continue during 2006.
49
Conditions affecting railroad service are subject to factors
beyond our control and we cannot predict whether and for how
long these railroad-related costs will continue to increase in
the future.
We experienced a tight market for supplies of mining and
processing equipment and parts during 2004 and 2005, due to
increased demand by coal producers attempting to increase
production in response to the strong market demand for coal.
Although we are attempting to obtain adequate supplies of mining
and processing equipment and parts to meet our production
forecasts, continued limited availability of equipment and parts
could prevent us from meeting those forecasts. The supply of
mining and processing equipment and parts is subject to factors
beyond our control and we cannot predict whether and for how
long this supply market will remain limited.
We are also experiencing a tight market for skilled mining
employees and certified supervisors, due to increased demand by
coal producers attempting to increase production in response to
the strong market demand for coal, and demographic changes as
existing miners in Appalachia retire at a faster rate than new
miners are added to the Appalachian mining workforce. Although
we have initiated training programs to create new skilled miners
and raise the skill levels of existing miners, continued limited
availability of skilled miners could prevent us from being able
to meet our production and sales forecasts. The supply of
skilled mining employees is subject to factors beyond our
control and we cannot predict whether and for how long this
employee market will remain limited.
Due to Hurricane Katrina, we recorded a net pre-tax charge of
$0.7 million in the third quarter of 2005 for loss of
tonnage at a coal loading facility in New Orleans, representing
the estimated total loss less the portion of the loss expected
to be recovered through insurance claims. Based upon actual
shipping data in the fourth quarter of 2005 and January 2006,
surveys and visual inspections of remaining coal inventory, we
determined that a loss of tonnage did not occur and the charge
taken in the third quarter was reversed in our fourth quarter
results.
For additional information regarding some of the risks and
uncertainties that affect our business, see Item 1A
Risks Factors.
Unaudited Pro Forma Financial Information
The following unaudited pro forma statement of income data for
the years ended December 31, 2005 and 2004 gives effect to
the 2004 Financings, Internal Restructuring, initial public
offering, Nicewonder Acquisition and 2005 Financing as if each
of these transactions described above had occurred on
January 1, 2004 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Revenues
|
|
$ |
1,799,129 |
|
|
|
1,397,315 |
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$ |
22,315 |
|
|
|
15,676 |
|
Loss from discontinued operations
|
|
|
(266 |
) |
|
|
(4,054 |
) |
|
|
|
|
|
|
|
Net income
|
|
$ |
22,049 |
|
|
|
11,622 |
|
|
|
|
|
|
|
|
Pro forma earnings per share data:
|
|
|
|
|
|
|
|
|
Basic and diluted:
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$ |
0.35 |
|
|
|
0.25 |
|
|
Loss from discontinued operations
|
|
|
|
|
|
|
(0.07 |
) |
|
|
|
|
|
|
|
|
Pro Forma net income
|
|
$ |
0.35 |
|
|
|
0.18 |
|
|
|
|
|
|
|
|
|
Pro Forma weighted average shares
|
|
|
63,359,431 |
|
|
|
63,047,913 |
|
|
Pro Forma weighted average diluted
|
|
|
63,895,431 |
|
|
|
63,394,263 |
|
50
|
|
|
Year Ended December 31, 2005 Compared to Year Ended
December 31, 2004 |
For the year ended December 31, 2005, we recorded revenues
of $1,627.3 million compared to $1,252.7 million for
the year ended December 31, 2004, an increase of
$374.6 million over the previous year. Net income increased
from $20.0 million in 2004 to $21.2 million for 2005
and operating income increased $3.0 million to
$72.1 million. Included in our 2005 results were after-tax
stock-based compensation charges of $46.5 million related
to our IPO. Tons sold increased from 25.3 million tons in
2004 to 26.7 million tons in 2005 mainly due to the impact
of the Nicewonder acquisition and the opening of new mines as a
result of our organic growth strategy. Coal margin, which we
define as coal revenues less cost of coal sales, divided by coal
revenues, increased from 14.8% in 2004 to 16.3% in 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
Increase (Decrease) | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
$ or Tons | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except per ton data) | |
Coal revenues
|
|
$ |
1,414,513 |
|
|
$ |
1,079,733 |
|
|
$ |
334,780 |
|
|
|
31 |
% |
Freight and handling revenues
|
|
|
185,555 |
|
|
|
141,100 |
|
|
|
44,455 |
|
|
|
32 |
% |
Other revenues
|
|
|
27,267 |
|
|
|
31,869 |
|
|
|
(4,602 |
) |
|
|
(14 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$ |
1,627,335 |
|
|
$ |
1,252,702 |
|
|
$ |
374,633 |
|
|
|
30 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Tons sold
|
|
|
26,698 |
|
|
|
25,326 |
|
|
|
1,372 |
|
|
|
5 |
% |
Coal sales realization per ton sold
|
|
$ |
52.98 |
|
|
$ |
42.63 |
|
|
$ |
10.35 |
|
|
|
24 |
% |
Coal Revenues. Coal revenues increased for the year ended
December 31, 2005 by $334.8 million or 31%, to
$1,414.5 million, as compared to the year ended
December 31, 2004. This increase was due to a
$10.35 per ton increase in the average sales price of our
coal and the sale of 1.4 million additional tons over the
comparable period last year. The acquisition of the Nicewonder
Coal Group accounted for almost one-half of the increase in tons
sold. The increase in the average sales price of our coal was
due to the general increase in coal prices during the period and
to our ability to take advantage of the exceptionally high
metallurgical coal (met coal) sale prices by processing and
marketing as met coal some coal qualities that would
traditionally have been marketed as steam coal. Met coal prices
increased by $13.06 per ton to $72.24 per ton as steam
coal prices increased by $8.69 per ton to an average of
$41.41 per ton. Our sales mix of met coal and steam coal in
2005 was essentially unchanged from 2004 at 37% and 63%,
respectively. We sold 0.5 million more met tons in 2005
than in the prior year.
Freight and Handling Revenues. Freight and handling
revenues increased to $185.6 million for the year ended
December 31, 2005, an increase of $44.5 million
compared to the year ended December 31, 2004 due to an
increase of 0.3 million tons of export shipments and a
general increase in freight costs. However, 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, 2005 by $4.6 million, or 14%, to
$27.3 million, as compared to the same period for 2004.
Revenues from our Maxxim Rebuild operation decreased by
$4.4 million as that operation has directed more of its
services to our companies and revenues from contract buy-outs
decreased by $4.2 million in the current year. In addition
to these decreases in other revenues, our other revenues in 2004
included a gain of $1.5 million on the partial satisfaction
of our obligation to reclaim certain properties retained by the
seller in the Pittston acquisition. Partially offsetting these
decreases were increases in our coal processing and handling
revenues of $1.9 million and highway construction revenues
in the amount of $3.8 million. The highway construction
revenues began with our acquisition of the Nicewonder Coal
Group. Other revenues attributable to our Coal Operations
segment were $9.9 million in 2005 and $13.8 million in
2004.
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31. | |
|
Increase (Decrease) | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
$ | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except per ton data) | |
Cost of coal sales (exclusive of items shown separately below)
|
|
$ |
1,184,092 |
|
|
$ |
920,359 |
|
|
$ |
263,733 |
|
|
|
29 |
% |
Freight and handling costs
|
|
|
185,555 |
|
|
|
141,100 |
|
|
|
44,455 |
|
|
|
32 |
% |
Cost of other revenues
|
|
|
23,675 |
|
|
|
22,994 |
|
|
|
681 |
|
|
|
3 |
% |
Depreciation, depletion and amortization
|
|
|
73,122 |
|
|
|
55,261 |
|
|
|
17,861 |
|
|
|
32 |
% |
Selling, general and administrative expenses (exclusive of
depreciation and amortization shown separately above)
|
|
|
88,812 |
|
|
|
43,881 |
|
|
|
44,931 |
|
|
|
102 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
$ |
1,555,256 |
|
|
$ |
1,183,595 |
|
|
$ |
371,661 |
|
|
|
31 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of coal sales per ton sold
|
|
$ |
44.35 |
|
|
$ |
36.34 |
|
|
$ |
8.01 |
|
|
|
22 |
% |
Cost of Coal Sales. For the year ended December 31,
2005, our cost of coal sales, which excludes charges for
depreciation, depletion and amortization, increased
$263.7 million, or 29%, to $1,184.1 million compared
to the year ended December 31, 2004. Included in the
increase in costs of $263.7 million was approximately
$20.7 million of cost from our new Callaway business unit.
Our cost of coal sales increased as a result of increased prices
for labor, mine supplies, the performance and cost of contract
mining services, higher prices for purchased coal, and increased
variable sales-related costs, such as royalties and severance
taxes. The average cost per ton sold increased 22% from
$36.34 per ton in 2004 to $44.35 per ton in 2005. Our
cost of coal sales as a percentage of coal revenues decreased
from 85% in 2004 to 84% in 2005. For the years ended
December 31, 2005 and 2004 our average cost per ton for our
produced and processed coal sales was $40.07 and $33.04,
respectively, and our average cost per ton for coal that we
purchased from third parties and resold without processing was
$58.88 and $45.21, respectively.
Freight and Handling Costs. Freight and handling costs
increased $44.5 million to $185.6 million during 2005
as compared to 2004, mainly due to a 0.3 million ton
increase in export shipments where we initially pay the freight
and handling costs and are then reimbursed by the customer as
well as a general increase in freight rates. These costs are
offset by an equivalent amount of freight and handling revenue.
Cost of Other Revenues. Cost of other revenues increased
$0.7 million, or 3%, to $23.7 million for the year
ended December 31, 2005 as compared to the prior year due
to the higher costs associated with our coal processing and
handling operations in the amount of $2.3 million and the
$2.7 million cost attributed to our highway construction
operations acquired from the Nicewonder Coal Operations. These
cost increases were almost offset by a reduction of costs at our
Maxxim Rebuild operations in the amount of $4.4 million.
Depreciation, Depletion and Amortization. Depreciation,
depletion, and amortization increased $17.9 million, or
32%, to $73.1 million for the year ended December 31,
2005 as compared to the same period of 2004 due to capital
additions resulting in additional depreciation and due to the
impact of the Nicewonder Acquisition. Depreciation, depletion
and amortization attributable to our Coal Operations segment
were $70.8 million in 2005 and $51.7 million 2004.
Depreciation, depletion and amortization per ton sold for our
produced and processed coal increased from $2.93 per ton
for the year ended December 31, 2004 to $3.55 per ton
in the same period of 2005.
Selling, General and Administrative Expenses. Selling,
general and administrative expenses increased
$44.9 million, or 102%, to $88.8 million for the year
ended December 31, 2005 compared to the same period in
2004. This increase is mainly attributable to our stock-based
compensation charges in the amount of $46.5 million related
to our IPO. Excluding the stock-based compensation charge of
$46.5 million, our selling, general and administrative
expenses as a percentage of total revenues decreased from 3.5%
in 2004 to 2.6% in 2005.
52
Interest expense increased $9.9 million to
$29.9 million during 2005 compared to 2004. The increase
was mainly due to higher levels of borrowings and higher
variable interest rates in 2005.
Interest income increased from $0.5 million to
$1.1 million as a result of interest received on a note
receivable issued in 2004 and an improved cash management system
that allows us to put excess cash to work in secure cash
equivalents.
Income tax expense from continuing operations increased
$13.8 million to $19.0 million for the year ended
December 31, 2005 as compared to the year ended
December 31, 2004. Our effective tax rates for the year
ended December 31, 2005 and 2004 were 43.8% and 10.2%,
respectively.
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
primarily by the tax benefits associated with percentage
depletion, the extraterritorial income exclusion, reduction in
valuation allowance ($6.1 million), and taxes not being
provided for on the minority interest and pass-through entity
prior to the Internal Restructuring.
The effective tax rate for 2004 is lower than the statutory
federal tax rate primarily due to the Company not being subject
to tax with respect to the portion of our income before taxes
which is attributable to ANR Fund IX Holdings, L. P.s
portion of our earnings and the minority interests share
in the earnings of ANR Holdings prior to the Internal
Restructuring. In addition, income tax expense was further
reduced by the tax benefits associated with percentage depletion
and the extraterritorial income exclusion, partially offset by
state income taxes and the increase in the valuation allowance
of $0.6 million.
|
|
|
Year Ended December 31, 2004 Compared to Year Ended
December 31, 2003 |
For the year ended December 31, 2004, we recorded revenues
of $1,252.7 million compared to $781.8 million for the
year ended December 31, 2003, an increase of
$470.9 million over the previous year. Net income increased
from $2.3 million in 2003 to $20.0 million for 2004
and operating income increased $57.1 million to
$69.1 million. Tons sold increased from 21.6 million
tons in 2003 to 25.3 million tons in 2004 mainly due to the
impact of our 2003 Acquisitions. Coal margin, which we define as
coal revenues less cost of coal sales, divided by coal revenues,
increased from 9.8% in 2003 to 14.8% in 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
Increase (Decrease) | |
|
|
| |
|
| |
|
|
2004 | |
|
2003 | |
|
$ or Tons | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except per ton data) | |
Coal revenues
|
|
$ |
1,079,733 |
|
|
$ |
694,591 |
|
|
$ |
385,142 |
|
|
|
55 |
% |
Freight and handling revenues
|
|
|
141,100 |
|
|
|
73,800 |
|
|
|
67,300 |
|
|
|
91 |
% |
Other revenues
|
|
|
31,869 |
|
|
|
13,458 |
|
|
|
18,411 |
|
|
|
137 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$ |
1,252,702 |
|
|
$ |
781,849 |
|
|
$ |
470,853 |
|
|
|
60 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Tons sold
|
|
|
25,326 |
|
|
|
21,613 |
|
|
|
3,713 |
|
|
|
17 |
% |
Coal sales realization per ton sold
|
|
$ |
42.63 |
|
|
$ |
32.14 |
|
|
$ |
10.49 |
|
|
|
33 |
% |
53
Coal Revenues. Coal revenues increased for the year ended
December 31, 2004 by $385.1 million or 55%, to
$1,079.7 million, as compared to the year ended
December 31, 2003. This increase was due to a
$10.49 per ton increase in the average sales price of our
coal and the sale of 3.7 million additional tons over the
comparable period last year. The increase in the average sales
price of our coal was due to the general increase in coal prices
during the period and to our ability to take advantage of the
exceptionally high metallurgical coal sale prices by processing
and marketing as metallurgical coal some coal qualities that
would traditionally have been marketed as steam coal.
Approximately 63% and 37% of our tons sold during 2004 were
steam coal and metallurgical coal, respectively, as compared to
71% and 29% during the same period in 2003. Our tons sold in
2004 increased by 3.7 million, or 17%, to
25.3 million, primarily due to the effect of our 2003
Acquisitions, which provided approximately 3.4 million
additional tons.
Freight and Handling Revenues. Freight and handling
revenues in 2004 increased $67.3 million from
$73.8 million in 2003 mainly due to an increase in overseas
exports of approximately 3.6 million tons where we paid the
freight and handling costs. 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, 2004 by $18.4 million, or 137%, to
$31.9 million, as compared to the same period for 2003
primarily due to higher equipment and parts sales and equipment
repairs in the amount of $8.4 million, an increase in coal
handling and processing fees of $6.1 million, and higher
sales commissions of $3.4 million. Other revenues for 2004
include a gain of $1.5 million on the partial satisfaction
of an obligation to reclaim certain properties retained by the
seller in the Pittston acquisition. Other revenues attributable
to our Coal Operations segment were $13.8 million in 2004
and $3.4 million in 2003.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
Increase (Decrease) | |
|
|
| |
|
| |
|
|
2004 | |
|
2003 | |
|
$ | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except per ton data) | |
Cost of coal sales (exclusive of items shown separately below)
|
|
$ |
920,359 |
|
|
$ |
626,265 |
|
|
$ |
294,094 |
|
|
|
47 |
% |
Freight and handling costs
|
|
|
141,100 |
|
|
|
73,800 |
|
|
|
67,300 |
|
|
|
91 |
% |
Cost of other revenues
|
|
|
22,994 |
|
|
|
12,488 |
|
|
|
10,506 |
|
|
|
84 |
% |
Depreciation, depletion and amortization
|
|
|
55,261 |
|
|
|
35,385 |
|
|
|
19,876 |
|
|
|
56 |
% |
Selling, general and administrative expenses (exclusive of
depreciation and amortization shown separately above)
|
|
|
43,881 |
|
|
|
21,926 |
|
|
|
21,955 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
$ |
1,183,595 |
|
|
$ |
769,864 |
|
|
$ |
413,731 |
|
|
|
54 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of coal sales per ton sold
|
|
$ |
36.34 |
|
|
$ |
28.98 |
|
|
$ |
7.36 |
|
|
|
25 |
% |
Cost of Coal Sales. For the year ended December 31,
2004, our cost of coal sales, which excludes charges for
depreciation, depletion and amortization and includes gain/loss
on sale of fixed assets, increased $294.1 million, or 47%,
to $920.4 million compared to the year ended
December 31, 2003. Our cost of coal sales increased as a
result of added costs involved in increasing the proportion of
our sales made to the metallurgical markets, such as higher
preparation and trucking costs, increased prices for
steel-related mine supplies, contract mining services, higher
prices for purchased coal, and increased variable sales-related
costs, such as royalties and severance taxes. Approximately
$80.0 million of the increase in the cost of coal sales was
due to the 2003 Acquisitions which provided approximately 87% of
our increase in tons sold. The average cost per ton sold
increased 25% from $28.98 per ton in 2003 to
$36.34 per ton in 2004. Our cost of coal sales as a
percentage of coal revenues decreased from 90% in 2003 to 85% in
2004. For the years ended December 31, 2004 and 2003 our
average cost per ton for our produced and processed coal sales
was $33.04 and $28.34, respectively, and our average cost per
ton for coal that we purchased from third parties and resold
without
54
processing was $45.21 and $31.91, respectively. Cost of coal
sales in 2004 included $2.0 million of incentive bonus
payments and accruals.
Freight and Handling Costs. Freight and handling costs
increased $67.3 million to $141.1 million during 2004
as compared to 2003, mainly due to a 3.6 million ton
increase in overseas export shipments where we paid the freight
and handling costs which we treated as being reimbursed by the
customer. These costs were offset by an equivalent amount of
freight and handling revenue.
Cost of Other Revenues. Cost of other revenues increased
$10.5 million, or 84%, to $23.0 million for the year
ended December 31, 2004 as compared to the prior year due
to higher volumes of equipment and part sales, equipment
repairs, and processing and handling fees. Cost of equipment
sales and repairs increased $7.3 million and processing and
handling costs increased $2.6 million for the year ended
December 31, 2004 as compared to the prior year. The cost
of trucking revenues increased by $0.5 million for 2004 as
compared to the prior year. Cost of other revenues attributable
to our Coal Operations segment were $7.4 million in 2004
and $2.3 million in 2003.
Depreciation, Depletion and Amortization. Depreciation,
depletion, and amortization increased $19.9 million, or
56%, to $55.3 million for the year ended December 31,
2004 as compared to the same period of 2003 due to capital
additions during 2004, resulting in additional depreciation of
approximately $9.1 million. The remaining increase is
attributable to the impact of the 2003 Acquisitions and 2003
capital additions of $27.7 million. Depreciation, depletion
and amortization attributable to our Coal Operations segment
were $51.7 million in 2004 and $32.4 million 2003.
Depreciation, depletion and amortization per produced and
processed ton sold increased from $2.00 per ton for the
year ended December 31, 2003 to $2.93 per ton in the
same period of 2004.
Selling, General and Administrative Expenses. Selling,
general and administrative expenses increased
$21.9 million, or 100%, to $43.9 million for the year
ended December 31, 2004 compared to the same period in
2003. The increase is attributed to higher staffing levels and
resulting salaries, wages and benefits of approximately
$4.7 million, increased incentive bonus payments and
accruals in the amount of $6.0 million, coal contract
buyouts of $3.3 million, increased professional fees of
approximately $3.2 million including $1.7 million
incurred in documenting, assessing, and improving our controls
and procedures due to the requirements of the Sarbanes-Oxley Act
of 2002, and a net increase in all other sales, general and
administrative expenses of approximately $4.7 million. Our
selling, general and administrative expenses as a percentage of
total revenues increased from 2.8% in 2003 to 3.5% in 2004.
Interest expense increased $12.2 million to
$20.0 million during 2004 compared to 2003. The increase
was mainly due to the additional interest expense of
$10.8 million related to our 10% senior notes issued
in May 2004 and the write-off of deferred financing costs of
$2.8 million related to our previous credit facility.
Interest income increased from $0.1 million to
$0.5 million as a result of interest received on notes
receivable issued in 2004.
Income tax expense increased $4.3 million to
$5.2 million for the year ended December 31, 2004 as
compared to the year ended December 31, 2003. Our effective
tax rates from continuing operations for the year ended
December 31, 2004 and 2003 were 10.2% and 18.7%,
respectively. The effective tax rates are lower than the
statutory tax rate since we are not subject to tax with respect
to the portion of our income before taxes which is attributable
to ANR Fund IX Holdings, L.P.s portion of our
earnings and the minority interests share in the earnings
of ANR Holdings. In addition, our taxable income is reduced by
percentage depletion allowances (computed as a percentage of
coal revenue, subject to certain income limitations) and the
extraterritorial income exclusion (ETI) deduction (computed
as a percentage of exported coal revenue,
55
subject to certain income limitations) which reduces our
effective tax rates. These reductions in our effective tax rates
are offset by the effect of increases in our valuation allowance
for deferred tax assets of $0.6 million and
$0.8 million recorded in the year ended December 31,
2004 and 2003, respectively. The reduction in our effective tax
rate in 2004 compared to 2003 is due primarily to the ETI
deduction in 2004 generated from significant export coal
revenue, a lower valuation allowance as a percentage of pre-tax
income in 2004, and a larger percentage of minority interest in
2004 which has no income tax provision.
Liquidity and Capital Resources
Our primary liquidity and capital resource requirements are to
finance the cost of our coal production and purchases, to make
capital expenditures, pay income taxes, and to service our debt
and reclamation obligations. Our primary sources of liquidity
are cash flow from sales of our produced and purchased coal,
other income and borrowings under our senior credit facility.
At December 31, 2005, our available liquidity was
$249.1 million, including cash and cash equivalents of
$39.6 million and $209.5 million available under our
credit facility. Our total indebtedness was $485.8 million
at December 31, 2005, an increase of $284.1 million
from the year ended December 31, 2004. As previously
discussed, on October 26, 2005, we closed our 2005
Financing.
Our cash capital spending for the year ended December 31,
2005 was $122.3 million, and we expect to spend from
$140.0 million to $150.0 million in cash capital
spending in 2006. These expenditures have been and will be used
to develop new mines and replace or add equipment. Based on the
terms of our outstanding capital lease obligations and
indebtedness as of December 31, 2005, projected 2006
payments of principal on capital lease obligations and
indebtedness, including repayment of the final installment due
on the promissory notes issued to the sellers in connection with
the Nicewonder Acquisition, are $62.3 million in the
aggregate, of which $46.2 million is payable in the first
quarter of 2006, $5.9 million is payable in each of the two
succeeding quarters and the balance is payable in the fourth
quarter. Based on our projection of cash to be generated from
operations in 2006 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 2006.
Net cash provided by operations in 2005 was $149.6 million,
an increase of $42.9 million from the $106.8 million
of net cash provided by operations during 2004. An increase in
our net income and an increase in our non-cash charges (mainly
due to our stock-based compensation) provided more cash in 2005
than the comparable period in 2004 in the amount of
$38.9 million and a decrease in our net investment in
operating assets and liabilities contributed $4.0 million
to our operating cash flow increase this year.
Net cash used in investing activities consumed
$253.2 million more cash in 2005 over the year ago period
mainly due to the Nicewonder Coal Group acquisition
($220.9 million) and an increase in capital expenditures in
the amount of $50.3 million.
Net cash provided by financing activities increased by
$246.4 million to $222.0 million in the year ended
December 31, 2005 over the year ended December 31,
2004. During the year ended December 31, 2004, we
recapitalized our company by issuing $175.0 million of
10% senior notes and entered into a new credit facility. We
used the proceeds to repay our then existing credit facility and
to pay distributions to the members of ANR Holdings, LLC. Net
cash used by financing activities was $24.4 million during
2004. In the year ended December 31, 2005, we completed our
previously discussed Internal Restructuring, IPO and 2005
Financing. The proceeds from the IPO were used to repay
shareholders notes issued as part of the Internal
Restructuring. The proceeds from the new credit facility we
entered into in connection with the 2005 Financing were used to
repay the 2004 credit facility and to finance the Nicewonder
Coal Group acquisition. Our long-term debt increased
approximately $126.7 million during 2005 and has been used
to fund our cash needs for the purchase of capital equipment and
the Nicewonder acquisition.
56
Cash provided by operating activities was $106.8 million
for the year ended December 31, 2004, an increase of
$52.7 million from the same period in 2003. Cash provided
by operations for 2004 benefited from the effects of our 2003
Acquisitions and the strength of the coal markets during the
period. This increase is attributable to an increase in net
income of $17.7 million for 2004 over 2003, an increase in
non-cash charges included in net income of $49.9 million
and partially offset by the effects of a $15.0 million
increase in net operating assets and liabilities.
Net cash used in investing activities was $86.2 million
during the year ended December 31, 2004, $13.9 million
less than the same period of 2003. Capital expenditures
increased $44.3 million, to $72.0 million during 2004.
The increase in capital expenditures was primarily due to the
replacement of equipment, new mine development and upgrades to a
preparation plant. In the second quarter of 2003, we sold our
interest in certain coal properties acquired in the purchase of
our Predecessor, and a royalty interest acquired in our Coastal
Coal Company acquisition for cash of $65.2 million. We also
paid $133.8 million for the Coastal Coal Company,
U.S. AMCI and Mears acquisitions in 2003. As part of a coal
supply agreement, we loaned an unrelated coal supplier
$10.0 million in June 2004 at a variable rate to be repaid
in installments over a two-year period beginning in August 2004.
The loan is secured by the assets of the debtor and personally
guaranteed by the debtors owner. The related coal supply
agreement with the debtor has provided us with approximately
27,000 tons of coal per month through December 31, 2005. In
September 2004, we also acquired an equity interest for a
subscription price of $6.5 million in a company which is
developing a mining property in Venezuela. Payments totaling
$4.5 million were made during the year ended
December 31, 2004.
Net cash used in financing activities during the year ended
December 31, 2004 was $24.4 million compared with net
cash provided by financing activities of $48.8 million in
the prior year. Net cash used by financing activities included
the net proceeds of $171.5 million received as a result of
the issuance of our $175 million 10% senior notes in
May 2004 offset by distributions made to our equity owners of
$115.6 million, the repayment of bank and other debt in the
amount of $75.8 million, $10.5 million paid for debt
issuance costs and $1.7 million for deferred stock offering
costs during the year ended December 31, 2004. We received
$18.3 million in capital contributions and
$20.0 million in advances from affiliates during the year
ended December 31, 2003. In addition, we incurred bank and
other debt in the net amount of $12.9 million during the
year ended December 31, 2003.
|
|
|
Credit Facility and Long-term Debt |
As of December 31, 2005, our total long-term indebtedness,
including capital lease obligations, consisted of the following
(in thousands):
|
|
|
|
|
|
|
|
December 31, | |
|
|
2005 | |
|
|
| |
10% Senior notes due 2012
|
|
$ |
175,000 |
|
Term Loan B
|
|
|
250,000 |
|
Variable rate term notes
|
|
|
293 |
|
Capital lease obligation
|
|
|
1,496 |
|
|
|
|
|
|
Total long-term debt
|
|
|
426,789 |
|
Less current portion
|
|
|
(3,242 |
) |
|
|
|
|
|
Long-term debt, net of current portion
|
|
$ |
423,547 |
|
|
|
|
|
Our current credit facility and the indenture governing the
senior notes each impose certain restrictions on our
subsidiaries, including restrictions on our subsidiaries
ability to: incur debt; grant liens; enter into agreements with
negative pledge clauses; provide guarantees in respect of
obligations of any other person; pay dividends and make other
distributions; make loans, investments, advances and
acquisitions; sell assets; make redemptions and repurchases of
capital stock; make capital expenditures; prepay, redeem or
repurchase debt; liquidate or dissolve; engage in mergers or
consolidations; engage in affiliate transactions; change
businesses; change our fiscal year; amend certain debt and other
material agreements; issue and sell capital stock of
57
subsidiaries; engage in sale and leaseback transactions; and
restrict distributions from subsidiaries. In addition, our
current credit facility provides that we must meet or exceed
certain interest coverage ratios and must not exceed certain
leverage ratios.
Borrowings under our current 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
Alpha NR Holding, Inc. 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 Alpha NR Holding, Inc. and
its subsidiaries from the issuance of debt securities or other
incurrence of debt, excluding certain indebtedness.
As a regular part of our business, we review opportunities for,
and engage in discussions and negotiations concerning, the
acquisition of coal mining assets and interests in coal mining
companies, and acquisitions of, or combinations with, coal
mining companies. When we believe that these opportunities are
consistent with our growth plans and our acquisition criteria,
we will make bids or proposals and/or enter into letters of
intent and other similar agreements, which may be binding or
nonbinding, that are customarily subject to a variety of
conditions and usually permit us to terminate the discussions
and any related agreement if, among other things, we are not
satisfied with the results of our due diligence investigation.
Any acquisition opportunities we pursue could materially affect
our liquidity and capital resources and may require us to incur
indebtedness, seek equity capital or both. There can be no
assurance that additional financing will be available on terms
acceptable to us, or at all.
|
|
|
Analysis of Material Debt Covenants |
We were in compliance with all covenants under our current
credit facility and the indenture governing our senior notes as
of December 31, 2005.
The financial covenants in our current credit facility require,
among other things, that:
|
|
|
|
|
Alpha NR Holding Inc. must maintain a leverage ratio, defined as
the ratio of consolidated adjusted debt (consolidated debt less
unrestricted cash and cash equivalents) to Adjusted EBITDA (as
defined in the new credit agreement), of not more than 4.00 at
December 31, 2005, March 31, June 30,
September 30 and December 31, 2006, 3.75 at
March 31, June 30, September 30 and
December 31, 2007, and 3.50 at March 31, 2008 and each
quarter end thereafter, with Adjusted EBITDA being computed
using the most recent four quarters; and |
|
|
|
Alpha NR Holding Inc. must maintain an interest coverage ratio,
defined as the ratio of Adjusted EBITDA to cash interest
expense, of 2.50 or greater on the last day of any fiscal
quarter. |
Based upon Adjusted EBITDA (as defined in our current credit
agreement), Alpha NR Holding Inc.s leverage ratio and
interest coverage ratio (as such ratios are defined in the
credit agreement) at December 31, 2005 were 1.85 and 8.12,
respectively. Adjusted EBITDA is used in our current credit
facility to determine compliance with many of the covenants
under the facility. 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 our indenture.
Adjusted EBITDA is defined in our current credit facility 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
58
EBITDA applied in presenting Adjusted EBITDA is appropriate to
provide additional information to investors to demonstrate
compliance with our financial covenants.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
Three Months | |
|
Three Months | |
|
Three Months | |
|
Twelve Months | |
|
|
Ended | |
|
Ended | |
|
Ended | |
|
Ended | |
|
Ended | |
|
|
March 31, | |
|
June 30, | |
|
September 30, | |
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2005 | |
|
2005 | |
|
2005 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Net Income
|
|
$ |
(25,429 |
) |
|
$ |
26,019 |
|
|
$ |
8,210 |
|
|
$ |
12,413 |
|
|
$ |
21,213 |
|
Interest expense, net
|
|
|
5,533 |
|
|
|
6,456 |
|
|
|
6,439 |
|
|
|
10,155 |
|
|
|
28,583 |
|
Income tax expense
|
|
|
2,457 |
|
|
|
9,050 |
|
|
|
3,542 |
|
|
|
3,812 |
|
|
|
18,861 |
|
Depreciation, depletion, and amortization
|
|
|
14,480 |
|
|
|
15,048 |
|
|
|
16,277 |
|
|
|
27,600 |
|
|
|
73,405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
(2,959 |
) |
|
|
56,573 |
|
|
|
34,468 |
|
|
|
53,980 |
|
|
|
142,062 |
|
Minority interest(1)
|
|
|
2,846 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,846 |
|
Other allowable adjustments
|
|
|
|
|
|
|
683 |
|
|
|
|
|
|
|
452 |
|
|
|
1,135 |
|
Accretion expense
|
|
|
878 |
|
|
|
878 |
|
|
|
878 |
|
|
|
880 |
|
|
|
3,514 |
|
Amortization of deferred gains
|
|
|
(358 |
) |
|
|
(358 |
) |
|
|
(358 |
) |
|
|
(402 |
) |
|
|
(1,476 |
) |
Nicewonder EBITDA
|
|
|
16,509 |
|
|
|
16,509 |
|
|
|
18,581 |
|
|
|
4,832 |
|
|
|
56,431 |
|
Stock-based compensation charge
|
|
|
36,407 |
|
|
|
3,381 |
|
|
|
3,381 |
|
|
|
3,350 |
|
|
|
46,519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$ |
53,323 |
|
|
$ |
77,666 |
|
|
$ |
56,950 |
|
|
$ |
63,092 |
|
|
$ |
251,031 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage ratio(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.85 |
|
Interest coverage ratio(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.12 |
|
|
|
(1) |
Because our credit facility and our senior notes are issued by
our subsidiaries, we are required to adjust our EBITDA for our
minority interest which does not exist at the subsidiary level. |
|
(2) |
Leverage ratio is defined in our credit facility as total debt
divided by adjusted EBITDA. |
|
(3) |
Interest coverage ratio is defined in our credit facility as
adjusted EBITDA divided by cash interest expense. |
Contractual Obligations
The following is a summary of our significant contractual
obligations as of December 31, 2005 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2007-2008 | |
|
2009-2010 | |
|
After 2010 | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Long-term debt and capital leases(1)
|
|
$ |
3,242 |
|
|
$ |
5,816 |
|
|
$ |
5,231 |
|
|
$ |
412,500 |
|
|
$ |
426,789 |
|
Equipment purchase commitments
|
|
|
64,342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64,342 |
|
Operating leases
|
|
|
5,099 |
|
|
|
4,668 |
|
|
|
1,590 |
|
|
|
7,284 |
|
|
|
18,641 |
|
Minimum royalties
|
|
|
10,388 |
|
|
|
18,821 |
|
|
|
16,650 |
|
|
|
27,859 |
|
|
|
73,718 |
|
Coal purchase commitments
|
|
|
258,490 |
|
|
|
27,420 |
|
|
|
|
|
|
|
|
|
|
|
285,910 |
|
Coal contract buyout
|
|
|
680 |
|
|
|
1,360 |
|
|
|
1,247 |
|
|
|
|
|
|
|
3,287 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
342,241 |
|
|
$ |
58,085 |
|
|
$ |
24,718 |
|
|
$ |
447,643 |
|
|
$ |
872,687 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Long-term debt and capital leases include principal amounts due
in the years shown. Interest payable on these obligations,
assuming a rate of 8.0% on our variable rate loan, would be
approximately $37.6 million in 2006, $74.3 million in
2007 to 2008, $73.4 million in 2009 to 2010, and
$62.4 million after 2010. |
59
Additionally, we have long-term liabilities relating to mine
reclamation and
end-of-mine closure
costs, workers compensation benefits and all of our
operating and management-services subsidiaries have long-term
liabilities relating to retiree health care (postretirement
benefits). The table below reflects the estimated payments for
these obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within | |
|
|
|
|
|
|
|
|
|
|
1 Year | |
|
2-3 Years | |
|
4-5 Years | |
|
After 5 Years | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Reclamation
|
|
$ |
7,190 |
|
|
$ |
9,873 |
|
|
$ |
12,865 |
|
|
$ |
45,895 |
|
|
$ |
75,823 |
|
Postretirement
|
|
|
115 |
|
|
|
711 |
|
|
|
2,707 |
|
|
|
283,833 |
|
|
|
287,366 |
|
Workers compensation benefits
|
|
|
1,019 |
|
|
|
875 |
|
|
|
309 |
|
|
|
4,717 |
|
|
|
6,920 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
8,324 |
|
|
$ |
11,459 |
|
|
$ |
15,881 |
|
|
$ |
334,445 |
|
|
$ |
370,109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. Under our
$150.0 million committed bonding facility, we are required
to provide bank letters of credit in an amount up to 50% of the
aggregate bond liability. Recently, 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, 2005, we had outstanding surety bonds
with third parties for post-mining reclamation totaling
$116.7 million plus $8.3 million for miscellaneous
purposes. We maintained letters of credit as of
December 31, 2005 totaling $65.5 million to secure
reclamation and other obligations.
In connection with our acquisition of Coastal Coal Company, the
seller, El Paso CGP Company, agreed to retain and indemnify
us 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 us, then we would be liable for the payment
of those claims, which were estimated in April 2004 to be
approximately $5.4 million on an undiscounted basis using
claims data through June 2003. El Paso CGP Company has
posted a bond with the state of West Virginia for the required
discounted amount of $3.7 million for claims incurred prior
to the acquisition.
Outlook
While our business is subject the general risks of the coal
industry and specific individual risks, we believe that the
outlook for coal markets remains positive worldwide, assuming
continued growth in the U.S., China, Pacific Rim, Europe and
other industrialized economies that are increasing coal demand
for electricity generation and steelmaking. Published indices
show improved year-over- year coal prices in most U.S. and
global coal markets, and worldwide coal supply/demand
fundamentals remain tight due to high market demand,
transportation constraints and production difficulties in most
countries. Metallurgical coal is
60
generally selling at a significant premium to steam coal, and we
expect that pricing relationship to continue based on the same
assumptions made above.
For 2006, we are targeting annual production of 24 million
to 25 million tons and total sales volume of
28 million to 30 million tons. Approximately 91%, 46%
and 25% of our planned production in 2006, 2007 and 2008,
respectively, has been priced as of February 22, 2006.
We anticipate continued challenges with railroad service,
hopefully with gradual improvement in rail service beginning in
the second half of 2006. We are working with our customers and
the railroads in an effort to address these issues in a timely
manner.
Based on current market conditions in the steam and
metallurgical coal markets, we anticipate increasing the
proportion of our metallurgical coal sales that are committed
under long-term contracts as compared to prior years and
continuing to market portions of our high quality steam coal
production as metallurgical coal. We plan to focus on organic
growth by continuing to develop our existing reserves. In
addition, we also plan to evaluate attractively priced
acquisitions that create potential synergies with our existing
operations.
We will record a charge in the amount of $3.2 million in
each quarter during 2006, as the result of stock-based
compensation related to our IPO. See
Overview Internal Restructuring
and Our Initial Public Offering. See Item 1A
Risks Factors for a discussion of other factors that
could affect us in the future.
Critical Accounting Estimates and Assumptions
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.
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 No. 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 No. 143 requires that asset
retirement obligations be recorded at fair value. In accordance
with the provisions of SFAS No. 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 No. 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 |
61
|
|
|
|
|
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, 2005, we had recorded asset retirement
obligation liabilities of $53.5 million, including amounts
reported as current. While the precise amount of these future
costs cannot be determined with certainty, as of
December 31, 2005, we estimate that the aggregate
undiscounted cost of final mine closure is approximately
$75.8 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.
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 assumption
reflects the rates available on high quality fixed income debt
instruments. The discount rate used to determine the net
periodic benefit cost for postretirement benefits other than
pensions was 5.75% for the year ended December 31, 2005 and
6.25% for the year ended December 31, 2004. We make
assumptions related to future trends for medical care costs in
the estimates of retiree health care and work-related injury and
illness obligations. If our assumptions do not materialize as
expected, actual cash expenditures and costs that we incur could
differ materially from our current estimates. Moreover,
regulatory changes could increase our requirement to satisfy
these or additional obligations. Below we have provided two
sensitivity analyses to demonstrate the significance of these
assumptions in relation to reported amounts.
Health care cost trend rate (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
One-Percentage- | |
|
One-Percentage- | |
|
|
Point Increase | |
|
Point Decrease | |
|
|
| |
|
| |
Effect on total service and interest cost components
|
|
$ |
97 |
|
|
$ |
(60 |
) |
Effect on accumulated postretirement benefit obligation
|
|
|
959 |
|
|
|
(740 |
) |
Discount rate (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
One Half- | |
|
One Half- | |
|
|
Percentage- | |
|
Percentage- | |
|
|
Point Increase | |
|
Point Decrease | |
|
|
| |
|
| |
Effect on total service and interest cost components
|
|
$ |
(367 |
) |
|
$ |
384 |
|
Effect on accumulated postretirement benefit obligation
|
|
|
(4,350 |
) |
|
|
4,813 |
|
62
Effective July 1, 2004, we began offering postretirement
medical benefits to active, union-free employees that will
provide a credit equal to $20 per month per year of service
for pre-65 year-old retirees, and $9 per month per
year of service for
post-65-year old
retirees toward the purchase of medical benefits (as defined)
from us. This new plan resulted in prior service cost of
$27.1 million which will be amortized over the remaining
service lives of the union-free employees. This amortization of
prior service cost is expected to be approximately
$2.8 million per year. We recorded $8.0 million in
costs with respect to this new plan in 2005, consisting of
service cost, amortization of prior service cost and interest
cost.
Effective April 1, 2005 and October 3, 2005, our 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
$6.2 million. In addition, on October 26, 2005 upon
the acquisition of the Nicewonder Coal Group, we granted the
acquired employees up to ten years of credited service under our
plan resulting in an estimated $2.0 million of prior
service cost.
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,
participation in a state run 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.
Coal Workers Pneumoconiosis. We are responsible
under various federal statutes, including the Coal Mine Health
and Safety Act of 1969, and various states statutes, for
the payment of medical and disability benefits to eligible
employees resulting from occurrences of coal workers
pneumoconiosis disease (black lung). Our operations are covered
through a combination of a self-insurance program, in which we
are a participant in a state run 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.
Income Taxes. We account for income taxes in accordance
with SFAS No. 109, Accounting for Income
Taxes, 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 No. 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 take 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. If historical earnings, future sales commitments, and
expected future earnings and tax planning strategies support
additional utilization of deferred tax assets than previously
recorded, we may record a change to the valuation allowance
through income tax expense in the period the determination is
made.
Changes in the valuation allowance due to increases in the tax
basis of assets caused by transactions between us and our
stockholders (the 2005 Internal Restructuring) are charged to
additional paid-in capital, and not income tax expense, in the
calendar year that the transaction occurred. Adjustments to the
valuation allowance in subsequent years are charged
(credited) to income tax expense.
63
New Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board
issued SFAS No. 123(R), Share-Based Payment,
which requires companies to expense the fair value of equity
awards over the required service period. This Statement is a
revision of SFAS No. 123, Accounting for
Stock Based Compensation.
SFAS No. 123(R) supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees, which uses the
intrinsic value method to value stock-based compensation. On
April 14, 2005, the Securities and Exchange Commission
adopted a new rule that amends the effective date of
SFAS No. 123(R) to allow registrants to implement
SFAS No. 123(R) as of the beginning of the first
annual reporting period that begins after June 15, 2005. We
adopted SFAS No. 123(R) effective January 1, 2006
and used the modified prospective method, in which compensation
cost is recognized beginning with the effective date based on
the requirements of SFAS No. 123(R) for all
share-based payments granted after the effective date and based
on the requirements of SFAS No. 123 for all awards
granted to employees prior to the effective date of
SFAS No. 123(R) that remain unvested on the effective
date. The expected impact of applying the modified prospective
method to unvested options as of January 1, 2006 is an
increase to pre-tax expense of approximately $1.3 million
for the year ended December 31, 2006. Such amount could
vary depending on the level of forfeitures that occur or other
circumstances. We currently anticipate utilizing restricted
stock for equity-based compensation in 2006 instead of stock
option grants. Accounting for restricted stock awards is not
impacted by SFAS No. 123(R),
In March 2005, the Emerging Issues Task Force issued EITF Issue
No. 04-6, Accounting for Stripping Costs in the
Mining Industry, which states that stripping costs
incurred during the production phase of a mine are variable
production costs that should be included in the costs of the
inventory produced during the period that the stripping costs
are incurred. EITF Issue No. 04-6 is effective for
the first reporting period in fiscal years beginning after
December 15, 2005. Our existing accounting practices are
consistent with EITF Issue No. 04-06, therefore this
pronouncement will not effect our results of operations or
financial condition.
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 cash flow and profits have been, and may
continue to be, negatively impacted. Lower than expected sales
by us during this period could have a material adverse effect on
the timing of our cash flows and therefore our ability to
service our obligations with respect to our existing and future
indebtedness.
|
|
Item 7A. |
Quantitative and Qualitative Discussions about Market
Risk |
In addition to risks inherent in operations, we are exposed to
market risks. The following discussion provides additional
detail regarding our exposure to the risks of changing coal
prices, interest rates and customer credit.
We are exposed to market price risk in the normal course of
selling coal. As of February 22, 2006, approximately 9%,
54% and 75% of our estimated 2006, 2007 and 2008 production
tonnage, respectively, was uncommitted. We have increased the
proportion of our planned future production for which we have
contracts to sell coal, which has the effect of lessening our
market price risk.
All of our borrowings under the revolving credit facility are at
a variable rate, so we are exposed to rising interest rates in
the United States. A one percentage point increase in interest
rates would result in an annualized increase to interest expense
of $2.5 million based on our variable rate borrowings as of
December 31, 2005.
Our concentration of credit risk is substantially with electric
utilities, producers of steel and foreign customers. Our policy
is to independently evaluate a customers creditworthiness
prior to entering into transactions and to periodically monitor
the credit extended.
64
|
|
Item 8. |
Financial Statements and Supplementary Data |
Report of Independent Registered Public Accounting
Firm
The Board of Directors
Alpha Natural Resources, Inc.:
We have audited the accompanying consolidated balance sheets of
Alpha Natural Resources, Inc. and subsidiaries as of
December 31, 2005 and 2004, and the related consolidated
statements of income, stockholders equity and
partners capital, and cash flows for each of the years in
the three-year period ended December 31, 2005. These
consolidated financial statements are the responsibility of the
Companys 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, 2005 and 2004, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2005, in conformity
with U.S. generally accepted accounting principles.
Roanoke, VA
March 28, 2006
65
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In thousands) | |
ASSETS |
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
39,622 |
|
|
$ |
7,391 |
|
|
Trade accounts receivable, net
|
|
|
147,961 |
|
|
|
95,828 |
|
|
Notes and other receivables
|
|
|
10,330 |
|
|
|
10,835 |
|
|
Inventories
|
|
|
84,885 |
|
|
|
54,569 |
|
|
Due from affiliate
|
|
|
|
|
|
|
323 |
|
|
Deferred income taxes
|
|
|
|
|
|
|
4,674 |
|
|
Prepaid expenses and other current assets
|
|
|
36,117 |
|
|
|
28,915 |
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
318,915 |
|
|
|
202,535 |
|
Property, plant, and equipment, net
|
|
|
582,750 |
|
|
|
217,964 |
|
Goodwill
|
|
|
18,641 |
|
|
|
18,641 |
|
Other intangibles, net
|
|
|
11,014 |
|
|
|
1,155 |
|
Deferred income taxes
|
|
|
38,967 |
|
|
|
|
|
Other assets
|
|
|
43,371 |
|
|
|
36,826 |
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
1,013,658 |
|
|
$ |
477,121 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY AND PARTNERS
CAPITAL |
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$ |
3,242 |
|
|
$ |
1,693 |
|
|
Notes payable
|
|
|
59,014 |
|
|
|
15,228 |
|
|
Bank overdraft
|
|
|
17,065 |
|
|
|
10,024 |
|
|
Trade accounts payable
|
|
|
99,746 |
|
|
|
51,050 |
|
|
Deferred income taxes
|
|
|
11,243 |
|
|
|
|
|
|
Accrued expenses and other current liabilities
|
|
|
93,531 |
|
|
|
68,283 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
283,841 |
|
|
|
146,278 |
|
Long-term debt, net of current portion
|
|
|
423,547 |
|
|
|
184,784 |
|
Workers compensation benefits
|
|
|
5,901 |
|
|
|
4,678 |
|
Postretirement medical benefits
|
|
|
24,461 |
|
|
|
15,637 |
|
Asset retirement obligation
|
|
|
46,296 |
|
|
|
32,888 |
|
Deferred gains on sale of property interests
|
|
|
5,762 |
|
|
|
5,516 |
|
Deferred income taxes
|
|
|
|
|
|
|
7,718 |
|
Other liabilities
|
|
|
11,085 |
|
|
|
4,911 |
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
800,893 |
|
|
|
402,410 |
|
|
|
|
|
|
|
|
Minority interest
|
|
|
|
|
|
|
28,778 |
|
|
|
|
|
|
|
|
Stockholders equity and partners capital:
|
|
|
|
|
|
|
|
|
Alpha Natural Resources, Inc.:
|
|
|
|
|
|
|
|
|
|
Preferred stock par value $0.01,
10,000,000 shares authorized, none issued
|
|
|
|
|
|
|
|
|
|
Common stock par value $0.01,
100,000,000 shares authorized, 64,420,414 shares
issued and outstanding
|
|
|
644 |
|
|
|
|
|
|
Additional paid-in capital
|
|
|
209,210 |
|
|
|
|
|
|
Unearned stock-based compensation
|
|
|
(15,602 |
) |
|
|
|
|
|
Retained earnings
|
|
|
18,513 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Alpha Natural Resources, Inc. stockholders equity
|
|
|
212,765 |
|
|
|
|
|
Alpha NR Holding, Inc.:
|
|
|
|
|
|
|
|
|
|
Preferred stock par value $0.01, 1,000 shares
authorized, none issued
|
|
|
|
|
|
|
|
|
|
Common stock par value $0.01, 1,000 shares
authorized, 100 shares issued and outstanding
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
|
|
|
|
22,153 |
|
|
Retained earnings
|
|
|
|
|
|
|
18,828 |
|
|
|
|
|
|
|
|
|
|
Total Alpha NR Holding, Inc. stockholders equity
|
|
|
|
|
|
|
40,981 |
|
Alpha Fund IX Holdings, L.P.:
|
|
|
|
|
|
|
|
|
|
Partners capital
|
|
|
|
|
|
|
4,952 |
|
|
|
|
|
|
|
|
|
|
Total stockholders equity and partners capital
|
|
|
212,765 |
|
|
|
45,933 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity and
partners capital
|
|
$ |
1,013,658 |
|
|
$ |
477,121 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
66
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands, except per share amounts) | |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coal revenues
|
|
$ |
1,414,513 |
|
|
$ |
1,079,733 |
|
|
$ |
694,591 |
|
|
Freight and handling revenues
|
|
|
185,555 |
|
|
|
141,100 |
|
|
|
73,800 |
|
|
Other revenues
|
|
|
27,267 |
|
|
|
31,869 |
|
|
|
13,458 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,627,335 |
|
|
|
1,252,702 |
|
|
|
781,849 |
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of coal sales (exclusive of items shown separately below)
|
|
|
1,184,092 |
|
|
|
920,359 |
|
|
|
626,265 |
|
|
Freight and handling costs
|
|
|
185,555 |
|
|
|
141,100 |
|
|
|
73,800 |
|
|
Cost of other revenues
|
|
|
23,675 |
|
|
|
22,994 |
|
|
|
12,488 |
|
|
Depreciation, depletion and amortization
|
|
|
73,122 |
|
|
|
55,261 |
|
|
|
35,385 |
|
|
Selling, general and administrative expenses (exclusive of
depreciation and amortization shown separately above)
|
|
|
88,812 |
|
|
|
43,881 |
|
|
|
21,926 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
1,555,256 |
|
|
|
1,183,595 |
|
|
|
769,864 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
72,079 |
|
|
|
69,107 |
|
|
|
11,985 |
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(29,937 |
) |
|
|
(20,041 |
) |
|
|
(7,848 |
) |
|
Interest income
|
|
|
1,064 |
|
|
|
531 |
|
|
|
103 |
|
|
Miscellaneous income
|
|
|
91 |
|
|
|
722 |
|
|
|
574 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net
|
|
|
(28,782 |
) |
|
|
(18,788 |
) |
|
|
(7,171 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes and
minority interest
|
|
|
43,297 |
|
|
|
50,319 |
|
|
|
4,814 |
|
Income tax expense
|
|
|
18,953 |
|
|
|
5,150 |
|
|
|
898 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest
|
|
|
24,344 |
|
|
|
45,169 |
|
|
|
3,916 |
|
Minority interest
|
|
|
2,918 |
|
|
|
22,781 |
|
|
|
1,164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
21,426 |
|
|
|
22,388 |
|
|
|
2,752 |
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations (Note 25):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations before income taxes and
minority interest
|
|
|
(378 |
) |
|
|
(6,514 |
) |
|
|
(950 |
) |
|
|
Income tax benefit
|
|
|
(93 |
) |
|
|
(1,190 |
) |
|
|
(230 |
) |
|
|
Minority interest
|
|
|
(72 |
) |
|
|
(2,951 |
) |
|
|
(230 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
|
(213 |
) |
|
|
(2,373 |
) |
|
|
(490 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
21,213 |
|
|
$ |
20,015 |
|
|
$ |
2,262 |
|
|
|
|
|
|
|
|
|
|
|
Net income per share, as adjusted (Note 4):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$ |
0.38 |
|
|
$ |
1.52 |
|
|
$ |
0.19 |
|
|
|
Loss from discontinued operations
|
|
|
|
|
|
|
(0.16 |
) |
|
|
(0.04 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net income, as adjusted
|
|
$ |
0.38 |
|
|
$ |
1.36 |
|
|
$ |
0.15 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
67
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND
PARTNERS CAPITAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ANR Fund IX | |
|
|
|
|
Alpha Natural Resources, Inc. | |
|
Alpha NR Holding, Inc. | |
|
Holdings, L.P. | |
|
|
|
|
| |
|
| |
|
| |
|
Total | |
|
|
|
|
|
|
|
|
Retained | |
|
|
|
|
|
Stockholders | |
|
|
Common Stock | |
|
Additional | |
|
Unearned |
|
|
|
Total | |
|
|
|
Additional | |
|
Earnings | |
|
Total | |
|
|
|
Equity and | |
|
|
| |
|
Paid-In | |
|
Stock-Based |
|
Retained |
|
Stockholders | |
|
Common |
|
Paid-In | |
|
(Accumulated | |
|
Stockholders | |
|
Partners | |
|
Partners | |
|
|
Shares | |
|
Amount | |
|
Capital | |
|
Compensation |
|
Earnings |
|
Equity | |
|
Stock |
|
Capital | |
|
Deficit) | |
|
Equity | |
|
Capital | |
|
Capital | |
|
|
| |
|
| |
|
| |
|
|
|
|
|
| |
|
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except per share amounts) | |
Balances, December 31, 2002
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
21,384 |
|
|
$ |
(529 |
) |
|
$ |
20,855 |
|
|
$ |
2,529 |
|
|
$ |
23,384 |
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,971 |
|
|
|
1,971 |
|
|
|
291 |
|
|
|
2,262 |
|
Contributed capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,153 |
|
|
|
|
|
|
|
15,153 |
|
|
|
1,868 |
|
|
|
17,021 |
|
Note payable to affiliate contributed to capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,173 |
|
|
|
|
|
|
|
39,173 |
|
|
|
4,827 |
|
|
|
44,000 |
|
Noncash distribution of Virginia Tax Credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(300 |
) |
|
|
(300 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75,710 |
|
|
|
1,442 |
|
|
|
77,152 |
|
|
|
9,215 |
|
|
|
86,367 |
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,386 |
|
|
|
17,386 |
|
|
|
2,629 |
|
|
|
20,015 |
|
Noncash distribution of Virginia Tax Credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(292 |
) |
|
|
(292 |
) |
Distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(53,557 |
) |
|
|
|
|
|
|
(53,557 |
) |
|
|
(6,600 |
) |
|
|
(60,157 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
) |
|
|
|
|
See accompanying notes to consolidated financial statements.
68
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND
PARTNERS CAPITAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ANR Fund IX |
|
|
|
|
Alpha Natural Resources, Inc. | |
|
Alpha NR Holding, Inc. |
|
Holdings, L.P. |
|
|
|
|
| |
|
|
|
|
|
Total | |
|
|
|
|
|
|
|
|
Retained |
|
|
|
|
|
Stockholders | |
|
|
Common Stock | |
|
Additional | |
|
Unearned | |
|
|
|
Total | |
|
|
|
Additional |
|
Earnings |
|
Total |
|
|
|
Equity and | |
|
|
| |
|
Paid-In | |
|
Stock-Based | |
|
Retained | |
|
Stockholders | |
|
Common |
|
Paid-In |
|
(Accumulated |
|
Stockholders |
|
Partners |
|
Partners | |
|
|
Shares | |
|
Amount | |
|
Capital | |
|
Compensation | |
|
Earnings | |
|
Equity | |
|
Stock |
|
Capital |
|
Deficit) |
|
Equity |
|
Capital |
|
Capital | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
(In thousands, except per share amounts) | |
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 |
|
|
|
85,424 |
|
|
|
(29,122 |
) |
|
|
|
|
|
|
56,445 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56,445 |
|
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 |
|
|
|
|
|
|
|
330 |
|
|
|
(330 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
Cancellation of nonvested stock options
|
|
|
|
|
|
|
|
|
|
|
(443 |
) |
|
|
443 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income subsequent to Internal Restructuring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,513 |
|
|
|
18,513 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,513 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2005
|
|
$ |
64,420 |
|
|
$ |
644 |
|
|
$ |
209,210 |
|
|
$ |
(15,602 |
) |
|
$ |
18,513 |
|
|
$ |
212,765 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
212,765 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
69
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
21,213 |
|
|
$ |
20,015 |
|
|
$ |
2,262 |
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, depletion and amortization
|
|
|
73,405 |
|
|
|
56,012 |
|
|
|
36,054 |
|
|
|
Amortization and write-off of debt issuance costs
|
|
|
3,357 |
|
|
|
4,474 |
|
|
|
1,276 |
|
|
|
Minority interest
|
|
|
2,846 |
|
|
|
19,830 |
|
|
|
934 |
|
|
|
Accretion of asset retirement obligation
|
|
|
3,514 |
|
|
|
3,301 |
|
|
|
2,699 |
|
|
|
Virginia tax credit
|
|
|
(343 |
) |
|
|
(4,872 |
) |
|
|
(4,313 |
) |
|
|
Stock-based compensation non-cash
|
|
|
39,045 |
|
|
|
91 |
|
|
|
|
|
|
|
Gain on sale of discontinued operations
|
|
|
(704 |
) |
|
|
|
|
|
|
|
|
|
|
Impairment charge
|
|
|
|
|
|
|
5,100 |
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
3,736 |
|
|
|
2,711 |
|
|
|
668 |
|
|
|
Other non-cash items
|
|
|
(515 |
) |
|
|
42 |
|
|
|
(550 |
) |
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
|
(52,102 |
) |
|
|
(25,775 |
) |
|
|
(21,056 |
) |
|
|
|
Notes and other receivables
|
|
|
13,276 |
|
|
|
(1,062 |
) |
|
|
(2,358 |
) |
|
|
|
Inventories
|
|
|
(24,279 |
) |
|
|
(21,040 |
) |
|
|
13,014 |
|
|
|
|
Prepaid expenses and other current assets
|
|
|
12,445 |
|
|
|
5,568 |
|
|
|
793 |
|
|
|
|
Other assets
|
|
|
(6,033 |
) |
|
|
805 |
|
|
|
(3,051 |
) |
|
|
|
Trade accounts payable
|
|
|
48,462 |
|
|
|
9,742 |
|
|
|
12,234 |
|
|
|
|
Accrued expenses and other current liabilities
|
|
|
5,453 |
|
|
|
27,243 |
|
|
|
16,392 |
|
|
|
|
Workers compensation benefits
|
|
|
1,155 |
|
|
|
3,018 |
|
|
|
1,660 |
|
|
|
|
Postretirement medical benefits
|
|
|
8,824 |
|
|
|
4,975 |
|
|
|
1,236 |
|
|
|
|
Asset retirement obligation expenditures
|
|
|
(4,142 |
) |
|
|
(3,306 |
) |
|
|
(2,252 |
) |
|
|
|
Other liabilities
|
|
|
1,030 |
|
|
|
(96 |
) |
|
|
(1,538 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
149,643 |
|
|
|
106,776 |
|
|
|
54,104 |
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(122,342 |
) |
|
|
(72,046 |
) |
|
|
(27,719 |
) |
|
Proceeds from disposition of property, plant, and equipment
|
|
|
5,450 |
|
|
|
1,096 |
|
|
|
65,174 |
|
|
Purchase of net assets of acquired companies
|
|
|
(221,869 |
) |
|
|
(2,891 |
) |
|
|
(133,757 |
) |
|
Equity investment
|
|
|
(1,234 |
) |
|
|
(4,500 |
) |
|
|
|
|
|
Issuance of note receivable to coal supplier
|
|
|
|
|
|
|
(10,000 |
) |
|
|
|
|
|
Collections on note receivable from coal supplier
|
|
|
5,608 |
|
|
|
1,519 |
|
|
|
|
|
|
Payment of additional consideration on previous acquisition
|
|
|
(5,000 |
) |
|
|
0 |
|
|
|
|
|
|
Decrease (increase) in due from affiliate
|
|
|
|
|
|
|
620 |
|
|
|
(3,770 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(339,387 |
) |
|
|
(86,202 |
) |
|
|
(100,072 |
) |
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
70
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments of notes payable
|
|
|
(15,228 |
) |
|
|
(14,425 |
) |
|
|
(15,600 |
) |
|
Proceeds from issuance of long-term debt
|
|
|
323,000 |
|
|
|
175,000 |
|
|
|
58,518 |
|
|
Repayments on long-term debt
|
|
|
(82,743 |
) |
|
|
(61,422 |
) |
|
|
(30,054 |
) |
|
Increase in bank overdraft
|
|
|
7,041 |
|
|
|
4,170 |
|
|
|
5,854 |
|
|
Proceeds from initial public offering, net of offering costs
|
|
|
598,066 |
|
|
|
|
|
|
|
|
|
|
Repayment of restructuring notes payable
|
|
|
(517,692 |
) |
|
|
|
|
|
|
|
|
|
Distributions to prior members of ANR Holdings, LLC subsequent
to Internal Restructuring
|
|
|
(71,135 |
) |
|
|
|
|
|
|
|
|
|
Payment of Sponsor Distributions related to Internal
Restructuring
|
|
|
(3,600 |
) |
|
|
|
|
|
|
|
|
|
Distributions to prior members of ANR Holdings, LLC prior to
Internal Restructuring
|
|
|
(7,732 |
) |
|
|
(115,572 |
) |
|
|
(3,085 |
) |
|
Debt issuance costs
|
|
|
(8,201 |
) |
|
|
(10,525 |
) |
|
|
(5,181 |
) |
|
Advances from affiliates
|
|
|
|
|
|
|
|
|
|
|
20,047 |
|
|
Capital contributions
|
|
|
|
|
|
|
|
|
|
|
3,118 |
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
15,153 |
|
|
Other
|
|
|
199 |
|
|
|
(1,655 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
221,975 |
|
|
|
(24,429 |
) |
|
|
48,770 |
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
32,231 |
|
|
|
(3,855 |
) |
|
|
2,802 |
|
Cash and cash equivalents at beginning of period
|
|
|
7,391 |
|
|
|
11,246 |
|
|
|
8,444 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$ |
39,622 |
|
|
$ |
7,391 |
|
|
$ |
11,246 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
71
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
Brinks 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 21 for further discussion
concerning these acquisitions.
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 financial statements for the years
ended December 31, 2003 and 2004 are presented on a
combined basis including the combined financial results for the
FR Affiliates and subsidiaries. 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, 2004 and 2003 have been
reported as discontinued operations. See also Note 25.
72
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
(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
Companys 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 Companys 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 are payable in five
equal installments on the dates for which estimated income tax
payments are 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 Companys stock on February 18,
2005), or $25,554 in total. The remaining 1,344,930 shares vest
over the two year period ending December 31, 2006. The
$25,554 in compensation expense related to these shares was
deferred and is being amortized to expense over the vesting
period. |
|
|
|
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. |
73
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
The Company, the FR Affiliates and affiliates of AMCI amended
certain of the post-closing arrangements previously entered into
as part of the Companys 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.
|
|
(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.
|
|
(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 Companys best estimate of the amount of probable
credit losses in the Companys 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
$25 and $93 at December 31, 2005 and 2004, respectively.
Credit losses were insignificant in the three-year period ending
December 31, 2005. The Company does not have
off-balance-sheet credit exposure related to its customers.
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.
74
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 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.
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, 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 in accordance with the provisions
of SFAS No. 142. The Company performs its impairment
test in August of each year. The impairment review in August
2005 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).
The Company accounts for income taxes in accordance with
SFAS No. 109, Accounting for Income Taxes,
which requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of events
that have been included in the financial statements or tax
returns. Under this method, deferred tax assets and liabilities
are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted
tax rates in effect for the year in which those items are
expected to reverse.
75
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 Companys operations. The Company
records these reclamation obligations under the provisions of
SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 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 21, the Company recorded the fair value of the
reclamation liabilities assumed as part of the acquisitions in
accordance with SFAS No. 143.
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, 2002
|
|
$ |
|
|
Additions associated with acquisitions
|
|
|
4,694 |
|
|
|
|
|
Balance at December 31, 2003
|
|
|
4,694 |
|
Provision for non-recoupable advance mining royalties
|
|
|
758 |
|
Write-offs of advance mining royalties
|
|
|
(11 |
) |
|
|
|
|
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 |
|
|
|
|
|
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
76
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
Other revenues generally consist of equipment and parts sales,
equipment rebuild and maintenance services, coal handling and
processing, trucking services for unrelated parties, royalties,
commissions on coal trades, 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 highway construction
business which was acquired as part of the acquisition of the
Nicewonder Coal Group (Note 21). Revenues from this
business are recognized under the percentage of completion
method.
|
|
(l) |
Deferred Financing Costs |
In connection with obtaining financing, the Company incurred
deferred financing costs totaling $8,201, $10,525 and $5,181
during the years ended December 31, 2005, 2004 and 2003,
respectively. These deferred financing costs are being amortized
to interest expense over the life of the related indebtedness or
credit facility. Unamortized deferred financing costs are
included in other assets in the accompanying balance sheets.
Amortization expense for the years ended December 31, 2005,
2004 and 2003 totaled $3,357, $4,474 and $1,276, respectively.
Amortization for the years ended December 31, 2005 and 2004
included $1,503 and $2,819, respectively, for deferred financing
costs written off in connection with refinancing transactions.
See Note 13.
|
|
(m) |
Virginia Coalfield Employment Enhancement Tax
Credit |
For tax years 1996 through 2007, 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 |
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 the West Virginia state insurance
program. 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 Companys 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.
77
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 liabilities for state black lung related claims in West
Virginia that are self-insured are estimates of the ultimate
losses incurred based on the Companys experience, and
include a provision for incurred but not reported losses.
Estimates of the liabilities are made annually based on an
actuarial study and adjustments to the liability are recorded
based on the results of this study.
The Company did not assume any responsibility for workers
compensation or black lung claims incurred by any of its
subsidiaries prior to their acquisition.
|
|
(o) |
Postretirement Benefits Other Than Pensions |
The Company accounts for health care and life insurance 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.
The accompanying 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 Companys
proportionate share of the investment companys income is
included in the Companys net income or loss with a
corresponding increase or decrease in the carrying value of the
investment.
|
|
(q) |
Equity-Based Compensation |
The Company accounts for equity-based compensation awards
granted to employees in accordance with Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations.
Compensation cost for stock option awards is recognized in an
amount equal to the difference between the exercise price of the
award and the fair value of the Companys equity on the
date of grant.
78
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 No. 123
to equity-based employee compensation using the Black-Scholes
option-pricing model for the years ended December 31, 2005
and December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Net income, as adjusted (Note 4)
|
|
$ |
21,124 |
|
|
$ |
19,015 |
|
Add: stock option expense included in net income, as adjusted,
net of income taxes and minority interest
|
|
|
484 |
|
|
|
50 |
|
Deduct: stock option expense determined under fair-value method,
net of income taxes and minority interest
|
|
|
(1,322 |
) |
|
|
(72 |
) |
|
|
|
|
|
|
|
Pro forma net income, adjusted for effect of fair value of stock
options
|
|
$ |
20,286 |
|
|
$ |
18,993 |
|
|
|
|
|
|
|
|
Earnings per share basic and diluted
|
|
|
|
|
|
|
|
|
Net income, as adjusted (Note 4)
|
|
$ |
0.38 |
|
|
$ |
1.36 |
|
|
|
|
|
|
|
|
Pro forma net income, adjusted for effect of fair value of stock
options
|
|
$ |
0.36 |
|
|
$ |
1.36 |
|
|
|
|
|
|
|
|
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, for which the expense
under SFAS No. 123 would have been the same. Such amount
includes $7,475, representing a cash distribution to certain
officers and employees of a portion of the net proceeds from the
Companys 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 values of stock options granted in
both years were 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 effects on pro forma net income of expensing the estimated
fair value of equity-based awards are not necessarily
representative of the effects on reported net income for future
periods due to such factors as the vesting periods of stock
options and the potential issuance of additional awards in
future years.
|
|
(r) |
New Accounting Pronouncements |
In December 2004, the Financial Accounting Standards Board
issued SFAS No. 123(R), Share-Based Payment,
which requires companies to expense the fair value of equity
awards over the required service period. This Statement is a
revision of SFAS No. 123, Accounting for
Stock-Based Compensation. SFAS No. 123(R)
supersedes APB Opinion No. 25, Accounting for Stock
Issued to Employees, which uses the intrinsic value method
to value stock-based compensation. On April 14, 2005, the
Securities and Exchange Commission adopted a new rule that
amends the effective date of SFAS No. 123(R) to allow
registrants to implement SFAS No. 123(R) as of the
beginning of the first annual reporting period that begins after
June 15, 2005. The Company adopted
SFAS No. 123(R) effective January 1, 2006 and
used the modified prospective method, in
79
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
which compensation cost is recognized beginning with the
effective date based on the requirements of
SFAS No. 123(R) for all share-based payments granted
after the effective date and based on the requirements of
SFAS No. 123 for all awards granted to employees prior
to the effective date of SFAS No. 123(R) that remain
unvested on the effective date. The expected impact of applying
the modified prospective method to unvested options as of
January 1, 2006 is an increase to pre-tax expense of
approximately $1,300 for the year ended December 31, 2006.
Such amount could vary depending on the level of forfeitures
that occur or other circumstances. The Company currently
anticipates that it will utilize restricted stock for
equity-based compensation in 2006 instead of stock option
grants. Accounting for restricted stock awards is not impacted
by SFAS No. 123(R).
In March 2005, the Emerging Issues Task Force issued EITF Issue
No. 04-6, Accounting for Stripping Costs in the
Mining Industry, which states that stripping costs
incurred during the production phase of a mine are variable
production costs that should be included in the costs of the
inventory produced during the period that the stripping costs
are incurred. EITF Issue No. 04-6 is effective for
the first reporting period in fiscal years beginning after
December 15, 2005 (January 1, 2006 for the Company).
The Companys existing accounting practices are consistent
with EITF Issue No. 04-06, therefore this pronouncement
will not effect the Companys results of operations or
financial condition.
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 the allowance for doubtful
accounts; 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; and fair value of financial instruments. Due to
the subjective nature of these estimates, actual results could
differ from those estimates.
Certain prior period amounts have been reclassified to conform
to the current year presentation.
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
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
80
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
forma adjustment for income taxes only applies to the percentage
interest owned by ANR Fund IX Holding, L.P., the
non-taxable FR Affiliate. No pro forma adjustment for income
taxes is required for the percentage interest owned by Alpha NR
Holding, Inc., the taxable FR Affiliate, because income taxes
have already been recorded in the historical results of
operations. Furthermore, no pro forma adjustment to reported net
income (loss) is necessary subsequent to February 11, 2005
because Alpha is subject to income taxes.
The denominator for purposes of computing basic net income
(loss) per share, as adjusted, 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.
81
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The computations of basic and diluted net income (loss) per
share, as adjusted, are set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
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 |
|
|
|
|
|
|
|
|
|
|
|
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Raw coal
|
|
$ |
6,401 |
|
|
$ |
3,888 |
|
Saleable coal
|
|
|
65,318 |
|
|
|
42,899 |
|
Materials and supplies
|
|
|
13,166 |
|
|
|
7,782 |
|
|
|
|
|
|
|
|
|
Total inventories
|
|
$ |
84,885 |
|
|
$ |
54,569 |
|
|
|
|
|
|
|
|
82
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
(6) |
Prepaid Expenses and Other Current Assets |
Prepaid expenses and other current assets consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Prepaid insurance
|
|
$ |
20,448 |
|
|
$ |
16,577 |
|
Advance mining royalties
|
|
|
3,435 |
|
|
|
4,831 |
|
Refundable income taxes
|
|
|
6,012 |
|
|
|
2,798 |
|
Other prepaid expenses
|
|
|
6,222 |
|
|
|
4,709 |
|
|
|
|
|
|
|
|
|
Total prepaid expenses and other current assets
|
|
$ |
36,117 |
|
|
$ |
28,915 |
|
|
|
|
|
|
|
|
|
|
(7) |
Property, Plant, and Equipment |
Property, plant, and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Land
|
|
$ |
11,986 |
|
|
$ |
5,380 |
|
Mineral rights
|
|
|
297,573 |
|
|
|
85,245 |
|
Plant and mining equipment
|
|
|
372,189 |
|
|
|
188,891 |
|
Vehicles
|
|
|
3,351 |
|
|
|
2,058 |
|
Mine development
|
|
|
39,017 |
|
|
|
11,205 |
|
Office equipment and software
|
|
|
8,170 |
|
|
|
7,264 |
|
Construction in progress
|
|
|
5,419 |
|
|
|
1,769 |
|
|
|
|
|
|
|
|
|
|
|
737,705 |
|
|
|
301,812 |
|
Less accumulated depreciation, depletion, and amortization
|
|
|
154,955 |
|
|
|
83,848 |
|
|
|
|
|
|
|
|
|
Property, plant, and equipment, net
|
|
$ |
582,750 |
|
|
$ |
217,964 |
|
|
|
|
|
|
|
|
As of December 31, 2005, the Company had commitments to
purchase approximately $64,342 of new equipment, expected to be
acquired at various dates in 2006.
Depreciation and amortization expense associated with property,
plant and equipment was $60,502, $50,679 and $28,438, and
depletion expense was $11,698, $3,541 and $2,396, for the years
ended December 31, 2005, 2004 and 2003, respectively.
The changes in the carrying amount of goodwill were as follows:
|
|
|
|
|
Balance as of December 31, 2002
|
|
$ |
|
|
Acquisition of U.S. AMCI
|
|
|
17,121 |
|
|
|
|
|
Balance as of December 31, 2003
|
|
|
17,121 |
|
2004 Adjustments
|
|
|
1,520 |
|
|
|
|
|
Balance as of December 31, 2004 and 2005
|
|
$ |
18,641 |
|
|
|
|
|
The carrying amount of goodwill was increased by $1,520 during
the year ended December 31, 2004 due to the final
settlement of the amount of working capital acquired in the
U.S. AMCI acquisition. See Note 19.
83
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Other intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 | |
|
December 31, 2004 | |
|
|
| |
|
| |
|
|
Gross Carrying | |
|
Accumulated | |
|
Gross Carrying | |
|
Accumulated | |
|
|
Amount | |
|
Amortization | |
|
Amount | |
|
Amortization | |
|
|
| |
|
| |
|
| |
|
| |
Sales contracts
|
|
$ |
7,227 |
|
|
$ |
1,757 |
|
|
$ |
3,248 |
|
|
$ |
2,249 |
|
Customer relationships
|
|
|
4,762 |
|
|
|
159 |
|
|
|
|
|
|
|
|
|
Noncompete agreements
|
|
|
1,177 |
|
|
|
236 |
|
|
|
250 |
|
|
|
94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
13,166 |
|
|
$ |
2,152 |
|
|
$ |
3,498 |
|
|
$ |
2,343 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortization expense for the above intangible assets was
$1,205, $1,792 and $5,220 for the years ended December 31,
2005, 2004 and 2003, respectively, and is expected to be
approximately $3,244, $2,264, $2,323, $1,896 and $1,308 for the
years ended December 31, 2006, 2007, 2008, 2009 and 2010,
respectively.
Other assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Advance mining royalties, net
|
|
$ |
11,557 |
|
|
$ |
8,841 |
|
Deferred loan costs, net
|
|
|
15,081 |
|
|
|
10,237 |
|
Deferred common stock offering costs
|
|
|
|
|
|
|
3,665 |
|
Notes receivable
|
|
|
102 |
|
|
|
3,451 |
|
Investment in terminaling facility
|
|
|
1,005 |
|
|
|
1,005 |
|
Investment in Excelven Pty Ltd
|
|
|
5,735 |
|
|
|
4,500 |
|
Virginia tax credit receivable
|
|
|
9,418 |
|
|
|
4,806 |
|
Other
|
|
|
473 |
|
|
|
321 |
|
|
|
|
|
|
|
|
|
Total other assets
|
|
$ |
43,371 |
|
|
$ |
36,826 |
|
|
|
|
|
|
|
|
At December 31, 2005, notes payable included $39,955 in
promissory installment notes that were issued in connection with
the Nicewonder Acquisition (Note 21). The notes bore
interest at 3.82% and were repaid on January 13, 2006. Also
at December 31, 2005, notes payable included $19,059 of
short-term indebtedness that was incurred to finance various
insurance premiums. Interest, which accrues at the rate of 5.5%,
and principal are due in monthly installments, with the final
payment due in November 2006. At December 31, 2004 notes
payable consisted entirely of indebtedness incurred to finance
insurance premiums, all of which was repaid in 2005.
84
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, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Wages and employee benefits
|
|
$ |
24,874 |
|
|
$ |
20,201 |
|
Current portion of asset retirement obligation
|
|
|
7,190 |
|
|
|
6,691 |
|
Taxes other than income taxes
|
|
|
10,697 |
|
|
|
6,136 |
|
Freight
|
|
|
9,717 |
|
|
|
12,376 |
|
Contractor escrow
|
|
|
771 |
|
|
|
1,615 |
|
Deferred gains on sales of property interests
|
|
|
941 |
|
|
|
808 |
|
Deferred revenues
|
|
|
4,589 |
|
|
|
1,086 |
|
Current portion of self-insured workers compensation
benefits
|
|
|
1,019 |
|
|
|
911 |
|
Workers compensation insurance premium payable
|
|
|
4,320 |
|
|
|
3,567 |
|
Interest payable
|
|
|
3,944 |
|
|
|
1,632 |
|
Additional consideration for acquisition
|
|
|
13,738 |
|
|
|
5,000 |
|
Accrued initial public offering costs
|
|
|
|
|
|
|
2,010 |
|
Other
|
|
|
11,731 |
|
|
|
6,250 |
|
|
|
|
|
|
|
|
|
Total accrued expenses and other current liabilities
|
|
$ |
93,531 |
|
|
$ |
68,283 |
|
|
|
|
|
|
|
|
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Term loan
|
|
$ |
250,000 |
|
|
$ |
|
|
10% Senior notes due 2012
|
|
|
175,000 |
|
|
|
175,000 |
|
Revolving credit facility
|
|
|
|
|
|
|
8,000 |
|
Variable rate term notes
|
|
|
293 |
|
|
|
1,466 |
|
Capital lease obligation
|
|
|
1,496 |
|
|
|
1,995 |
|
Other
|
|
|
|
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
426,789 |
|
|
|
186,477 |
|
|
Less current portion
|
|
|
3,242 |
|
|
|
1,693 |
|
|
|
|
|
|
|
|
|
|
Long-term debt, net of current portion
|
|
$ |
423,547 |
|
|
$ |
184,784 |
|
|
|
|
|
|
|
|
On October 26, 2005, in connection with the Nicewonder
Acquisition, Alpha NR Holding, Inc. (a wholly owned subsidiary
of Alpha) and its wholly owned subsidiary, Alpha Natural
Resources, LLC, entered into a senior secured credit facility
with a group of lending institutions led by Citicorp North
America, Inc., as administrative agent (the New Citicorp
Credit Facility). The New 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.
Proceeds from the New Citicorp Credit Facility were used to fund
the cash portion of the Nicewonder Acquisition, including the
payment of the first installment on the
85
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
promissory notes on November 2, 2005, to refinance the
existing Citicorp Credit Facility and to pay certain expenses
related to the Nicewonder Acquisition and debt refinancing. As
of December 31, 2005 there were $250,000 in borrowings
under the term loan facility and no borrowings under the
revolving credit facility. In addition, there were $65,487 in
letters of credit outstanding, $50,000 of which resulted from
conversion of funded letters of credit that were outstanding
under the existing Citicorp Credit Facility, and $209,513 was
available for borrowing.
Borrowings under the New Citicorp Credit Facility bear interest
at variable rates based upon, at the Companys option,
either the prime rate or a London Interbank Offered Rate
(LIBOR), in each case plus a spread that is generally dependent
on a leverage ratio. The Company is required to pay a commitment
fee on the unused portion of the revolving credit facility, as
well as customary letter of credit fees. The commitment fee is
currently 0.50% per annum but may be reduced in the future
subject to the attainment of certain leverage ratios. As of
December 31, 2005, the weighted average interest rate
applicable to borrowings under the term loan facility was 6.32%.
Under the term loan facility, quarterly principal payments of
$625 are required, commencing on March 31, 2006 and ending
on September 30, 2012. The remaining unpaid principal,
which is projected to be $233,125, is due and payable on
October 26, 2012. Any outstanding principal amounts
outstanding under the revolving credit facility are due and
payable on October 26, 2010.
All obligations under the New Citicorp Credit Facility are
unconditionally guaranteed by Alpha NR Holding, Inc. and each of
its existing and future direct and indirect domestic
subsidiaries (other than the borrower, Alpha Natural Resources,
LLC), and are secured by substantially all of the assets of
Alpha NR Holding, Inc. and its subsidiaries. The New Citicorp
Credit Facility contains various affirmative and negative
covenants which, among other things, require the Company to
maintain certain leverage and interest coverage ratios, and
restrict certain payments and transactions, including dividends,
payments for the repurchase of capital stock and mergers or
consolidations.
|
|
|
10% Senior Notes Due June 2012 |
On May 18, 2004, Alpha Natural Resources, 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
Alphas wholly-owned domestic restricted subsidiaries other
than the issuers of the notes. The senior notes are the
Companys 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
Companys secured indebtedness, including borrowings under
the New 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, amount 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.
86
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
Prior Senior Credit Facilities |
On May 28, 2004, Alpha entered into a new revolving credit
facility with a group of lending institutions led by Citicorp
North America, Inc., as administrative agent (Citicorp Credit
Facility). The Citicorp Credit Facility was terminated on
October 26, 2005 in connection with the debt refinancing
discussed above. The Citicorp Credit Facility, as amended,
provided for a revolving line of credit of up to $125,000 and a
funded letter of credit facility of up to $50,000. Amounts drawn
under the revolver bore interest at variable rates based upon
either the prime rate or LIBOR, in each case plus a spread that
was dependent on a leverage ratio. The obligations of Alpha, ANR
Holdings and Alphas subsidiaries under the Citicorp Credit
Facility were collateralized by all of the assets of Alpha, ANR
Holdings and Alphas subsidiaries. The Company paid an
annual commitment fee of up to
1/2
of 1% of the unused portion of the commitment.
Prior to May 28, 2004, the Company had a term loan and
revolving credit facility with a group of lending institutions
led by PNC Bank (PNC). The term note had a variable interest
rate and was payable in quarterly principal installments of
$2,250 plus interest, with a final balloon payment due
March 11, 2006. The PNC credit facility provided for a
revolving line of credit of up to $75,000. Amounts drawn under
the revolver had a variable interest rate and the principal
balance of the revolving credit note was due March 11,
2006. ANR Holdings and each of the subsidiaries of the Company
had guaranteed Alphas obligations under the credit
facility. The Company paid an annual commitment fee of
1/2
of 1% of the unused portion of the commitment. The PNC
term loan and credit facility were paid in full on May 28,
2004.
The Company has term notes payable to The CIT Group Equipment
Financing, Inc. in the amount of $293 at December 31, 2005
and $1,466 at December 31, 2004. The term notes bear
interest at variable rates (7.72% as of December 31, 2005)
and are repayable in monthly installments through April 2,
2006.
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, 2005. Accumulated
amortization was $881 and $378 at December 31, 2005 and
2004, respectively. Amortization expense on capital leases is
included with depreciation expense.
In conjunction with the purchase of Coastal Coal Company, LLC,
the Company issued a note payable to El Paso CGP on
January 31, 2003. The balance of the note at
December 31, 2003 was $8,000. The note had a fixed interest
rate of 14% and was due on March 11, 2009. This note was
paid in full in May 2004.
In conjunction with the purchase of the U.S. coal
production and marketing operations of AMCI (U.S. AMCI) on
March 11, 2003, the Company assumed term notes payable to
Komatsu Financial LP. The balance of the notes at
December 31, 2003, was $3,719. The notes had fixed interest
rates with a weighted average rate of 8.75% at December 31,
2003, and were payable in monthly installments ranging from $4
to $24, through August 1, 2006. These notes were paid in
full in May 2004.
In conjunction with the purchase of U.S. AMCI, the Company
assumed term notes payable to the Caterpillar Financial Services
Corporation. The balance of the notes at December 31, 2003,
was $945. The notes had a fixed interest rate of 8.75% and were
payable in monthly installments ranging from $9 to $25, through
October 5, 2004. These notes were paid in full in May 2004.
87
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Future maturities of long-term debt, including capital lease
obligations, are as follows as of December 31, 2005:
|
|
|
|
|
|
|
Year ending December 31:
|
|
|
|
|
|
2006
|
|
$ |
3,242 |
|
|
2007
|
|
|
3,000 |
|
|
2008
|
|
|
2,816 |
|
|
2009
|
|
|
2,731 |
|
|
2010
|
|
|
2,500 |
|
|
Thereafter
|
|
|
412,500 |
|
|
|
|
|
|
|
Total long-term debt
|
|
$ |
426,789 |
|
|
|
|
|
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, 2005:
|
|
|
|
|
|
|
Year ending December 31:
|
|
|
|
|
|
2006
|
|
$ |
600 |
|
|
2007
|
|
|
600 |
|
|
2008
|
|
|
360 |
|
|
2009
|
|
|
240 |
|
|
|
|
|
|
|
Total future minimum lease payments
|
|
|
1,800 |
|
Less amount representing interest
|
|
|
(304 |
) |
|
|
|
|
|
|
Present value of future minimum lease payments
|
|
|
1,496 |
|
Less current portion
|
|
|
(449 |
) |
|
|
|
|
|
|
Long-term capital lease obligation
|
|
$ |
1,047 |
|
|
|
|
|
88
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
(14) |
Asset Retirement Obligation |
At December 31, 2005 and 2004, the Company has recorded
asset retirement obligation accruals for mine reclamation and
closure costs totaling $53,487 and $39,579, respectively. The
portion of the costs expected to be incurred within a year in
the amount of $7,190 and $6,691, at December 31, 2005 and
2004, respectively, is included in accrued expenses and other
current liabilities. These regulatory obligations are secured by
surety bonds in the amount of $116,680 at December 31, 2005
and $91,394 at December 31, 2004. Changes in the
reclamation obligation were as follows:
|
|
|
|
|
|
|
Total asset retirement obligation at December 31, 2002
|
|
$ |
15,107 |
|
Coastal Coal Company, LLC acquisition
|
|
|
12,861 |
|
U.S. AMCI acquisition
|
|
|
8,768 |
|
Mears Enterprises, Inc. acquisition
|
|
|
2,079 |
|
Accretion for 2003
|
|
|
2,699 |
|
Sites added in 2003
|
|
|
1,165 |
|
Expenditures in 2003
|
|
|
(2,252 |
) |
|
|
|
|
|
Total asset retirement obligation at December 31, 2003
|
|
|
40,427 |
|
Accretion for 2004
|
|
|
3,301 |
|
2004 acquisitions
|
|
|
1,189 |
|
Sites added in 2004
|
|
|
3,657 |
|
Revisions in estimated cash flows
|
|
|
(5,689 |
) |
Expenditures in 2004
|
|
|
(3,306 |
) |
|
|
|
|
|
Total asset retirement obligation at December 31, 2004
|
|
|
39,579 |
|
Accretion for 2005
|
|
|
3,514 |
|
2005 acquisitions
|
|
|
7,883 |
|
Sites added in 2005
|
|
|
3,977 |
|
Revisions in estimated cash flows
|
|
|
2,676 |
|
Expenditures in 2005
|
|
|
(4,142 |
) |
|
|
|
|
|
Total asset retirement obligation at December 31, 2005
|
|
$ |
53,487 |
|
|
|
|
|
|
|
(15) |
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 estimated gain on
this transaction in the amount of $7,057 was deferred and is
being amortized over the ten-year term of the lease.
The Company recognized $790, $959 and $618 of the above deferred
gains for the years ended December 31, 2005, 2004 and 2003,
respectively. During the year ended December 31, 2004, the
deferred gain was increased by $3,514 for revisions in estimated
cash flows underlying the asset retirement obligation relating
to the mineral properties which had been sold, increased by
$1,480 for revisions in the estimated contract reclamation
liability assumed in conjunction with the acquisition of the
Virginia coal operations of Pittston Coal Company, and decreased
by $5,000 relating to the accrual of additional consideration
for the
89
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
acquisition of the Virginia coal operations of Pittston Coal
Company. In 2005 the deferred gain was increased by an
additional $1,169 for revisions in estimated cash flows
underlying assets retirement obligations relating to the
properties which had been sold.
|
|
(16) |
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. The estimated fair values of
long-term debt were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
10% Senior notes due 2012
|
|
$ |
193,375 |
|
|
$ |
209,970 |
|
Term loan
|
|
|
250,000 |
|
|
|
|
|
Revolving credit facility
|
|
|
|
|
|
|
8,000 |
|
Variable rate term notes
|
|
|
293 |
|
|
|
1,466 |
|
Capital lease obligation
|
|
|
1,496 |
|
|
|
2,196 |
|
Other
|
|
|
|
|
|
|
16 |
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$ |
445,164 |
|
|
$ |
221,648 |
|
|
|
|
|
|
|
|
|
|
(17) |
Employee Benefit Plans |
|
|
|
(a) Postretirement Benefits
Other Than Pensions |
Three of the Companys 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 Brinks Company and AMCI,
as 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 Brinks
Company 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
90
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$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 new plan resulted in
prior service cost of $27,122 which is being amortized over the
remaining service of the union-free employees. 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. In
addition, 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 estimated $2,020 of prior service cost.
The components of the change in accumulated benefit obligations
of the plans for postretirement benefits other than pensions
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation-beginning of period:
|
|
$ |
43,783 |
|
|
$ |
11,532 |
|
|
$ |
5,951 |
|
|
|
Service cost
|
|
|
3,906 |
|
|
|
2,266 |
|
|
|
656 |
|
|
|
Interest cost
|
|
|
2,489 |
|
|
|
1,375 |
|
|
|
580 |
|
|
|
Actuarial (gain) or loss
|
|
|
3,514 |
|
|
|
1,526 |
|
|
|
870 |
|
|
|
Benefits paid
|
|
|
(60 |
) |
|
|
(38 |
) |
|
|
|
|
|
|
Plan amendments
|
|
|
(4,147 |
) |
|
|
27,122 |
|
|
|
|
|
|
|
Postretirement benefits assumed in acquisitions
|
|
|
|
|
|
|
|
|
|
|
3,475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation-end of period
|
|
$ |
49,485 |
|
|
$ |
43,783 |
|
|
$ |
11,532 |
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
$ |
(49,485 |
) |
|
$ |
(43,783 |
) |
|
$ |
(11,532 |
) |
Unrecognized prior service cost
|
|
|
19,114 |
|
|
|
25,725 |
|
|
|
|
|
Unrecognized net actuarial loss
|
|
|
5,910 |
|
|
|
2,421 |
|
|
|
870 |
|
|
|
|
|
|
|
|
|
|
|
Accrued postretirement medical benefits
|
|
$ |
(24,461 |
) |
|
$ |
(15,637 |
) |
|
$ |
(10,662 |
) |
|
|
|
|
|
|
|
|
|
|
The following table details the components of the net periodic
benefit cost for postretirement benefits other than pensions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Service cost
|
|
$ |
3,906 |
|
|
$ |
2,266 |
|
|
$ |
656 |
|
Interest cost
|
|
|
2,489 |
|
|
|
1,375 |
|
|
|
580 |
|
Amortization of net (gain) or loss
|
|
|
27 |
|
|
|
(24 |
) |
|
|
|
|
Amortization of prior service cost
|
|
|
2,463 |
|
|
|
1,396 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$ |
8,885 |
|
|
$ |
5,013 |
|
|
$ |
1,236 |
|
|
|
|
|
|
|
|
|
|
|
The discount rates used in determining the benefit obligations
as of December 31, 2005, 2004 and 2003 were 5.50%, 5.75%
and 6.25%, respectively. The discount rates used in determining
net periodic postretirement benefit cost were 5.75%, 6.25% and
6.75% for the years ended December 31, 2005, 2004 and 2003,
respectively.
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 2005, decreasing to 5% in
2010 and thereafter.
91
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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, 2005:
|
|
|
|
|
|
|
|
|
|
|
One | |
|
One | |
|
|
Percentage | |
|
Percentage | |
|
|
Point | |
|
Point | |
|
|
Increase | |
|
Decrease | |
|
|
| |
|
| |
Effect on accumulated postretirement benefit obligation
|
|
$ |
959 |
|
|
$ |
(740 |
) |
Effect on total service and interest cost components
|
|
|
97 |
|
|
|
(60 |
) |
Employer contributions for benefits paid for the years ended
December 31, 2005 and 2004 were $60 and $38, respectively.
Employee contributions are not expected to be made and the plan
is unfunded.
Estimated future benefit payments reflecting expected future
service for the fiscal years ending after December 31, 2005
are as follows:
|
|
|
|
|
|
|
Year ending December 31:
|
|
|
|
|
|
2006
|
|
$ |
115 |
|
|
2007
|
|
|
143 |
|
|
2008
|
|
|
568 |
|
|
2009
|
|
|
1,105 |
|
|
2010
|
|
|
1,601 |
|
|
2011-2015
|
|
|
17,817 |
|
|
|
|
|
|
|
Total
|
|
$ |
21,349 |
|
|
|
|
|
On December 8, 2003, the President of the United States
signed into law the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the Act). The Act
introduces a prescription drug benefit under Medicare
(Medicare Part D) as well as a federal subsidy
to sponsors of retiree heath care benefit plans that provide a
benefit that is at least actuarially equivalent to Medicare
Part D.
At December 31, 2003, in accordance with FASB Staff
Position No. FAS 106-1, Accounting and Disclosure
Requirements related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (FSP
106-1), the Company elected to defer recognition of the
effects of the Act in any measures of the benefit obligation or
cost.
In May 2004, the FASB issued further guidance with the release
of FASB Staff Position No. FAS 106-2, Accounting
and Disclosure Requirements related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 (FSP
106-2). The Company has reflected the estimated impact of
the Act as a $629 reduction in the present value of the
accumulated postretirement benefit obligation as of
January 1, 2004 and a $113 reduction in the net periodic
service cost for the year ended December 31, 2004.
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, 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. The effective date of the plan was February 1,
2003. Total Company contributions for the years ended
December 31, 2005, 2004 and 2003, were $6,418, $5,086, and
$3,505, respectively.
92
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
(c) Self-Insured Medical
Plan |
The Company is self-insured for health insurance coverage
provided for all of its employees. During the years ended
December 31, 2005, 2004 and 2003, total claims expense of
$20,714, $18,094 and $12,313, respectively, was incurred, which
represents claims processed and an estimate for claims incurred
but not reported.
|
|
|
(d) Multi-Employer Pension
Plan |
Three of the Companys 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 whereby the expense is based upon
defined contribution rates. There was no expense under these
plans for the years ended December 31, 2005, 2004 and 2003.
Two of the three subsidiaries referenced above 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, 2005,
2004 and 2003 were $32, $31 and $29, respectively.
|
|
|
(e) Equity-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
Companys management team under the Alpha Coal Management
Long-Term Incentive Plan. These options vest over a period of
five years (with accelerated vesting upon a change of control)
and have a term of ten years. In connection with this grant of
options, ACM entered into a letter agreement with ANR Holdings
pursuant to which ANR Holdings agreed to issue to ACM additional
membership interests representing sharing ratios in the
aggregate amount equal to 1% of the outstanding membership
interests upon exercise of awards granted by ACM under the Alpha
Coal Management Long-Term Incentive Plan. In connection with the
Internal Restructuring on February 11, 2005, this plan was
amended and restated, the outstanding options to purchase units
of ACM were automatically converted into options to purchase
shares of Alpha Natural Resources, Inc. common stock and Alpha
Natural Resources, Inc. assumed the obligations of ACM pursuant
to this plan. After the Internal Restructuring, there were
outstanding under the plan options to purchase an aggregate of
596,985 shares of common stock at an exercise price of
$12.73 per share. No additional options or awards will be
granted under the plan.
In connection with the Internal Restructuring, Alpha Natural
Resources, Inc. adopted, and its stockholders approved, the
Alpha Natural Resources, Inc. Long-Term Incentive Plan (the
Long-Term Incentive Plan). The principal purpose of
the Long-Term Incentive Plan is to attract, motivate, reward and
retain selected employees, consultants and directors through the
granting of stock-based compensation awards. The Long-Term
Incentive Plan provides for a variety of awards, including
non-qualified stock options, incentive stock options (within the
meaning of Section 422 of the Code), stock appreciation
rights, restricted stock awards, dividend equivalents,
performance-based awards and other stock-based awards.
The total number of shares of Alpha Natural Resources, Inc.
common stock initially available for issuance or delivery under
the Long-Term Incentive Plan is 3,338,841 shares, and the
maximum number of shares that may be subject to awards made to
any one plan participant in any fiscal year will be
2,000,000 shares. On February 11, 2005 the Company
granted certain of its executive officers, directors and key
employees options to purchase an aggregate of
692,905 shares of Alpha Natural Resources, Inc. common
stock at the initial public offering price of $19.00 per
share. During the remainder of 2005, options to purchase an
additional 70,000 shares were granted. All options granted
pursuant to the Long-Term Incentive Plan vest
93
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
over a period of five years and have a term of ten years. The
number of shares of Alpha Natural Resources, Inc. common stock
issued or reserved pursuant to the Long-Term Incentive Plan is
subject, at the discretion of the board of directors (or the
committee if so empowered), to adjustment as a result of stock
splits, stock dividends and similar changes in Alpha Natural
Resources, Inc. common stock.
Stock option activity is summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- | |
|
|
|
|
Average | |
|
|
Number of | |
|
Exercise | |
|
|
Shares | |
|
Price | |
|
|
| |
|
| |
Conversion of ACM options
|
|
|
596,985 |
|
|
$ |
12.73 |
|
Granted at initial public offering
|
|
|
692,905 |
|
|
$ |
19.00 |
|
Additional grants
|
|
|
70,000 |
|
|
$ |
23.69 |
|
Exercised
|
|
|
(15,601 |
) |
|
$ |
12.73 |
|
Forfeited
|
|
|
(90,696 |
) |
|
$ |
14.11 |
|
|
|
|
|
|
|
|
Outstanding at December 31, 2005
|
|
|
1,253,593 |
|
|
$ |
16.71 |
|
|
|
|
|
|
|
|
A summary of stock options outstanding at December 31, 2005
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- | |
|
Weighted- | |
|
|
|
|
Average | |
|
Average | |
|
|
Number | |
|
Remaining | |
|
Exercise | |
Range of Exercise Prices |
|
Outstanding | |
|
Life (Years) | |
|
Price | |
|
|
| |
|
| |
|
| |
$12.73
|
|
|
510,688 |
|
|
|
8.8 |
|
|
$ |
12.73 |
|
$19.00
|
|
|
672,905 |
|
|
|
9.1 |
|
|
$ |
19.00 |
|
$23.50 - $24.85
|
|
|
70,000 |
|
|
|
9.4 |
|
|
$ |
23.69 |
|
At December 31, 2005, a total of 89,655 options were
exercisable, at an exercise price of $12.73 per share.
As part of the Internal Restructuring, the Companys
executive officers and certain other key employees exchanged
their interests in ANR Holdings for shares of Alpha Natural
Resources, Inc. common stock and the right to participate in a
distribution of the proceeds to be 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, the Company recorded stock-based
compensation expense in the amount of $45,875 for the year ended
December 31, 2005. See Notes 2 and 3(q). In addition,
the Company recorded stock-based compensation attributable to
the converted ACM options (discussed above) of $645 in 2005.
|
|
(18) |
Workers Compensation Benefits |
The Companys operations generally are fully insured for
workers compensation and black lung claims. Insurance
premium expense for the years ended December 31, 2005, 2004
and 2003 was $14,108, $16,192 and $15,984, 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 these claims is an estimate of the
ultimate losses to be incurred on such claims based on the
Companys 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 obligations incurred prior to
January 31, 2003 are currently secured by surety bonds of
El Paso Corporation, an unrelated entity. Also see
Note 24.
The liability for self-insured workers compensation benefits at
December 31, 2005 and 2004 was $6,920 and $5,589,
respectively, including a current portion of $1,019 and $911,
respectively. Workers compensation expense for the years
ended December 31, 2005, 2004 and 2003 was $6,940, $7,697
and $4,464, respectively, including fees paid to the State of
West Virginia to be self-insured. The Company is required to
94
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
post bonds in the amount of $2,288 with the state of West
Virginia to secure estimated self-insured liabilities for claims
incurred during the period from February 1, 2003 through
June 30, 2004. The state of West Virginia allows the
self-insured companies to post these bonds in installments to be
fully secured by June 30, 2006. Through December 31,
2005 the Company has posted bonds totaling $1,508 and is
required to post the remaining $780 by June 30, 2006.
|
|
(19) |
Related Party Transactions |
As of December 31, 2002, the Company had notes payable in
the amount of $23,953 payable to a related party. These notes
along with other notes in the amount of $20,047 were converted
to contributed capital of the Company in 2003. The Company
incurred interest expense on the related party notes of $2,625
during the year ended December 31, 2003.
In conjunction with the purchase of U.S. AMCI, the Company
paid $35,000 for the working capital of U.S. AMCI, as
defined in the contribution agreement, subject to an audit. As
of December 31, 2003, the net working capital acquired was
estimated to be $31,569 and the difference of $3,431 was
recorded as a receivable. In September 2004, ANR Holdings, First
Reserve and the former owners of AMCI (the AMCI
Parties) agreed that the net working capital actually
acquired was $34,070, and the AMCI Parties paid the difference
of $930 to the Company. The parties further agreed that the AMCI
Parties would be entitled to any refund of, and obligated to
make any payment of, all federal black lung excise taxes of the
companies contributed by the AMCI Parties to ANR Holdings, but
only insofar as the taxes related to pre-closing or straddle
periods ending on or prior to the closing date of the
U.S. AMCI acquisition. As a result, $981 of the previously
recorded receivable from AMCI was reclassified to offset a
federal black lung excise tax accrued liability included in the
net working capital acquired. The remaining $1,520 was recorded
as an increase to goodwill.
The Company leases its Latrobe, Pennsylvania operating facility
from a company controlled by the AMCI Parties and one of the
Companys Executive Vice Presidents. Total rent expense was
$263, $144 and $114 for the years ended December 31, 2005,
2004 and 2003, 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. As of December 31, 2005, the Company had retained
an aggregate of $2,842 under this arrangement. 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 retained from 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. Based on the aggregate of $21,689,
$20,219 and $16,028 that the Company paid to NRP in lease,
royalty and property tax reimbursement payments for the years
ended December 31, 2005, 2004
95
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and 2003, respectively, NRP is the Companys largest
landlord. As of December 31, 2005 and 2004, the Company had
$1,522 and $1,430, respectively, in accounts payable to NRP. In
an unrelated transaction in December 2003, a 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.
One of the Companys 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 to the operations of the Companys AMFIRE regional
business unit in Pennsylvania. For the years ended
December 31, 2005, 2004 and 2003, the Companys
subsidiaries Alpha Coal Sales and AMFIRE Mining Company, LLC
made purchases of $581, $799 and $172, respectively, from
Robindale for trucking services and waste coal. For the years
ended December 31, 2005 and 2004, the Company had sales of
$463 and $206, respectively, to Robindale. The Company has
agreed that its Executive Vice Presidents continued
relationship with Robindale will not cause a breach of his
employment agreement with Alpha, and he has agreed that he will
not participate in any decisions to enter into any transactions
that might be 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. board members hold ownership in AMCI
International AG. For the years ended December 31, 2005 and
2004, total sales of $72,121 and $46,315, respectively, have
been made pursuant to these arrangements. Accounts receivable
due from AMCI International AG were $0 and $7,121 at
December 31, 2005 and 2004, respectively. The Company also
had total sales of $49,165 and $14,872 for the years ended
December 31, 2005 and 2004, respectively, to AMCI Australia
Pty Ltd., an entity owned by these board members. Accounts
receivable due from AMCI Australia Pty Ltd. were $7,847 at
December 31, 2005. In addition, American Metals and Coal
International, Inc., an entity owned by these board members,
facilitated coal transactions for an international buyer of
$9,427 and $5,202 for the years ended December 31, 2005 and
2004, respectively. The Company made coal purchases totaling
$13,931 and $1,658 during the years ended December 31, 2005
and 2004, respectively, from XCoal Energy and Resources, an
entity in which each of the aforementioned board members each
own more than a 10% equity interest. The Company had outstanding
payables due to XCoal Energy and Resources of $11,335 and $4 as
of December 31, 2005 and 2004, respectively.
One of the Companys subsidiaries made coal purchases
totaling $34,790 and $4,799 in the ordinary course of business
during the years ended December 31, 2005 and 2004,
respectively, from subsidiaries of Foundation Coal Holdings,
Inc. (Foundation). As of December 31, 2005,
three of the Companys directors also served as directors
of Foundation. Based on publicly available filings with the SEC,
the Company believes that First Reserve Fund IX, L.P. and
an entity affiliated with AMCI beneficially owned an aggregate
of approximately 9.2% of the outstanding shares of
Foundations common stock as of December 31, 2005. The
Company had outstanding payables due to Foundation of $2,605 and
$822 as of December 31, 2005 and 2004, respectively.
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.
96
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2005, aggregate future minimum lease
payments under operating leases and minimum royalties under coal
leases were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment | |
|
Coal | |
|
|
|
|
Facility | |
|
and Other | |
|
Royalties | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
Year ending December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
$ |
1,237 |
|
|
$ |
3,862 |
|
|
$ |
10,388 |
|
|
$ |
15,487 |
|
|
2007
|
|
|
1,020 |
|
|
|
2,206 |
|
|
|
10,079 |
|
|
|
13,305 |
|
|
2008
|
|
|
918 |
|
|
|
524 |
|
|
|
8,742 |
|
|
|
10,184 |
|
|
2009
|
|
|
833 |
|
|
|
|
|
|
|
8,496 |
|
|
|
9,329 |
|
|
2010
|
|
|
757 |
|
|
|
|
|
|
|
8,154 |
|
|
|
8,911 |
|
|
Thereafter
|
|
|
7,284 |
|
|
|
|
|
|
|
27,859 |
|
|
|
35,143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
12,049 |
|
|
$ |
6,592 |
|
|
$ |
73,718 |
|
|
$ |
92,359 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The above table includes amounts due under noncancelable leases
with initial or remaining lease terms in excess of one year.
Net rent expense amounted to $6,972 for the year ended
December 31, 2005, $6,290 for the year ended
December 31, 2004 and $6,113 for the year ended
December 31, 2003. Coal royalties expense amounted to
$57,952 for the year ended December 31, 2005, $43,858 for
the year ended December 31, 2004 and $29,027 for the year
ended December 31, 2003.
As of December 31, 2005, the Company had commitments to
purchase 4.5 million and 0.5 million tons of coal
at a cost of $258,490 and $27,420 in 2006 and 2007,
respectively. As part of a coal supply tonnage buyout agreement,
at December 31, 2005, the Company had commitments to pay
the customer $680 each year from 2006 to 2009, and $567 in 2010.
|
|
(21) |
Mergers and Acquisitions |
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 to be
made to the sellers in April 2006, transaction costs of $4,701,
$221,000 principal amount of promissory installment notes of one
of our indirect, wholly owned subsidiaries, 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 $53,184 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 Energys 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
97
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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
Companys 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 noncompete 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.
98
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 and 2004 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 (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 | |
|
2004 | |
|
|
| |
|
| |
Revenues
|
|
$ |
1,799,129 |
|
|
|
1,397,315 |
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$ |
22,315 |
|
|
|
15,676 |
|
Loss from discontinued operations
|
|
|
(266 |
) |
|
|
(4,054 |
) |
|
|
|
|
|
|
|
Net income
|
|
$ |
22,049 |
|
|
|
11,622 |
|
|
|
|
|
|
|
|
Pro forma earnings per share data:
|
|
|
|
|
|
|
|
|
Basic and diluted:
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$ |
0.35 |
|
|
|
0.25 |
|
|
Loss from discontinued operations
|
|
|
|
|
|
|
(0.07 |
) |
|
|
|
|
|
|
|
|
Pro Forma net income
|
|
$ |
0.35 |
|
|
|
0.18 |
|
|
|
|
|
|
|
|
|
Pro Forma weighted average shares
|
|
|
63,359,431 |
|
|
|
63,047,913 |
|
|
Pro Forma weighted average diluted
|
|
|
63,895,431 |
|
|
|
63,394,263 |
|
|
|
|
Moravian Run Reclamation Co. |
On April 1, 2004, the Company acquired substantially all of
the assets of Moravian Run Reclamation Co., Inc. (Moravian Run)
for $5 in cash. The Company agreed to pay Moravian Run monthly
overriding royalty payments for four years in an aggregate
amount of $1,000 and monthly payments for five years in respect
of leased equipment in an aggregate amount of $3,100 structured
as a capital lease with a present value of $2,360. The Company
also assumed $1,086 of reclamation obligations. The Moravian Run
assets included, as of March 31, 2004, four active surface
mines and two additional surface mines under development,
operating in close proximity to and serving many of the same
customers as the Companys AMFIRE business unit located in
Pennsylvania.
|
|
|
Cooney Bros. Coal Company |
On May 10, 2004, the Company 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 $2,500 in cash and an adjacent
coal refuse disposal site from a Cooney family trust for $300 in
cash. The Company also assumed approximately $102 of reclamation
obligations in connection with this acquisition.
The Moravian Run Reclamation Co. and Cooney Bros. Coal Company
acquisitions are not significant to the Companys financial
position, results of operations, or cash flows and, therefore,
are not included in the pro forma information presented below.
99
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On January 31, 2003, the Company acquired 100% of the
membership interest of Coastal Coal Company, LLC and certain
other assets. The results of Coastal Coals operations have
been included in the combined and consolidated financial
statements since that date. Coastal Coal Company, LLC is a
producer of thermal and industrial coals in the Appalachian
region.
The aggregate net purchase price for the Coastal Coal membership
interest and related assets was $67,772. Consideration included
cash of $44,172 and notes payable issued to the seller of
$23,600.
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 (January 31, 2003):
|
|
|
|
|
|
Current assets
|
|
$ |
31,614 |
|
Property, plant, and equipment
|
|
|
40,342 |
|
Intangibles
|
|
|
3,937 |
|
Other noncurrent assets
|
|
|
18,269 |
|
|
|
|
|
|
Total assets acquired
|
|
|
94,162 |
|
|
|
|
|
Current liabilities
|
|
|
(11,700 |
) |
Asset retirement obligation
|
|
|
(12,861 |
) |
Other noncurrent liabilities
|
|
|
(1,431 |
) |
Notes payable
|
|
|
(398 |
) |
|
|
|
|
|
Total liabilities assumed
|
|
|
(26,390 |
) |
|
|
|
|
|
Net assets acquired
|
|
$ |
67,772 |
|
|
|
|
|
American Metals and Coal International, Inc.
On March 11, 2003, the Company acquired the majority of the
North American operations of American Metals and Coal
International, Inc. (U.S. AMCI). The results of
U.S. AMCIs operations have been included in the
combined and consolidated financial statements since that date.
U.S. AMCI is a producer of Appalachian coal and a broker of
steam and metallurgical coals in the United States and abroad.
The aggregate purchase price for the U.S. AMCI net assets
was $121,299. Consideration included cash of $52,339, and common
and preferred membership interests in ANR Holdings issued,
valued at $68,960. The value attributed to the membership
interest was based on the cash contributions made by the other
owners of ANR Holdings.
The goodwill represents the portion of the purchase price
allocated to the U.S. AMCI sales force. The goodwill is not
deductible for federal income tax purposes.
100
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 (March 11, 2003):
|
|
|
|
|
|
Current assets
|
|
$ |
47,005 |
|
Property, plant, and equipment
|
|
|
94,732 |
|
Goodwill
|
|
|
17,121 |
|
Other noncurrent assets
|
|
|
976 |
|
|
|
|
|
|
Total assets acquired
|
|
|
159,834 |
|
|
|
|
|
Current liabilities
|
|
|
(17,307 |
) |
Asset retirement obligation
|
|
|
(8,768 |
) |
Postretirement medical benefits
|
|
|
(3,475 |
) |
Other noncurrent liabilities
|
|
|
(1,051 |
) |
Notes payable
|
|
|
(7,934 |
) |
|
|
|
|
|
Total liabilities assumed
|
|
|
(38,535 |
) |
|
|
|
|
|
Net assets acquired
|
|
$ |
121,299 |
|
|
|
|
|
On November 17, 2003, the Company acquired the assets of
Mears Enterprises, Inc (Mears Enterprises) and affiliated
companies. The results of Mears Enterprises and affiliates
operations have been included in the combined and consolidated
financial statements since that date. Mears Enterprises and
affiliates operate six mining complexes and a preparation plant,
all located in Pennsylvania.
The aggregate purchase price for the net assets of Mears
Enterprises and affiliates was $37,977 in cash.
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 (November 17, 2003):
|
|
|
|
|
|
Current assets
|
|
$ |
280 |
|
Property, plant, and equipment
|
|
|
39,476 |
|
Intangibles
|
|
|
200 |
|
Other noncurrent assets
|
|
|
100 |
|
|
|
|
|
|
Total assets acquired
|
|
|
40,056 |
|
Asset retirement obligation
|
|
|
(2,079 |
) |
|
|
|
|
|
Net assets acquired
|
|
$ |
37,977 |
|
|
|
|
|
The following unaudited pro forma financial information for the
year ended December 31, 2003 reflects the combined results
of operations of the Company as if the acquisitions of Coastal
Coal Company, LLC, U.S. AMCI, and Mears Enterprises and
affiliates had taken place on January 1, 2003. The pro
forma information includes primarily adjustments for
depreciation and depletion on acquired property, plant, and
equipment, and interest expense. The pro forma financial
information is not necessarily indicative of the results of
operations had the transactions been completed on the assumed
date.
|
|
|
|
|
Revenues
|
|
$ |
902,766 |
|
Net income
|
|
|
5,769 |
|
101
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
(22) |
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, 2005 and 2004, trade accounts
receivable from electric utilities totaled approximately $52,400
and $30,900, respectively. Credit is extended based on an
evaluation of the customers 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 Companys largest customer
accounted for less than 10% of total sales for each of the years
ended December 31, 2005, 2004 and 2003.
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, 2005, consisted of 44
active underground mines and 25 active surface mines located in
Central Appalachia and Northern Appalachia. Coal Operations also
includes the Companys purchased coal sales function, which
markets the Companys Appalachian coal to domestic and
international customers. The All Other category includes the
Companys equipment sales and 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 a highway construction
business 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, as adjusted, which the Company defines as net income
(loss) plus interest expense, income tax expense (benefit),
depreciation, depletion and amortization, less interest income,
and adjusted for minority interest.
Segment operating results and capital expenditures for the year
ended December 31, 2005, and segment assets as of
December 31, 2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate | |
|
|
|
|
Coal | |
|
|
|
and | |
|
|
|
|
Operations | |
|
All Other | |
|
Eliminations | |
|
Combined | |
|
|
| |
|
| |
|
| |
|
| |
Revenues
|
|
$ |
1,609,942 |
|
|
$ |
42,335 |
|
|
$ |
(24,942 |
) |
|
$ |
1,627,335 |
|
Depreciation, depletion, and amortization
|
|
|
70,832 |
|
|
|
2,171 |
|
|
|
119 |
|
|
|
73,122 |
|
EBITDA, as adjusted
|
|
|
229,476 |
|
|
|
4,601 |
|
|
|
(88,785 |
) |
|
|
145,292 |
|
Capital expenditures
|
|
|
118,379 |
|
|
|
296 |
|
|
|
3,357 |
|
|
|
122,032 |
|
Total assets
|
|
|
948,431 |
|
|
|
85,471 |
|
|
|
(20,244 |
) |
|
|
1,013,658 |
|
102
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Segment operating results and capital expenditures for the year
ended December 31, 2004, and segment assets as of
December 31, 2004 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate | |
|
|
|
|
Coal | |
|
|
|
and | |
|
|
|
|
Operations | |
|
All Other | |
|
Eliminations | |
|
Combined | |
|
|
| |
|
| |
|
| |
|
| |
Revenues
|
|
$ |
1,234,640 |
|
|
$ |
28,571 |
|
|
$ |
(10,509 |
) |
|
$ |
1,252,702 |
|
Depreciation, depletion, and amortization
|
|
|
51,732 |
|
|
|
1,435 |
|
|
|
2,094 |
|
|
|
55,261 |
|
EBITDA, as adjusted
|
|
|
166,159 |
|
|
|
2,808 |
|
|
|
(43,877 |
) |
|
|
125,090 |
|
Capital expenditures
|
|
|
68,940 |
|
|
|
332 |
|
|
|
1,167 |
|
|
|
70,439 |
|
Total assets
|
|
|
396,935 |
|
|
|
105,727 |
|
|
|
(25,541 |
) |
|
|
477,121 |
|
Segment operating results and capital expenditures for the year
ended December 31, 2003, and segment assets as of
December 31, 2003 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate | |
|
|
|
|
Coal | |
|
|
|
and | |
|
|
|
|
Operations | |
|
All Other | |
|
Eliminations | |
|
Combined | |
|
|
| |
|
| |
|
| |
|
| |
Revenues
|
|
$ |
771,791 |
|
|
$ |
18,277 |
|
|
$ |
(8,219 |
) |
|
$ |
781,849 |
|
Depreciation, depletion, and amortization
|
|
|
32,421 |
|
|
|
1,867 |
|
|
|
1,097 |
|
|
|
35,385 |
|
EBITDA, as adjusted
|
|
|
69,098 |
|
|
|
719 |
|
|
|
(21,873 |
) |
|
|
47,944 |
|
Capital expenditures
|
|
|
21,656 |
|
|
|
516 |
|
|
|
5,210 |
|
|
|
27,382 |
|
Total assets
|
|
|
342,019 |
|
|
|
70,797 |
|
|
|
(33,480 |
) |
|
|
379,336 |
|
Reconciliation of total segment EBITDA, as adjusted, to income
from continuing operations follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Total segment EBITDA, as adjusted from continuing operations
|
|
$ |
145,292 |
|
|
$ |
125,090 |
|
|
$ |
47,944 |
|
Interest expense
|
|
|
(29,937 |
) |
|
|
(20,041 |
) |
|
|
(7,848 |
) |
Interest income
|
|
|
1,064 |
|
|
|
531 |
|
|
|
103 |
|
Income tax expense
|
|
|
(18,953 |
) |
|
|
(5,150 |
) |
|
|
(898 |
) |
Depreciation, depletion and amortization
|
|
|
(73,122 |
) |
|
|
(55,261 |
) |
|
|
(35,385 |
) |
Minority interest
|
|
|
(2,918 |
) |
|
|
(22,781 |
) |
|
|
(1,164 |
) |
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$ |
21,426 |
|
|
$ |
22,388 |
|
|
$ |
2,752 |
|
|
|
|
|
|
|
|
|
|
|
The Company markets produced, processed and purchased coal to
customers in the United States and in international markets,
primarily Canada, Japan, Brazil and various European countries.
Export revenues totaled: $737,097, or approximately 45% of total
revenues for the year ended December 31, 2005; $597,902 or
approximately 48% of total revenues for the year ended
December 31, 2004; and, $220,818 or approximately 28% of
total revenues for the year ended December 31, 2003.
Included in total export revenues were: sales totaling $108,037
to customers located in Canada during the year ended
December 31, 2005; sales totaling $137,395 to customers
located in Japan during the year ended December 31, 2004;
and, sales totaling $88,630 to customers located in Canada
during the year ended December 31, 2003.
103
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
(a) |
Guarantees and Financial Instruments with Off-balance
Sheet Risk |
In the normal course of business, the Company is a party to
certain guarantees and financial instruments with off-balance
sheet risk, such as bank letters of credit and performance or
surety bonds. No liabilities related to these arrangements are
reflected in the Companys 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, 2005 was $65,487. The amount of surety bonds
outstanding at December 31, 2005 was $124,955, including
$116,680 related to the Companys reclamation obligations
(Note 14). The Company has provided guarantees for
equipment financing obtained by certain of its contract mining
operators totaling approximately $1,015 as of December 31,
2005. The estimated fair value of these guarantees is not
significant.
The Company is involved in various legal proceedings from time
to time in the normal course of business. In managements
opinion, the Company is not currently involved in any legal
proceeding which individually or in the aggregate could have a
material effect on the financial condition, results of
operations and/or cash flows of the Company.
In connection with the Companys acquisition of Coastal
Coal Company, the seller, El Paso CGP Company, has 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 April 2004 by the West
Virginia Workers Compensation Commission to be
approximately $5,369 on an undiscounted basis using claims data
through June 30, 2003. El Paso has posted a bond with
the state of West Virginia for the required discounted amount of
$3,722 for claims incurred prior to the acquisition.
|
|
(25) |
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 NKCs coal inventory, and the assumption by
the buyer of certain liabilities of NKC. The Company recorded a
gain on the sale of NKC of $704 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.
104
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following statement of operations data reflects the activity
for the discontinued operation for the years ended
December 31, 2005, 2004 and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Total revenues
|
|
$ |
4,523 |
|
|
$ |
17,016 |
|
|
$ |
10,717 |
|
Total costs and expenses (excluding impairment charge)
|
|
|
(5,607 |
) |
|
|
(18,442 |
) |
|
|
(11,668 |
) |
Impairment charge
|
|
|
|
|
|
|
(5,100 |
) |
|
|
|
|
Gain on sale of discontinued operations
|
|
|
704 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(380 |
) |
|
|
(6,526 |
) |
|
|
(951 |
) |
Miscellaneous income
|
|
|
2 |
|
|
|
12 |
|
|
|
1 |
|
Income tax benefit from discontinued operations
|
|
|
(93 |
) |
|
|
(1,190 |
) |
|
|
(230 |
) |
Minority interest in loss from discontinued operations
|
|
|
(72 |
) |
|
|
(2,951 |
) |
|
|
(230 |
) |
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
$ |
(213 |
) |
|
$ |
(2,373 |
) |
|
$ |
(490 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
(26) |
Supplemental Cash Flow Disclosures |
Cash paid for interest (net of amounts capitalized) for the
years ended December 31, 2005, 2004 and 2003 was $24,269,
$14,293 and $6,879, respectively. Income taxes paid by the
Company for the years ended December 31, 2005, 2004 and
2003 were $19,960, $4,047 and $0, 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, 2005 includes:
|
|
|
|
|
Issuance of 2,180,233 shares of Alpha Natural Resources,
Inc. common stock valued at $53,184 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 Notes 2 and 29. |
Significant non-cash activity for the year ended
December 31, 2004 includes:
|
|
|
|
|
Increase in other assets of $2,372 for the Virginia Coalfield
Employment Enhancement Tax Credit receivable. This represents
the portion of the tax credit allocated to Alpha NR Holding, Inc. |
|
|
|
The short-term financing of prepaid insurance premiums in the
amount of $15,228. |
|
|
|
Settlement of the net working capital acquired in conjunction
with the acquisition of U.S. AMCI recorded as an increase
in goodwill of $1,520, a decrease in due from affiliate of
$2,501 and a decrease in accrued expenses of $981. |
|
|
|
Increase in deferred gains on sales of property interests and
decrease in other liabilities of $1,480 for revisions in
estimated contract reclamation liability assumed in conjunction
with the acquisition of the Virginia coal operations of Pittston
Coal Company. |
|
|
|
Decrease in deferred gains on sales of property interests of
$5,000 as a result of additional consideration payable for the
acquisition of the Virginia coal operations of Pittston Coal
Company. |
105
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Significant non-cash activity for the year ended
December 31, 2003 includes:
|
|
|
|
|
Increase in other assets of $2,434 for the Virginia Coalfield
Employment Enhancement Tax Credit receivable. This represents
the portion of the tax credit allocated to Alpha NR Holding, Inc. |
|
|
|
The short-term financing of prepaid insurance premiums in the
amount of $14,425. |
|
|
|
The conversion of $44,000 of related party notes payable to
contributed capital. |
|
|
|
Seller financing of acquired entities of $23,600. |
|
|
|
Issuance of membership interests in ANR Holdings, LLC of $68,960
for the acquisition of U.S. AMCI. |
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 ACM, which
was owned by certain members of management, in exchange for the
net assets of U.S. AMCI and cash. All members of ANR
Holdings, other than ACM, held both common and preferred sharing
ratios representing membership interests. Pursuant to the
provisions of the ANR Holdings limited liability company
agreement, the income of ANR Holdings was allocated among its
members as follows:
|
|
|
|
|
First, to the holders of preferred sharing ratios on a pro rata
basis to the extent of any losses that had been allocated to
them in prior periods, |
|
|
|
Second, to the holders of preferred sharing ratios on a pro rata
basis up to the cumulative unallocated preferred yield (based on
an annual preferred yield of 12%), and |
|
|
|
Third, to the holders of common sharing ratios on a pro rata
basis. |
For purposes of allocating income in the year in which a new
member was admitted, ANR Holdings applied a proration method,
which allocated income based on the weighted-average ownership
of its membership interests for the year.
Prior to the Internal Restructuring on February 11, 2005,
the principal executive officers of Alpha and other key
employees held the entire membership interest of ACM, which in
turn owned a common membership interest in ANR Holdings. The
interest of ACM in ANR Holdings entitled ACM to receive
approximately 0.32% of the distributions made to the holders of
common membership interests in ANR Holdings (which we refer to
as the management members purchased interest).
In addition, ACM was entitled to receive, subject to certain
conditions, an additional distribution of up to 5% of any
profits (which we refer to as the management members
profits interest) upon the occurrence of a liquidity
event, as defined in the governing documents of ANR Holdings.
Generally, a liquidity event would occur when ANR Holdings was
sold or when it made a public sale of equity. The provisions of
ACMs limited liability company agreement also contained
put and call rights for the benefit of the executive and Alpha,
respectively, with respect to the purchased interests and
profits interests if the employment relationship of the
executive was terminated. In general, depending on when the
employment relationship was terminated, the put and call prices
were equal to (1) the sum of the greater of (a) the
members original investment minus returns on that
investment or (b) the fair market value, as defined, of the
members purchased interest on the date the put was
exercised, plus (2) a percentage of the fair market value,
as defined, of the profits interest on the date the put was
exercised, with the percentage increasing from 50% to 100% as
the length of the employment period increased from two to four
years from the date ACM was formed. For purposes of the put and
call, the agreement required Alpha to use the same method of
valuation that First Reserve Corporation uses for purposes of
reporting to its limited partners, reduced by a 25% minority
discount.
106
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
|
|
|
Dominion Terminal Associates |
As part of the Companys 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). 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, 2005, 2004 and 2003, the
Company made advances to DTA equal to its share of allocated
costs of $4,056, $3,266 and $3,348, respectively, offset by
outside revenues of $1,869, $1,763 and $1,321, respectively. The
Company records its share of losses in DTA equal to the amount
of advances. The Company does not guarantee the obligations of
DTA and is not otherwise committed to provide further financial
support. Accordingly, the Company does not reduce its investment
below zero.
In September 2004, Alpha, together with its affiliate American
Metals and Coal International, Inc. (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 $6,500 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. Alpha made payments
totaling $1,235 and $4,500 during the years ended
December 31, 2005 and 2004, respectively. The investment is
accounted for under the equity method, and is included in other
assets at December 31, 2005 and 2004.
Prior to the completion of the Internal Restructuring on
February 11, 2005 (Note 2), the minority interest
owners and ANR Fund IX Holdings, L.P. owned interests in
ANR Holdings, a limited liability company and pass-through
entity for income tax purposes. As a pass-through entity, ANR
Holdings provided information returns reflecting the allocated
income (loss) to the minority interest owners and ANR
Fund IX Holdings, L.P based upon their respective ownership
percentage and certain special allocations as provided by the
limited liability company agreement and the Internal Revenue
Code. The income tax consequences of the income (loss) allocated
to these owners for the periods prior to February 11, 2005
are not reflected in the financial statements. For these
periods, only the income tax expense associated with Alpha NR
Holding, Inc., a taxable entity, is included. The primary source
of the income tax impact is derived from the allocated income
(loss) from ANR Holdings, Alpha Natural Resources, LLC and its
operating subsidiaries, all of which are pass-through entities
for tax purposes. Subsequent to the Internal Restructuring, all
of the income of ANR Holdings is taxed to Alpha Natural
Resources, Inc.
107
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The federal and state income tax provisions from continuing
operations in 2005, 2004 and 2003 were offset by federal and
state income tax benefits included in the loss from discontinued
operations, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Continuing operations
|
|
$ |
18,953 |
|
|
$ |
5,150 |
|
|
$ |
898 |
|
Discontinued operations
|
|
|
(93 |
) |
|
|
(1,190 |
) |
|
|
(230 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
18,860 |
|
|
$ |
3,960 |
|
|
$ |
668 |
|
|
|
|
|
|
|
|
|
|
|
Significant components of income tax expense from continuing
operations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Current tax expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
13,841 |
|
|
$ |
1,625 |
|
|
$ |
|
|
|
State
|
|
|
1,364 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,205 |
|
|
|
1,625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
3,740 |
|
|
|
2,918 |
|
|
|
894 |
|
|
State
|
|
|
8 |
|
|
|
607 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,748 |
|
|
|
3,525 |
|
|
|
898 |
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
17,581 |
|
|
|
4,543 |
|
|
|
894 |
|
|
State
|
|
|
1,372 |
|
|
|
607 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
18,953 |
|
|
$ |
5,150 |
|
|
$ |
898 |
|
|
|
|
|
|
|
|
|
|
|
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 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Federal statutory income tax expense
|
|
$ |
15,154 |
|
|
$ |
17,612 |
|
|
$ |
1,685 |
|
Increases (reductions) in taxes due to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nondeductible stock-based compensation
|
|
|
16,056 |
|
|
|
|
|
|
|
|
|
|
Percentage depletion allowance
|
|
|
(4,625 |
) |
|
|
(3,376 |
) |
|
|
(1,087 |
) |
|
Extraterritorial income exclusion
|
|
|
(2,381 |
) |
|
|
(1,225 |
) |
|
|
|
|
|
State taxes, net of federal tax impact
|
|
|
2,016 |
|
|
|
395 |
|
|
|
3 |
|
|
Change in valuation allowance
|
|
|
(6,077 |
) |
|
|
559 |
|
|
|
815 |
|
|
Taxes not provided for minority interest
|
|
|
(1,021 |
) |
|
|
(8,189 |
) |
|
|
(625 |
) |
|
Taxes not provided for pass-through entity
|
|
|
(142 |
) |
|
|
(779 |
) |
|
|
91 |
|
|
Other, net
|
|
|
(27 |
) |
|
|
153 |
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual income tax expense
|
|
$ |
18,953 |
|
|
$ |
5,150 |
|
|
$ |
898 |
|
|
|
|
|
|
|
|
|
|
|
108
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, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
$ |
78,526 |
|
|
$ |
|
|
|
Asset retirement obligation
|
|
|
20,855 |
|
|
|
|
|
|
Goodwill
|
|
|
18,214 |
|
|
|
|
|
|
Postretirement medical benefits
|
|
|
9,538 |
|
|
|
|
|
|
Workers compensation benefits
|
|
|
4,730 |
|
|
|
|
|
|
Deferred gains on sales of property interests
|
|
|
2,614 |
|
|
|
|
|
|
Minimum tax credit carryforwards
|
|
|
8,989 |
|
|
|
1,249 |
|
|
Net operating loss carryforwards
|
|
|
|
|
|
|
5,598 |
|
|
Other
|
|
|
4,074 |
|
|
|
207 |
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
147,540 |
|
|
|
7,054 |
|
|
Less valuation allowance
|
|
|
(93,525 |
) |
|
|
(1,374 |
) |
|
|
|
|
|
|
|
|
|
Total net deferred tax assets
|
|
|
54,015 |
|
|
|
5,680 |
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Prepaid insurance and other prepaid expenses
|
|
|
(12,882 |
) |
|
|
|
|
|
Advance mining royalties
|
|
|
(5,174 |
) |
|
|
|
|
|
Virginia tax credit
|
|
|
(3,672 |
) |
|
|
(1,855 |
) |
|
Investment in limited liability company subsidiary
|
|
|
|
|
|
|
(6,869 |
) |
|
Other
|
|
|
(4,563 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(26,291 |
) |
|
|
(8,724 |
) |
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset (liability)
|
|
$ |
27,724 |
|
|
$ |
(3,044 |
) |
|
|
|
|
|
|
|
The breakdown of the net deferred tax asset (liability) as
recorded in the accompanying consolidated balance sheets is as
follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Current asset
|
|
$ |
|
|
|
$ |
4,674 |
|
Current liability
|
|
|
(11,243 |
) |
|
|
|
|
Noncurrent asset
|
|
|
38,967 |
|
|
|
|
|
Noncurrent liability
|
|
|
|
|
|
|
(7,718 |
) |
|
|
|
|
|
|
|
Total net deferred tax asset (liability)
|
|
$ |
27,724 |
|
|
$ |
(3,044 |
) |
|
|
|
|
|
|
|
109
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Changes in the net deferred tax asset (liability) during
the year ended December 31, 2005 were as follows:
|
|
|
|
|
ANR Fund IX Holdings, L.P. and Alpha NR Holding, Inc. and
Subsidiaries:
|
|
|
|
|
Net deferred tax liability at December 31, 2004
|
|
$ |
(3,044 |
) |
Deferred tax benefit recorded in period from January 1,
2005 to February 11, 2005 for continuing and discontinued
operations
|
|
|
192 |
|
|
|
|
|
Deferred tax liability balance at February 11, 2005
|
|
$ |
(2,852 |
) |
|
|
|
|
Alpha Natural Resources, Inc.:
|
|
|
|
|
Deferred tax liability balance on February 12, 2005
|
|
$ |
(2,852 |
) |
Gross deferred tax asset generated from the Internal
Restructuring
|
|
|
149,790 |
|
Valuation allowance
|
|
|
(115,286 |
) |
|
|
|
|
Net deferred tax asset recorded as part of Internal
Restructuring, with offsetting increase to additional paid-in
capital
|
|
|
34,504 |
|
Deferred tax expense recorded in period from February 12,
2005 to December 31, 2005 for continuing and discontinued
operations
|
|
|
(3,928 |
) |
|
|
|
|
Net deferred tax asset at December 31, 2005
|
|
$ |
27,724 |
|
|
|
|
|
Changes in the valuation allowance during the year ended
December 31, 2005 were as follows:
|
|
|
|
|
|
Valuation allowance at December 31, 2004
|
|
$ |
1,374 |
|
Changes in the valuation allowance not affecting income tax
expense:
|
|
|
|
|
|
Offset to gross deferred tax asset recorded in connection with
the Internal Restructuring (discussed below)
|
|
|
115,286 |
|
|
Reduction of previously recorded valuation allowance
attributable to acquisition of Premium Energy, Inc.
(Note 21)
|
|
|
(20,105 |
) |
|
Allowance established against deferred tax assets recorded in
connection with Nicewonder Acquisiton (Note 21)
|
|
|
3,047 |
|
Reduction of valuation allowance recorded as a reduction to
income tax expense
|
|
|
(6,077 |
) |
|
|
|
|
Valuation allowance at December 31, 2005
|
|
$ |
93,525 |
|
|
|
|
|
The Internal Restructuring resulted in an increase in the basis
of assets for income tax purposes of $389,993, which resulted in
a gross deferred tax asset of $149,790. This amount was offset
by an increase to the valuation allowance of $115,286. The
resulting net increase in deferred income taxes of $34,504
($25,729 estimated net increase recorded in the first quarter of
2005, plus additional net deferred tax asset of $8,775 recorded
in the fourth quarter of 2005) was credited to additional
paid-in capital, as the underlying change in the tax basis of
assets of the Company was caused by the Internal Restructuring
transactions between the Company and its stockholders.
The Company has not been in business long enough to develop a
strong earnings history (objective evidence as required by
generally accepted accounting principles), and it is likely that
the alternative minimum tax will exceed the regular tax for the
foreseeable future. Accordingly, the Company has recorded a
valuation allowance of $93,525 as of December 31, 2005,
which includes a full valuation allowance against the $8,989
minimum tax credit carryforward, which is available for an
unlimited carryforward period to offset regular federal income
tax in excess of the alternative minimum tax. The Company
monitors the valuation allowance each quarter and makes
adjustments to the allowance as appropriate based primarily upon
continued development of an earnings history and projected
future earnings based on future sales commit-
110
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
ments, which impacts the utilization of deferred tax assets.
Management believes that it is more likely than not that the
Company will generate sufficient taxable income in future years
to realize the net deferred tax asset of $27,724.
|
|
(30) |
Quarterly Financial Information (Unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005 | |
|
|
| |
|
|
First | |
|
Second | |
|
Third | |
|
Fourth | |
|
|
Quarter | |
|
Quarter | |
|
Quarter | |
|
Quarter | |
|
|
| |
|
| |
|
| |
|
| |
Total revenues
|
|
$ |
312,157 |
|
|
$ |
417,636 |
|
|
$ |
397,689 |
|
|
$ |
499,853 |
|
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 |
) |
|
|
266 |
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(25,801 |
) |
|
|
26,393 |
|
|
|
8,210 |
|
|
|
12,412 |
|
Earnings (loss) per share, as adjusted basic and
diluted
|
|
$ |
(0.71 |
) |
|
$ |
0.43 |
|
|
$ |
0.13 |
|
|
$ |
0.20 |
|
Quarterly results for the year ended December 31, 2005
included stock-based compensation expense, primarily relating to
the Internal Restructuring and the Companys 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.
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 (See Notes 2 and 27).
The results of operations from the Nicewonder Coal Group were
included in the Companys consolidated results of
operations from the date of the acquisition, October 26,
2005 (Note 21).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2004 | |
|
|
| |
|
|
First | |
|
Second | |
|
Third | |
|
Fourth | |
|
|
Quarter | |
|
Quarter | |
|
Quarter | |
|
Quarter | |
|
|
| |
|
| |
|
| |
|
| |
Total revenues
|
|
$ |
242,723 |
|
|
$ |
339,875 |
|
|
$ |
341,709 |
|
|
$ |
328,395 |
|
Income from operations
|
|
|
5,048 |
|
|
|
35,009 |
|
|
|
22,908 |
|
|
|
6,142 |
|
Income from continuing operations
|
|
|
1,412 |
|
|
|
12,449 |
|
|
|
7,267 |
|
|
|
1,260 |
|
Loss from discontinued operations
|
|
|
(175 |
) |
|
|
(206 |
) |
|
|
(1,846 |
) |
|
|
(145 |
) |
Net income
|
|
|
1,236 |
|
|
|
12,243 |
|
|
|
5,421 |
|
|
|
1,115 |
|
Earnings per share, as adjusted basic and diluted
|
|
$ |
0.08 |
|
|
$ |
0.83 |
|
|
$ |
0.37 |
|
|
$ |
0.08 |
|
Quarterly net income for the year ended December 31, 2004
included reductions for minority interest as follows: first
quarter $1,283; second quarter $12,678;
third quarter $5,602; and, fourth
quarter $267 (See Note 27).
The loss from discontinued operations for the third quarter of
2004 included an impairment charge of $5,100 (Note 25).
111
|
|
Item 9. |
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure |
None.
|
|
Item 9A. |
Controls and Procedures |
Evaluation of disclosure controls and procedures. Under
the supervision and with the participation of our management,
including our Chief Executive Officer and our Chief Financial
Officer, we evaluated the effectiveness of our disclosure
controls and procedures, as such term is defined under
Rule 13a-15(e)
promulgated under the Securities Exchange Act of 1934, as
amended. 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 annual report.
Changes in internal control over financial reporting.
Beginning with the year ending December 31, 2006,
Section 404 of the Sarbanes-Oxley Act of 2002 will require
us to include managements report on our internal control
over financial reporting in our Annual Report on
Form 10-K. The
internal control report must contain (1) a statement of
managements responsibility for establishing and
maintaining adequate internal control over our financial
reporting, (2) a statement identifying the framework used
by management to conduct the required evaluation of the
effectiveness of our internal control over financial reporting,
(3) managements assessment of the effectiveness of
our internal control over financial reporting as of the end of
our most recent fiscal year, including a statement as to whether
or not our internal control over financial reporting is
effective, and (4) a statement that our registered
independent public accounting firm has issued an attestation
report on managements assessment of our internal control
over financial reporting.
In order to achieve compliance with Section 404 within the
prescribed period, management has commenced a Section 404
compliance project under which management has engaged outside
consultants and adopted a detailed project work plan to assess
the adequacy of our internal control over financial reporting,
remediate any control weaknesses that may be identified,
validate through testing that controls are functioning as
documented and implement a continuous reporting and improvement
process for internal control over financial reporting. In
connection with our Section 404 compliance project, during
the fourth quarter of fiscal 2005 we undertook measures designed
to improve our internal control over financial reporting in the
following areas: documentation of controls and procedures;
segregation of duties; establishing review procedures,
developing consistent practices in applying accounting
procedures, establishing procedures to verify and update
accounting data, and strengthening controls over information
technology and the level of experience in public company
accounting and periodic reporting matters among our financial
and accounting staff. We expect to continue to make changes in
our internal control over financial reporting from time to time
during the period prior to December 31, 2006 in connection
with our Section 404 compliance project. Except as
described above, during the fourth quarter of fiscal year 2005,
there have been no changes in our internal control over
financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting.
Limitations of the effectiveness of internal control. A
control system, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the
objectives of the internal control system are met. Because of
the inherent limitations of any internal control system, no
evaluation of controls can provide absolute assurance that all
control issues, if any, within a company have been detected.
Notwithstanding these limitations, our disclosure controls and
procedures are designed to provide reasonable assurance of
achieving their objectives. Our Chief Executive Officer and
Chief Financial Officer have concluded that our disclosure
controls and procedures are, in fact, effective at the
reasonable assurance level.
|
|
Item 9B. |
Other Information. |
On March 22, 2006, the compensation committee of our board
of directors approved a Third Amended and Restated Employment
Agreement with Michael J. Quillen, our Chief Executive Officer,
and an Employment Agreement with Kevin S. Crutchfield, one of
our Executive Vice Presidents. The material terms of these
agreements are described below.
112
Third Amended and Restated Employment Agreement with Michael
J. Quillen. On March 22, 2006, our indirect
wholly-owned subsidiary, Alpha Natural Resources Services, LLC
(Alpha Services) entered into a Third Amended and
Restated Employment Agreement with Mr. Quillen to serve as
our Chief Executive Officer and to be nominated for re-election
to our board of directors, which agreement is effective as of
January 1, 2006. Pursuant to the employment agreement,
Mr. Quillen receives a base salary of $650,000 per
annum, subject to any increase as determined by our compensation
committee or the board of directors. In addition,
Mr. Quillen is entitled to receive under our Annual
Incentive Bonus Plan an annual bonus targeted at 100% of his
then current base salary, with a maximum target bonus
opportunity of 200% of his then current base salary, based upon
achievement of certain performance and other goals, and to
participate in our Retention Compensation Plan on the same basis
as his direct reports. Under the agreement, each time that our
compensation committee or board of directors grants any equity
securities to any senior executive officers reporting directly
to Mr. Quillen, other than inducement awards to potential
new employees, Mr. Quillen is entitled to be granted an
equity award of the same type of security granted to his direct
reports targeted at 150% of the highest number of such security
granted to any direct report. In the event a change in
control (as defined in the agreement) occurs during the
term of the agreement, Mr. Quillen is entitled to receive a
minimum lump sum cash payment equal to a pro rata target bonus
for the year in which the change in control occurs.
Mr. Quillen is also entitled to participate in our benefit
plans. In the event that any payments or distributions to
Mr. Quillen pursuant to the employment agreement or
otherwise would constitute an excess parachute
payment within the meaning of Section 280G of the
Internal Revenue Code, then the agreement obligates us (subject
to certain exceptions) to pay Mr. Quillen an additional tax
gross-up payment such
that the net amount retained by Mr. Quillen, after
deduction of any excise tax imposed under Section 4999 of
the Internal Revenue Code and any taxes imposed upon the
gross-up payment
itself, is equal to the amount that would have been payable or
distributable to Mr. Quillen if such payments or
distributions did not constitute excess parachute payments.
The initial term of Mr. Quillens employment agreement
ends on December 31, 2006, and the agreement renews for
successive annual terms unless terminated by Mr. Quillen or
Alpha Services in advance of the end of the initial term or any
renewal term. Alpha Services may terminate
Mr. Quillens employment at any time and for any
reason and Mr. Quillen may resign at any time and for any
reason. Under his employment agreement, Mr. Quillen has
agreed to certain non-competition provisions. In consideration
for this non-competition agreement and contingent upon
Mr. Quillens execution of an agreed-upon form of
separation of employment agreement and general release, Alpha
Services has agreed to make payments to Mr. Quillen
following the termination of his employment. If Mr. Quillen
resigns for good reason (as defined in the
agreement) or our employing subsidiary terminates
Mr. Quillen without employer cause (as defined
in the agreement), the vesting of all of Mr. Quillens
stock options, restricted stock and other equity rights awarded
after the date of his employment agreement will be fully
accelerated, and we will be required to pay to Mr. Quillen
his earned but unpaid salary through the date of termination,
any bonuses payable for prior years, the pro rata portion of his
bonus payable for the current year, and an amount equal to 200%
of his then current base salary and target annual bonus in
installments over the following twenty-four months, except that
if the resignation by Mr. Quillen for good cause or
termination by our employing subsidiary without employer cause
occurs during the 90 days prior to or on or within one year
after a change in control, then we will be required to pay him
an amount equal to 300% (instead of 200%) of his then current
base salary and target annual bonus and we will also be required
to pay him an amount equal to the difference between the present
value of his accrued benefits on the termination date under our
defined benefit plans and supplemental retirement plan and the
present value of benefits to which he would have been entitled
had he continued to participate in such plans for an additional
three years.
Employment Agreement with Kevin S. Crutchfield. On
March 22, 2006, Alpha Services entered into an Employment
Agreement with Mr. Crutchfield to serve as our Executive
Vice President, which agreement is effective as of
January 1, 2006. Pursuant to the employment agreement,
Mr. Crutchfield receives a base salary of $378,023 per
annum, subject to any increase as determined by our compensation
committee or the board of directors. In addition,
Mr. Crutchfield is entitled to receive under our Annual
Incentive Bonus Plan an annual bonus targeted at 75% of his then
current base salary, with a maximum target bonus opportunity of
150% of his then current base salary, based upon achievement of
certain performance and other goals, and to
113
participate in our Retention Compensation Plan. In the event a
change in control (as defined in the agreement)
occurs during the term of the agreement, Mr. Crutchfield is
entitled to receive a minimum lump sum cash payment equal to a
pro rata target bonus for the year in which the change in
control occurs. Mr. Crutchfield is also entitled to
participate in our benefit plans. In the event that any payments
or distributions to Mr. Crutchfield pursuant to the
employment agreement or otherwise would constitute an
excess parachute payment within the meaning of
Section 280G of the Internal Revenue Code, then the
agreement obligates us (subject to certain exceptions) to pay
Mr. Crutchfield an additional tax
gross-up payment such
that the net amount retained by Mr. Crutchfield, after
deduction of any excise tax imposed under Section 4999 of
the Internal Revenue Code and any taxes imposed upon the
gross-up payment
itself, is equal to the amount that would have been payable or
distributable to Mr. Crutchfield if such payments or
distributions did not constitute excess parachute payments.
The initial term of Mr. Crutchfields employment
agreement ends on December 31, 2006, and the agreement
renews for successive annual terms unless terminated by
Mr. Crutchfield or Alpha Services in advance of the end of
the initial term or any renewal term. Alpha Services may
terminate Mr. Crutchfields employment at any time and
for any reason and Mr. Crutchfield may resign at any time
and for any reason. Under his employment agreement,
Mr. Crutchfield has agreed to certain non-competition
provisions. In consideration for this non-competition agreement
and contingent upon Mr. Crutchfields execution of an
agreed-upon form of separation of employment agreement and
general release, Alpha Services has agreed to make payments to
Mr. Crutchfield following the termination of his
employment. If Mr. Crutchfield resigns for good
reason (as defined in the agreement) or our employing
subsidiary terminates Mr. Crutchfield without
employer cause (as defined in the agreement), the
vesting of all of Mr. Crutchfields stock options,
restricted stock and other equity rights awarded after the date
of his employment agreement will be fully accelerated, and we
will be required to pay to Mr. Crutchfield his earned but
unpaid salary through the date of termination, any bonuses
payable for prior years, the pro rata portion of his bonus
payable for the current year, and an amount equal to 150% of his
then current base salary and target annual bonus in installments
over the following twelve months, except that if the resignation
by Mr. Crutchfield for good cause or termination by our
employing subsidiary without employer cause occurs during the
90 days prior to or on or within one year after a change in
control, then we will be required to pay him an amount equal to
200% (instead of 150%) of his then current base salary and
target annual bonus, and we will also be required to pay him an
amount equal to the difference between the present value of his
accrued benefits on the termination date under our defined
benefit plans and supplemental retirement plan and the present
value of benefits to which he would have been entitled had he
continued to participate in such plans for an additional two
years.
On March 22, 2006, the compensation committee of our board
of directors also approved a Key Employee Separation Plan (the
Key Employee Plan). Participants in the Key Employee
Plan will include those employees of Alpha Natural Resources,
Inc. and its affiliates designated by our compensation committee
who are determined to be responsible for our continued growth,
development and future financial success. Participants in the
Key Employee Plan will be entitled to receive, in the event of a
change in control (as defined in the Key Employee
Plan), a lump sum cash payment equal to a pro rata target annual
bonus for the participant for the year in which the change in
control occurs, payable contemporaneously with the change in
control or as soon as administratively feasible thereafter.
Contingent upon the participants execution of an
agreed-upon form of general release, non-disparagement and
non-competition agreement, in the event the participants
employment is terminated by us without cause (as
defined in the Key Employee Plan) or by participant for
good reason (as defined in the Key Employee Plan)
during the 90 days prior to or on or within one year after
a change in control, the vesting of all of the
participants stock options, restricted stock and other
equity rights awarded after the adoption of the Key Employee
Plan will be fully accelerated, and we will be required to pay
to the participant all of his or her earned but unpaid salary
through the date of termination, any bonuses payable for prior
years and the pro rata portion of his or her bonus payable for
the current year, an amount equal to the difference between the
present value of the participants accrued benefits under
our defined benefit plans and supplemental retirement plan and
the present value of benefits to which the participant would
have been entitled had he or she continued to participate in
such plans for his or her applicable service period,
and an amount equal to the participants applicable
benefit factor multiplied by the participants
then current base salary and target annual bonus. Contingent
upon the participants execution
114
of an agreed-upon form of general release, non-disparagement and
non-competition agreement, in the event the participants
employment is terminated by us without cause (as
defined in the Key Employee Plan) or by participant for
good reason (as defined in the Key Employee Plan) at
any time prior to 90 days before a change in control, the
vesting of all of the participants stock options,
restricted stock and other equity rights awarded after the
adoption of the Key Employee Plan will be fully accelerated, and
we will be required to pay to the participant all of his or her
earned but unpaid salary through the date of termination, any
bonuses payable for prior years and the pro rata portion of his
or her bonus payable for the current year, an amount equal to
the difference between the present value of the
participants accrued benefits under our defined benefit
plans and supplemental retirement plan and the present value of
benefits to which the participant would have been entitled had
he or she continued to participate in such plans for his or her
applicable service period, and an amount equal to
the participants applicable benefit factor
multiplied by the participants then current base salary
and target annual bonus. The compensation committee will
determine the applicable service period (either 24, 18 or
12 months) and benefit factor (either 2.0, 1.5 or 1.0) for
each employee designated as a participant under the Key Employee
Plan. The compensation committee designated the following named
executive officers of Alpha Natural Resources, Inc. (as defined
in Item 402(a)(3) of
Regulation S-K) as
participants under the Key Employee Plan: Michael D. Brown and
David C. Stuebe, each of whom has a service period of
24 months and a benefit factor of 2.0 in the case of
termination by us without cause or by the executive for good
reason during the 90 days prior to or on or within one year
after a change in control, and a benefit factor of 1.5 in the
case of such a termination at any time prior to 90 days
before a change in control.
PART III
The information required by Part III is incorporated by
reference from the information identified below contained in the
Alpha Natural Resources, Inc. Proxy Statement for the Annual
Meeting of Stockholders to be held May 17, 2006 (the
Proxy Statement). The Proxy Statement is to be filed
with the SEC pursuant to Regulation 14A of the Exchange
Act, no later than 120 days after the end of the fiscal
year covered by this annual report.
|
|
Item 10. |
Directors and Executive Officers of the Registrant |
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 controller, 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.
|
|
Item 11. |
Executive Compensation |
Incorporated herein by reference from the Proxy Statement.
|
|
Item 12. |
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters |
Incorporated herein by reference from the Proxy Statement.
|
|
Item 13. |
Certain Relationships and Related Transactions |
Incorporated herein by reference from the Proxy Statement.
|
|
Item 14. |
Principal Accounting Fees and Services |
Incorporated herein by reference from the Proxy Statement.
115
PART IV
|
|
Item 15. |
Exhibits, Financial Statement Schedules |
(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
|
Report of Independent Registered Public Accounting Firm
|
Consolidated Balance Sheets, December 31, 2005 and 2004
|
Consolidated Statements of Income, years ended December 31,
2005, 2004 and 2003
|
Consolidated Statements of Stockholders Equity and
Partners Capital, years ended December 31, 2005, 2004
and 2003
|
Consolidated Statements of Cash Flows, years ended
December 31, 2005, 2004 and 2003
|
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. |
116
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. |
|
|
|
|
Title: |
Vice President and Chief Financial Officer |
Date: March 28, 2006
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
Michael J. Quillen |
|
March 28, 2006 |
|
President, Chief Executive Officer and Director (Principal
Executive Officer) |
|
/s/ David C. Stuebe
David C. Stuebe |
|
March 28, 2006 |
|
Vice President and Chief Financial Officer (Principal Financial
Officer) |
|
/s/ Eddie W. Neely
Eddie W. Neely |
|
March 28, 2006 |
|
Vice President, Assistant Secretary
and Controller
(Principal Accounting Officer) |
|
/s/ E. Linn Draper, Jr.
E. Linn Draper, Jr. |
|
March 28, 2006 |
|
Director |
|
/s/ John W. Fox, Jr.
John W. Fox, Jr. |
|
March 28, 2006 |
|
Director |
|
/s/ Glenn A. Eisenberg
Glenn A. Eisenberg |
|
March 28, 2006 |
|
Director |
|
/s/ Fritz R. Kundrun
Fritz R. Kundrun |
|
March 28, 2006 |
|
Director |
|
/s/ Ted G. Wood
Ted G. Wood |
|
March 28, 2006 |
|
Director |
|
/s/ Hans J. Mende
Hans J. Mende |
|
March 28, 2006 |
|
Director |
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.) |
|
|
|
|
|
Exhibit No. |
|
Description of Exhibit |
|
|
|
|
|
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.) |
|
|
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.) |
|
|
|
|
|
Exhibit No. |
|
Description of Exhibit |
|
|
|
|
|
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 30, 2005.) |
|
|
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.) |
|
|
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.) |
|
|
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.) |
|
|
|
|
|
Exhibit No. |
|
Description of Exhibit |
|
|
|
|
|
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* |
|
Third Amended and Restated Employment Agreement between Alpha
Natural Resources Services, LLC and Michael J. Quillen dated
March 22, 2006 |
|
|
10 |
.4 |
|
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 |
.5* |
|
Employment Agreement between Alpha Natural Resources Services,
LLC and Kevin S. Crutchfield dated March 22, 2006 |
|
|
10 |
.6 |
|
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 |
.7 |
|
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 |
.8 |
|
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.) |
|
|
10 |
.9 |
|
Alpha Natural Resources Annual Incentive Bonus (AIB) Plan
(the AIB Plan) (Incorporated by reference to
Exhibit 10.9 to Amendment No. 2 to the Registration
Statement on Form S-1 of Alpha Natural Resources, Inc.
(File No. 333-121002) filed on February 2, 2005.) |
|
|
10 |
.10 |
|
Amended and Restated Alpha Coal Management LLC 2004 Long-Term
Incentive Plan (Incorporated by reference to Exhibit 10.10
to Amendment No. 2 to the Registration Statement on
Form S-1 of Alpha Natural Resources, Inc. (File
No. 333-121002) filed on February 2, 2005.) |
|
|
10 |
.11 |
|
Alpha Natural Resources, Inc. 2005 Long-Term Incentive Plan
(Incorporated by reference to Exhibit 10.11 to Amendment
No. 2 to the Registration Statement on Form S-1 of
Alpha Natural Resources, Inc. (File No. 333-121002) filed
on February 2, 2005.) |
|
|
10 |
.12 |
|
Form of Alpha Natural Resources, Inc. Grantee Stock Option
Agreement for Alpha Natural Resources, Inc. 2005 Long-Term
Incentive Plan (Incorporated by reference to Exhibit 10.15
to the Annual Report on Form 10-K of Alpha Natural
Resources, Inc. (File No. 1-32423) filed on March 30,
2005.) |
|
|
10 |
.13 |
|
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.) |
|
|
10 |
.14 |
|
Form of Alpha Natural Resources, Inc. Restricted Stock Agreement
for Alpha Natural Resources, Inc. 2005 Long-Term Incentive Plan
(for grants after March 3, 2006) (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
March 10, 2006.) |
|
|
10 |
.15 |
|
Form of Alpha Natural Resources, Inc. Performance Share Award
Agreement for Alpha Natural Resources, Inc. 2005 Long-Term
Incentive Plan (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 March 10,
2006.) |
|
|
|
|
|
Exhibit No. |
|
Description of Exhibit |
|
|
|
|
|
10 |
.16 |
|
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 |
.17* |
|
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 |
|
|
10 |
.18* |
|
Partial Surrender Agreement dated November 1, 2005, by and
between ACIN LLC and Alpha Land and Reserves, LLC, amending the
ACIN Lease |
|
|
10 |
.19 |
|
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 |
.20 |
|
Amended and Restated Alpha Natural Resources, Inc. and
Subsidiaries Deferred Compensation Plan (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 August 15, 2005.) |
|
|
10 |
.21 |
|
Summary of Alpha Natural Resources, Inc. Director Compensation
Policy (Incorporated by reference to Exhibit 10.21 to the
Annual Report on Form 10-K of Alpha Natural Resources, Inc.
(File No. 1-32423) filed on March 30, 2005.) |
|
|
10 |
.22 |
|
Performance goals and target bonuses set for 2006 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 January 31, 2006 and
incorporated by this reference |
|
|
10 |
.23 |
|
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.) |
|
|
10 |
.24* |
|
Plan Document and Summary Plan Description of the Alpha Natural
Resources, Inc. Key Employee Separation Plan |
|
|
21 |
.1 |
|
List of Subsidiaries (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.) |
|
|
23* |
|
|
Consent of KPMG LLP |
|
|
31(a)* |
|
|
Certification Pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934, as adopted pursuant to
§302 of the Sarbanes-Oxley Act of 2002 |
|
|
31(b)* |
|
|
Certification Pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934, as adopted pursuant to
§302 of the Sarbanes-Oxley Act of 2002 |
|
|
32(a)* |
|
|
Certification Pursuant to 18 U.S.C. §1350, As Adopted
Pursuant to §906 of the Sarbanes-Oxley Act of 2002 |
|
|
32(b)* |
|
|
Certification Pursuant to 18 U.S.C. §1350, As Adopted
Pursuant to §906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
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. |