SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
(Mark
One)
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þ
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
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For
the fiscal year ended December 31,
2006
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OR
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
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For
the transition period from
to
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Commission
File No. 1-32423
ALPHA
NATURAL RESOURCES, INC.
(Exact
name of registrant as specified in its charter)
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Delaware
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02-0733940
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(State
or other jurisdiction of incorporation or
organization)
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(I.R.S.
Employer Identification Number)
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One
Alpha Place, P.O. Box 2345, Abingdon,
Virginia
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24212
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code:
(276) 619-4410
Securities
registered pursuant to Section 12(b) of the Act:
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Title
of Each Class
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Name
of Each Exchange on Which Registered
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Common
stock, $0.01 par value
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New
York Stock Exchange
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Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark whether the registrant is a well-known seasoned issuer, as
defined
in Rule 405 of the Securities Act. Yes þ
No 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 registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. þ
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer (as defined in Exchange Act
Rule 12b-2).
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þ Large
accelerated filer
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o Accelerated
filer
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¨ Non-accelerated
filer
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Indicate
by check mark whether the registrant is a shell company (as defined in Exchange
Act Rule 12b-2). Yes o
No þ
The
aggregate market value of the Common Stock held by non-affiliates of the
registrant on June 30, 2006, was approximately $1,107,287,407 based on the
last sales price reported that date on the New York Stock Exchange of $19.62
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, 2007 —
65,543,546 shares.
DOCUMENTS
INCORPORATED BY REFERENCE
Part III
incorporates certain information by reference from the registrant’s definitive
proxy statement for the 2007 annual meeting of stockholders, which proxy
statement will be filed no later than 120 days after the close of the
registrant’s fiscal year ended December 31, 2006.
CAUTIONARY
NOTE REGARDING FORWARD LOOKING STATEMENTS
This
report includes statements of our expectations, intentions, plans and beliefs
that constitute “forward-looking statements” within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 and are intended to come within the safe
harbor
protection provided by those sections. These statements, which involve risks
and
uncertainties, relate to analyses and other information that are based on
forecasts of future results and estimates of amounts not yet determinable
and
may also relate to our future prospects, developments and business strategies.
We have used the words “anticipate,” “believe,” “could,” “estimate,” “expect,”
“intend,” “may,” “plan,” “predict,” “project,” “should” and similar terms and
phrases, including references to assumptions, in this report to identify
forward-looking statements. These forward-looking statements are made based
on
expectations and beliefs concerning future events affecting us and are subject
to uncertainties and factors relating to our operations and business
environment, all of which are difficult to predict and many of which are
beyond
our control, that could cause our actual results to differ materially from
those
matters expressed in or implied by these forward-looking
statements.
The
following factors are among those that may cause actual results to differ
materially from our forward-looking statements:
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•
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market
demand for coal, electricity and
steel;
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•
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future
economic or capital market
conditions;
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•
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weather
conditions or catastrophic weather-related
damage;
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•
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our
production capabilities;
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•
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the
consummation of financing, acquisition or disposition transactions
and the
effect thereof on our business;
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•
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our
ability to successfully integrate the operations we have acquired
with our
existing operations, as well as our ability to successfully integrate
operations we may acquire in the
future;
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•
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our
plans and objectives for future operations and expansion or
consolidation;
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•
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our
relationships with, and other conditions affecting, our
customers;
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•
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timing
of changes in customer coal
inventories;
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•
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changes
in, renewal of and acquiring new long-term coal supply
arrangements;
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•
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inherent
risks of coal mining beyond our
control;
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•
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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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•
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competition
in coal markets;
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•
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railroad,
barge, truck and other transportation performance and
costs;
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•
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the
geological characteristics of Central and Northern Appalachian
coal
reserves;
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•
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availability
of mining and processing equipment and
parts;
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•
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our
assumptions concerning economically recoverable coal reserve
estimates;
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•
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availability
of skilled employees and other employee workforce
factors;
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•
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regulatory
and court decisions;
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•
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future
legislation and changes in regulations, governmental policies or
taxes;
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•
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changes
in postretirement benefit
obligations;
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•
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our
liquidity, results of operations and financial
condition;
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•
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decline
in coal prices;
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•
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forward
sales and purchase contracts not accounted for as a
hedge;
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•
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indemnification
of certain obligations not being met;
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•
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continued
funding of the road construction
business;
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•
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disruption
in coal supplies; and
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•
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Other
factors, including the other factors discussed in Item 1A, “Risk
Factors” of this report.
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When
considering these forward-looking statements, you should keep in mind the
cautionary statements in this report and the documents incorporated by
reference. We do not undertake any responsibility to release publicly any
revisions to these forward-looking statements to take into account events
or
circumstances that occur after the date of this report. Additionally, we
do not
undertake any responsibility to update you on the occurrence of any
unanticipated events which may cause actual results to differ from those
expressed or implied by the forward-looking statements contained in this
report.
-2-
2006
ANNUAL REPORT ON FORM 10-K
TABLE
OF CONTENTS
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Page
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PART I
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Item 1.
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4 | |
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Item 1A.
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21 | |
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Item
1B.
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39 | |||
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Item 2.
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40 | |
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Item 3.
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44 | |
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Item 4.
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44 | |
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PART II
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Item 5.
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44 | |
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Item 6.
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45 | |
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Item 7.
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50 | |
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Item 7A.
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69 | |
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Item 8.
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71 | |
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Item 9.
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127 | |
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Item 9A.
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127 | |
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Item 9B.
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128 | |
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PART III
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Item 10.
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128 | ||
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Item 11.
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128 | ||
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Item 12.
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128 | ||
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Item 13.
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128 | ||
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Item 14.
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128 | ||
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PART IV
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Item 15.
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129 |
PART I
Overview
We
are a leading Appalachian coal supplier. We produce, process and sell steam
and
metallurgical coal from eight regional business units, which, as of February
1,
2007, are supported by 38 active underground mines,
27
active surface mines and 10 preparation plants located throughout Virginia,
West
Virginia, Kentucky, and Pennsylvania, as well as a road construction business
in
West Virginia that recovers coal. We are also actively involved in the purchase
and resale of coal mined by others, the majority of which we blend with coal
produced from our mines, allowing us to realize a higher overall margin for
the
blended product than we would be able to achieve selling these coals separately.
Steam
coal, which is primarily purchased by large utilities and industrial customers
as fuel for electricity generation, accounted for approximately 66% of our
2006
coal sales volume. The majority of our steam coal sales volume in 2006 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
34% of our 2006 coal sales volume. Metallurgical coal generally sells at
a
premium over steam coal because of its higher quality and its value in the
steelmaking process as the raw material for coke. We believe that the use
of the
coal we sale will grow as demand for power and steel increases.
During
2006, we sold a total of 29.1 million tons of steam and metallurgical coal
and generated coal sales revenues of $1,687.6 million, EBITDA of
$279.4 million and net income of $128.2 million. We define and
reconcile EBITDA and explain its importance, in note 3 under “Selected
Financial Data.” Our coal sales during 2006 consisted of 24.7 million tons of
produced and processed coal, including 1.4 million tons purchased from
third parties and processed at our processing plants or loading facilities
prior
to resale, and 4.4 million tons of purchased coal that we resold without
processing. Approximately 68% of the purchased coal in 2006 was blended with
coal produced from our mines prior to resale. Approximately 35% of our sales
revenue in 2006 was derived from sales made outside the United States, primarily
in Canada, Italy, France, India, Brazil, and Turkey.
As
of
December 31, 2006, we owned or leased 548.6 million tons of proven and probable
coal reserves. Of our total proven and probable reserves, approximately 82%
are
low sulfur reserves, with approximately 57% having sulfur content below 1.0%.
Approximately 91% of our total proven and probable reserves have a high Btu
content which creates more energy per unit when burned compared to coals
with
lower Btu content. We believe that our total proven and probable reserves
will
support current production levels for more than 20 years.
As
discussed in Note 24 to our financial statements, we have one reportable
segment — Coal Operations — which consists of our coal extracting,
processing and marketing operations, as well as our purchased coal sales
function and certain other coal-related activities, including our recovery
of
coal incidental to our road construction operations. Our equipment and part
sales and equipment repairs operations, terminal services, coal analysis
services, leasing of mineral rights, and the non-coal recovery portion of
our road construction operations described below under “— Other
Operations” are not included in our Coal Operations segment.
History
In
2002, ANR Holdings, LLC (“ANR Holdings”) was formed by First Reserve
Fund IX, L.P. and ANR Fund IX Holdings, L.P. (referred to as the
“First Reserve Stockholders” or collectively with their affiliates, “First
Reserve”) and our management to serve as the top-tier holding company of the
Alpha Natural Resources organization. On February 11, 2005, Alpha Natural
Resources, Inc. succeeded to the business of ANR Holdings in a series of
transactions that we refer to collectively as the “Internal Restructuring,” and
on February 18, 2005, Alpha Natural Resources, Inc. completed an initial
public offering of its common stock. When we use the terms “Alpha,” “we,” “our,”
“the Company” and similar terms in this report, we mean (1) prior to our
Internal Restructuring, ANR Fund IX Holdings, L.P. and Alpha NR Holding,
Inc. (a subsidiary of First Reserve Fund IX, L.P. prior to our Internal
Restructuring) and subsidiaries on a combined basis and (2) after our
Internal Restructuring, Alpha Natural Resources, Inc. and its consolidated
subsidiaries. Alpha Natural Resources, Inc. was formed under the laws of
the
State of Delaware on November 29, 2004.
On
December 13, 2002, the First Reserve Stockholders, who then owned 100% of
the membership interests of ANR Holdings, acquired the majority of the Virginia
coal operations of Pittston Coal Company (our “Predecessor”), a subsidiary of
the Brink’s Company (formerly known as The Pittston Company), through
wholly-owned subsidiaries of ANR Holdings for $62.9 million.
On
January 31, 2003, wholly owned subsidiaries of ANR Holdings acquired
Coastal Coal Company, LLC for $67.8 million, and on March 11, 2003,
ANR Holdings and its subsidiaries acquired the U.S. coal production and
marketing operations of American Metals and Coal International, Inc. (“AMCI”)
for $121.3 million. Of the consideration for the U.S. AMCI
acquisition, $69.0 million was provided in the form of an approximate 44%
membership interest in ANR Holdings issued to the owners of AMCI, which together
with the issuances of an approximate 1% membership interest to Madison Capital
Funding, LLC and Alpha Coal Management reduced the First Reserve Stockholders
membership interest in ANR Holdings to approximately 55%.
On
November 17, 2003, we acquired the assets of Mears Enterprises, Inc.
(“Mears”) for $38.0 million.
On
April 1, 2004, we acquired substantially all of the assets of Moravian Run
Reclamation Co., Inc. for five thousand dollars in cash and the assumption
by us
of certain liabilities, including four active surface mines and two additional
surface mines under development, operating in close proximity to and serving
many of the same customers as our AMFIRE business unit located in
Pennsylvania.
On
May 10, 2004, we acquired a coal preparation plant and railroad loading
facility located in Portage, Pennsylvania and related equipment and coal
inventory from Cooney Bros. Coal Company for $2.5 million in cash and an
adjacent coal refuse disposal site from a Cooney family trust for
$0.3 million in cash.
On
October 13, 2004, our AMFIRE business unit entered into a coal mining lease
with Pristine Resources, Inc., a subsidiary of International Steel Group
Inc.,
for the right to deep mine a substantial area of the Upper Freeport Seam
in
Pennsylvania.
On
February 11, 2005, we succeeded to the business and became the indirect
parent entity of ANR Holdings in connection with the Internal Restructuring
and,
on February 18, 2005, we completed an initial public offering of our common
stock (the “IPO”).
On
April 14, 2005, we sold the assets of our Colorado mining subsidiary,
National King Coal LLC, and related trucking subsidiary, Gallup Transportation
and Transloading Company, LLC (collectively, “NKC”) to an unrelated third party
for cash in the amount of $4.4 million, plus an amount in cash equal to the
fair market value of NKC’s coal inventory, and the assumption by the buyer of
certain liabilities of NKC.
On
October 26, 2005, we acquired the Nicewonder Coal Group’s coal reserves and
operations in southern West Virginia and southwestern Virginia. The Nicewonder
acquisition consisted of the purchase of the outstanding capital stock of
White
Flame Energy, Inc., Twin Star Mining, Inc. and Nicewonder Contracting, Inc.,
the
equity interests of Powers Shop, LLC and Buchanan Energy, LLC and substantially
all of the assets of Mate Creek Energy of W. Va., Inc. and Virginia Energy
Company, and the business of Premium Energy, Inc. by merger. We paid an
aggregate purchase price of $328.2 million in the Nicewonder
acquisition. The operations we acquired from the Nicewonder Coal Group
constitute our eight business unit, Callaway Natural Resources.
On
May 1, 2006, we
acquired certain coal mining operations in eastern Kentucky from Progress
Fuels
Corp, a subsidiary of Progress Energy (Progress Acquisition) for $28.8 million,
including adjustments for working capital. The Progress Acquisition consisted
of
the purchase of the outstanding capital stock of Diamond May Coal Co. and
Progress Land Corp. and the assets of Kentucky May Coal Co., Inc. The operations
acquired are adjacent to our Enterprise business unit and have been integrated
with Enterprise.
On
December 28, 2006, we paid $3.3 million and were obligated to make an additional
contribution of $7.0 million in 2007 for a 94% ownership interest in Gallatin
Materials LLC (“Gallatin”), a lime manufacturing venture near Cincinnati, Ohio.
Gallatin plans to construct two rotary pre-heater lime kilns over the next
several years to produce lime to be sold primarily to coal-burning utilities
as
a scrubbing agent for removing sulfur dioxide from flue gas, helping them
to
meet increasingly stringent air quality standards under the federal Clean
Air
Act. The lime will also be sold to steel producers for use as flux in electric
arc and basic oxygen furnaces. The minority owners were granted restricted
member interests in Gallatin, which vest based on performance criteria
approximately three years from the closing date and which, if earned in their
entirety, would reduce our ownership to 77.5%. We are committed to providing
financing through a $3.8 million loan and a $2.6 million letter of credit
to
cover project cost overruns.
Mining
Methods
We
produce coal using two mining methods: underground room and pillar mining
using
continuous mining equipment, and surface mining.
Underground
Mining.
Underground mines in the United States are typically operated using one of
two
different methods: room and pillar mining or longwall mining. In 2006,
approximately 58% of our coal production volume from mines operated by our
subsidiaries’ employees and contractors came from underground mining operations
using the room and pillar method with continuous mining equipment. In room
and
pillar mining, rooms are cut into the coal bed leaving a series of pillars,
or
columns of coal, to help support the mine roof and control the flow of air.
Continuous mining equipment is used to cut the coal from the mining face.
Generally, openings are driven 20 feet wide, and the pillars are generally
rectangular in shape, measuring 35-50 feet wide by 35-80 feet long. As
mining advances, a grid-like pattern of entries and pillars is formed. Shuttle
cars 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.
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 2006, approximately
42% of our coal production volume from mines operated by our subsidiaries’
employees and contractors came from surface mines. This method involves the
removal of overburden (earth and rock covering the coal) with heavy earthmoving
equipment and explosives, loading out the coal, replacing the overburden
and
topsoil after the coal has been excavated and reestablishing vegetation and
plant life and making other improvements that have local community and
environmental benefit. Overburden is typically removed at our mines using
large,
rubber-tired diesel loaders. Seam recovery for surface mining is typically
90%
or more.
Coal
Characteristics
In
general, coal of all geological compositions is characterized by end use
as
either steam coal or metallurgical coal. Heat value, sulfur and ash content,
and
volatility, in the case of metallurgical coal, are the most important variables
in the profitable marketing and transportation of coal. These characteristics
determine the best end use of a particular type of coal. We mine, process,
market and transport bituminous coal, characteristics of which are described
below.
Heat
Value.
The heat
value of coal is commonly measured in British thermal units, or “Btus.” A Btu is
the amount of heat needed to raise the temperature of one pound of water
by one
degree Fahrenheit. 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 548.6 million tons of proven and probable reserves,
approximately 91% 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 82% of our proven and probable reserves are low
sulfur coal.
High
sulfur coal can be burned in plants equipped with sulfur-reduction technology,
such as scrubbers, which can reduce sulfur dioxide emissions by 50% to 90%.
Plants without scrubbers can burn high sulfur coal by blending it with lower
sulfur coal or by purchasing emission allowances on the open market, allowing
the user to emit a predetermined amount of sulfur dioxide. Some older coal-fired
plants have been retrofitted with scrubbers, although most have shifted to
lower
sulfur coals as their principal strategy for complying with Phase II of the
Clean Air Act’s Acid Rain regulations. We expect that any new coal-fired
generation plant built in the United States will use clean coal-burning
technology.
Ash &
Moisture Content.
Ash is
the inorganic residue remaining after the combustion of coal. As with sulfur
content, ash content varies from seam to seam. Ash content is an important
characteristic of coal because electric generating plants must handle and
dispose of ash following combustion. The absence of ash is also important
to the
process by which metallurgical coal is transformed into coke for use in steel
production. Moisture content of coal varies by the type of coal, the region
where it is mined and the location of coal within a seam. In general, high
moisture content decreases the heat value and increases the weight of the
coal,
thereby making it more expensive to transport. Moisture content in coal,
as
sold, can range from approximately 5% to 30% of the coal’s weight.
Coking
Characteristics.
The
coking characteristics of metallurgical coal are typically measured by the
coal’s fluidity, ARNU and volatility. Fluidity and ARNU tests measure the
expansion and contraction of coal when it is heated under laboratory conditions
to determine the strength of coke that could be produced from a given coal.
Typically, higher numbers on these tests indicate higher coke strength.
Volatility refers to the loss in mass, less moisture, when coal is heated
in the
absence of air. The volatility of metallurgical coal determines the percentage
of feed coal that actually becomes coke, known as coke yield. Coal with a
lower
volatility produces a higher coke yield and is more highly valued than coal
with
a higher volatility, all other metallurgical characteristics being
equal.
Mining
Operations
We
currently have eight regional business units, including two in Virginia,
four
predominately in West Virginia, one in Pennsylvania, and one in Kentucky.
As of
February 1,
2007, these business units include 10 preparation plants, each of which receive,
blend, process and ship coal that is produced from one or more of our 65
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
2006, most of our preparation plants also processed coal that we purchased
from
third party producers before reselling it to our customers. Within each regional
business unit, mines have been developed at strategic locations in close
proximity to our preparation plants and rail shipping facilities. Coal is
transported from our regional business units to customers by means of railroads,
trucks, barge lines and ocean-going vessels from terminal
facilities.
The
following table provides location and summary information regarding our eight
regional business units and the preparation plants and active mines associated
with these business units as of February 1, 2007:
Regional
Business Units
|
Number
and Type of
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||||||||||||||||||||||
|
Mines
as of
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||||||||||||||||||||||
|
February1,
2007
|
2006
|
|||||||||||||||||||||
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Preparation
plant(s) as of
|
Under-
|
Production
of Saleable Tons
|
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Regional
Business Unit
|
Location
|
February
1, 2007
|
ground
|
Surface
|
Total
|
Railroad
|
(in
000’s)(1)
|
|||||||||||||||
|
Paramont
|
Virginia | Toms Creek |
8
|
6
|
14
|
NS
|
5,640
|
|||||||||||||||
|
Dickenson-Russell
|
Virginia | McClure River and Moss#3 |
6
|
1
|
7
|
CSX,
NS
|
2,140
|
|||||||||||||||
|
Kingwood
|
West Virginia | Whitetail |
1
|
0
|
1
|
CSX
|
1,414
|
|||||||||||||||
|
Brooks
Run
|
West Virginia | Erbacon |
3
|
1
|
4
|
CSX
|
2,749
|
|||||||||||||||
|
Welch
|
West Virginia | Litwar and Kepler |
12
|
0
|
12
|
NS
|
2,998
|
|||||||||||||||
|
AMFIRE
|
Pennsylvania | Clymer and Portage |
5
|
13
|
18
|
NS
|
3,398
|
|||||||||||||||
|
Enterprise
|
Kentucky | Roxana |
3
|
3
|
6
|
CSX
|
2,554
|
|||||||||||||||
|
Callaway
|
West Virginia/ Virginia |
0
|
3
|
3
|
NS
|
3,934 | ||||||||||||||||
|
|
Total |
38
|
27
|
65
|
24,827 | |||||||||||||||||
|
(1)
|
Includes
coal purchased from third-party producers that was processed at
our
subsidiaries’ preparation plants in 2006.
|
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.
The
following provides a brief description of our business units as of February
1,
2007
Paramont.
Our
Paramont business unit produces coal from eight underground mines using
continuous miners and the room and pillar mining method. Three of the
underground mines are operated by independent contractors. The coal from
these
mining operations is transported by truck to the Toms Creek preparation plant
operated by Paramont, or the McClure River or Moss #3 preparation plants
operated by Dickenson-Russell. At the preparation plant, the coal is cleaned,
blended and loaded onto rail for shipment to customers. Paramont also operates
six 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 2006, Paramont purchased
approximately 208,000 tons of coal from third parties that was blended with
Paramont’s coal and shipped to our customers. As of February 1, 2007, the
Paramont business unit was operating at a capacity to ship approximately
five
and one half million tons per year.
Dickenson-Russell.
Our
Dickenson-Russell business unit produces coal from six underground mines
using
continuous miners and the room and pillar mining method. Three of the
underground mines are operated by independent contractors. The coal from
these
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 2006, Dickenson-Russell purchased
approximately 137,000 tons of coal from third parties that was blended with
Dickenson-Russell’s coal and shipped to our customers. As of February 1, 2007,
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 2006, Kingwood purchased approximately 37,000 tons
of
coal from third parties that was blended with Kingwood’s coal and shipped to our
customers. As of February 1, 2007, 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 by Brooks Run employees. Brooks Run purchased approximately 15,000
tons
of coal from third parties in 2006. As of February 1, 2007, the Brooks Run
business unit was operating at a capacity to ship approximately two million
tons
per year.
Welch.
Our
Welch business unit produces coal from twelve underground mines using continuous
miners and the room and pillar mining method. Three of the underground mines
are
operated by our employees, and the others are operated by independent
contractors. The coal is transported by truck or rail to the Litwar and Kepler
preparation plants operated by 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, 2007. During 2006, the Welch
business unit purchased approximately 868,000 tons of coal from third parties
that was blended with other coals and shipped to our customers. As of February
1, 2007, 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 five underground mines using continuous
miners and the room and pillar mining method. All of the underground mining
operations at AMFIRE are staffed and operated by AMFIRE employees. The
underground coal is delivered directly by truck to the customer, or to the
Clymer or Portage coal preparation plants or raw coal loading docks where
it is
cleaned, blended and loaded onto rail or truck for shipment to customers.
AMFIRE
also operates thirteen truck/loader surface mines, six 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 2006, AMFIRE purchased approximately 137,000
tons
of coal from third parties that was blended with AMFIRE’s coal and shipped to
our customers. As of February 1, 2007, the AMFIRE business unit was operating
at
a capacity to ship approximately three and one-quarter million tons per year.
Enterprise.
Our
Enterprise business unit produces coal from three underground mines using
continuous miners and the room and pillar mining method. Two 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, two of which are operated by independent
contractors. The coal produced by the surface mines is transported to the
Roxana
preparation plant and Pioneer load-out facility where it is blended and loaded
onto rail for shipment to customers. During 2006, Enterprise purchased
approximately 45,000 tons of coal from third parties that was blended with
Enterprise’s coal and shipped to our customers. As of February 1, 2007, the
Enterprise business unit was operating at a capacity to ship approximately
three
million tons per year. The Progress acquisition was included in the Enterprise
operations beginning May 2006.
Callaway.
Our
Callaway business unit produces coal from three surface mining operations
operated by our Callaway employees and also recovers coal from the road
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 facility where it is blended and
loaded onto rail for shipment to customers. Coal from the Premium Energy
Surface
mine and highwall miner is currently trucked to Arch Coal, Inc’s Mingo Logan
mining complex, where a portion of the coal is sold to Arch Coal Inc. with
the
remaining tons to various other customers. Coal from the Twin Star surface
mine
is trucked to our Virginia Energy load-out facility 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
2006. As of February 1, 2007, 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 road construction business.
Marketing,
Sales and Customer Contracts
Our
marketing and sales force, which is principally based in Latrobe, Pennsylvania,
included 35
employees as of December 31, 2006, and consists of sales managers,
distribution/traffic managers and administrative personnel. In addition to
selling coal produced in our eight regional business units, we are also actively
involved in the purchase and resale of coal mined by others, the majority
of
which we blend with coal produced from our mines. We have coal supply
commitments with a wide range of electric utilities, steel manufacturers,
industrial customers and energy traders and brokers. Our overall sales
philosophy is to focus first on the customer’s individual needs and
specifications, as opposed to simply selling our production inventory. By
offering coal of both steam and metallurgical grades 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 29.1 million tons of coal in 2006, consisting of 24.7 million tons
of
produced and processed coal and 4.4 million tons of purchased coal that we
resold without processing. Of our total purchased coal sales of 5.8 million
tons
in 2006, approximately 3.9 million tons were blended prior to resale, 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
1.4 million tons of our 2006 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 26.7 million tons
of coal
in 2005, consisting of 20.6 million tons of produced and processed coal and
6.1
million tons of purchased coal that we resold without processing. Of our
total
purchased coal sales of 7.6 million tons in 2005, approximately 5.0 million
tons
were blended prior to resale. Approximately 1.5 million tons of our 2005
purchased coal sales were processed by us. 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 processed prior to resale. The breakdown of tons sold by
market served for 2006, 2005 and 2004 is set forth in the table
below:
|
Steam
Coal Sales(1)
|
Metallurgical
Coal Sales
|
||||||||||||
|
Year
|
Tons
|
%
of Total Sales
|
Tons
|
%
of Total Sales
|
|||||||||
|
(In
millions, except percentages)
|
|||||||||||||
|
2006
|
19.1
|
66
|
%
|
10.0
|
34
|
%
|
|||||||
|
2005
|
16.7
|
62
|
%
|
10.0
|
38
|
%
|
|||||||
|
2004
|
15.8
|
63
|
%
|
9.5
|
37
|
%
|
|||||||
|
(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 4%, 3% and 4% of total sales in 2006, 2005 and
2004,
respectively.
|
|
(2)
|
Our
sales of steam coal during 2006 and 2005 were made primarily to
large
utilities and industrial customers in the Eastern region of the
United
States, and our sales of metallurgical coal during those years
were made
primarily to steel companies in the Northeastern and Midwestern
regions of
the United States and in several countries in Europe, Asia and
South
America.
|
We
sold
coal to over 118 different customers in 2006. Our top ten customers in 2006
accounted for approximately 38% of 2006 revenues and our largest customer
during
2006 accounted for approximately 7% of 2006 revenues. The following table
provides information regarding our exports (including to Canada) in 2006,
2005
and 2004 by revenues and tons sold:
|
Year
|
Export
Tons Sold
|
Export
Tons Sold as a Percentage of Total Coal Sales
|
Export
Sale Revenues (1)
|
Export
Sales Revenue as a Percentage of Total Revenues
|
|||||||||
|
(In
millions, except percentages)
|
|||||||||||||
|
2006
|
7.2
|
25
|
%
|
$
|
668.8
|
35
|
%
|
||||||
|
2005
|
8.4
|
31
|
%
|
$
|
737.1
|
45
|
%
|
||||||
|
2004
|
8.1
|
32
|
%
|
$
|
597.9
|
48
|
%
|
||||||
| (1) |
Export
sale revenues in 2006 and 2005 include approximately $0.7 million
and $0.6
million, respectively, in equipment export sales. All other export
sale
revenues are coal sales revenues and freight and handling
revenues.
|
Our
export shipments during 2006, 2005 and 2004 serviced customers in 18, 16
and 18
countries, respectively, across North America, Europe, South America, Asia
and
Africa. Canada was our largest export market in 2006,
with
sales to Canada accounting for approximately 17% of export revenues and 6%
of
total revenues. Canada was our largest export market in 2005 accounting for
approximately 15% of export revenues and approximately 7% of total revenues,
while Japan was our largest export market in 2004, with sales to Japan
accounting for approximately 23% 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. The majority of the metallurgical coal sales contracts we entered
into during 2004 and 2005 were long-term contracts. During 2006, approximately
63% and 45% of our steam and metallurgical coal sales volume, respectively,
was
delivered pursuant to long-term contracts and during 2005, approximately
86% and
75% of our steam and metallurgical coal sales volume, respectively, was
delivered pursuant to long-term contracts.
At
February 5, 2007, 83% of our planned 2007 production was committed and priced
and 7% was committed and unpriced, with approximately 2.0 million tons
uncommitted. Committed steam coal prices for 2007 average $48 to $49 per
ton and
committed metallurgical prices average $72 to $73 per ton. Approximately
43% of
our planned production in 2008 was committed at February 5, 2007. At December
31, 2006, we had commitments to purchase 2.4 million tons of coal during
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.
Distribution
We
employ transportation specialists who negotiate freight and terminal agreements
with various providers, including railroads, trucks, barge lines, and terminal
facilities. Transportation specialists also coordinate with customers, mining
facilities and transportation providers to establish shipping schedules that
meet the customer’s needs. Our produced and processed coal is loaded from our
ten preparation plants and in certain cases directly from our mines. The
coal we
purchased is loaded in some cases directly from mines and preparation plants
operated by third parties or from an export terminal. Virtually all of our
coal
is transported from the mine to our preparation plants by truck or rail,
and
then from the preparation plant to the customer by means of railroads, trucks,
barge lines and ocean-going vessels from terminal facilities. Rail shipments
constituted approximately 73% of total shipments of coal volume produced
and
processed coal from our mines to the preparation plant to the customer in
2006.
The balance was shipped from our preparation plants, loadout facilities or
mines
via truck. In 2006, approximately 8% of our coal sales were ultimately delivered
to customers through transport on the Great Lakes, approximately 12% was
moved
through the Norfolk Southern export facility at Norfolk, Virginia, approximately
4% was moved through the coal export terminal at Newport News, Virginia operated
by Dominion Terminal Associates, 2% was moved through the export terminal
at
Baltimore, Maryland, and approximately 1% 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.”
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 2006, only 3% 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 92% 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 2006 and
2005,
we largely competed with producers from Australia, Canada, and other
international producers of metallurgical coal.
Our
business is seasonal, with operating results varying from quarter to quarter.
We
generally experience lower sales and hence build coal inventory during the
winter months primarily due to the freezing of lakes that we use to transport
coal to some of our customers.
In
addition to competition for coal sales in the United States and internationally,
we compete with other coal producers, particularly in the Appalachian region,
for the services of experienced coal industry employees at all levels of
our
mining operations.
Other
Operations
We
have
other operations and activities in addition to our normal coal production,
processing and sales business, including:
Road
Construction Business. NCI
operates a road construction business under a contract with the State of
West
Virginia Department of Transportation. Pursuant to the contract, NCI is building
approximately 11 miles of rough grade road in West Virginia over the next
four
to five years and, in exchange, NCI will be compensated by West Virginia
based
on the number of cubic yards of material excavated and/or filled to create
a
road bed, as well as for certain other cost components. As the road is
constructed any coal recovered is sold by NCI as part of its coal operations.
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 $34.9 million for 2006, of which
approximately 86% was generated by services provided to our other subsidiaries
and approximately 14% was generated by sales to external customers, including
$0.7 million to export customers.
Dominion
Terminal Associates.
Through
our subsidiary Alpha Terminal Company, LLC, we hold a 32.5% interest in Dominion
Terminal Associates, a 22 million-ton annual capacity coal export terminal
located in Newport News, Virginia. The terminal, constructed in 1982, provides
the advantages of 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 2006, we shipped a
total
of 1.2 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 2006 were
$4.9 million, partially offset by payments received in 2006 of
$1.7 million. The terminal is held in a partnership with subsidiaries of
three other companies, Dominion Energy (20%), Arch Coal (17.5%) and Peabody
Energy (30%). We and our other interested partners are currently pursuing
an
investment of approximately $35.0 million for the construction of a new
coal import facility at the terminal. Engineering and permitting work on
the
project has been completed. Construction could begin in the second half of
2007.
Gallatin
Materials LLC.
On
December 28, 2006, the Company paid $3.3 million and we are obligated to
make an
additional contribution of $7.0 million in 2007 for a 94% ownership interest
in
Gallatin Materials LLC (Gallatin), a lime manufacturing venture near Cincinnati,
Ohio. Gallatin plans to construct two rotary pre-heater lime kilns to produce
lime to be sold primarily to coal-burning utilities as a scrubbing agent
for
removing sulfur dioxide from flue gas. The lime will also be sold to steel
producers for use as flux in electric arc and basic oxygen
furnaces.
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
94% of our coal production in 2006 came from mines operated by union-free
employees, and as of December 31, 2006, over 92% of 3,546 employees were
union-free. We believe our employee relations are good, and there have been
no
material work stoppages at any of our properties in the past ten years.
Environmental
and Other Regulatory Matters
Federal,
state and local authorities regulate the U.S. coal mining industry with
respect to matters such as employee health and safety, permitting and licensing
requirements, air quality standards, water pollution, plant and wildlife
protection, the reclamation and restoration of mining properties after mining
has been completed, the discharge of materials into the environment, surface
subsidence from underground mining, and the effects of mining on groundwater
quality and 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 operating procedures. Future legislation, regulations or orders
may also cause coal to become a less attractive fuel source, thereby reducing
coal’s share of the market for fuels used to generate electricity. 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, 2006, we had accrued $77.3 million for reclamation
liabilities and mine closures, including $7.8 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; climatology; 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 state’s 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 OSM’s 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 company’s
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 were recently approved and will
decrease to $0.315 per surface-mined ton and $0.135 per deep-mined ton in
October 2007. Further reductions will occur in October 2012. The main purpose
of
the fee proceeds is to fund the reclamation of mine lands closed or abandoned
prior to SMCRA’s adoption in 1977. In 2006, we recorded $5.0 million of
expense related to this reclamation tax.
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. During the fourth quarter
of 2006, we also entered into a committed bonding facility with the Chubb
Group
of Insurance Companies. Chubb has agreed, subject to certain conditions,
to
issue surety bonds on our behalf in a maximum amount of $50.0 million. As
of
December 31, 2006, we have posted an aggregate of $138.0 million in
reclamation bonds and $10.4 million of other types of bonds under these
facilities.
Clean
Air Act.
The
Clean Air Act and comparable state laws that regulate air emissions affect
coal
mining operations both directly and indirectly. Direct impacts on coal mining
and processing operations include Clean Air Act permitting requirements and/or
emission control requirements relating to particulate matter which may include
controlling fugitive dust. The Clean Air Act indirectly affects coal mining
operations by extensively regulating the emissions of fine particulate matter
measuring 2.5 micrometers in diameter or smaller, sulfur dioxide, nitrogen
oxides, mercury and other compounds emitted by coal-fired 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
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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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 District of Columbia to reduce 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,
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. The rule is also subject
to
judicial challenge, which makes its impact difficult to
assess.
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Clean
Air Mercury Rule.
On March15, 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. Stricter limitations on mercury emissions from power
plants
may adversely affect the demand for coal. In 2006, EPA proposed
a federal
plan to directly regulate mercury emissions from coal-fired power
plants
where certain states have not provided their own
plans.
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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. In February 2004, EPA entered into a
consent
decree with parties including the states that had given notice
of intent
to sue in 2003 to compel the Agency to set new source performance
standards. Under the consent decree, EPA promulgated final amendments
to
the new source performance standards for utility and industrial
boilers in
February 2006. In April 2006, ten states, the District of Columbia,
and
New York City petitioned the United States Court of Appeals for
the
District of Columbia Circuit for review of those new source performance
standards for utility and industrial boilers, claiming that the
EPA
improperly refused to regulate carbon dioxide as a criteria pollutant
and
that the standards for sulfur dioxide and nitrogen oxides are
insufficient. In June 2006, the United States Court of Appeals
heard oral
argument in a public nuisance action filed by eight states (Connecticut,
Delaware, Maine, New Hampshire, New Jersey, New York, and Vermont)
and New
York City to curb carbon dioxide emissions from power plants. In
November
2006, the United States Supreme Court heard oral argument in a
case that
commenced in June 2003 challenging the EPA’s refusal to regulate carbon
dioxide and other greenhouse gas emissions from new motor vehicles
on the
ground that it lacks the authority to list carbon dioxide as a
criteria
pollutant. If these lawsuits result in the issuance of a court
order
requiring the EPA to set emission limitations for carbon dioxide,
this in
turn could reduce the amount of coal our customers would purchase
from us.
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Regional
Emissions Trading.
In December 2005, seven Northeastern states (Connecticut, Delaware,
Maine,
New Hampshire, New Jersey, New York, and Vermont) signed the Regional
Greenhouse Gas Initiative (RGGI) Agreement, calling for a ten percent
reduction of carbon dioxide emissions by 2019, with compliance
to begin
January 1, 2009. Maryland signed onto RGGI in July 2006. The RGGI
final
model rule was issued on August 15, 2006, and participating states
are
developing their state rules. Climate change developments are also
taking
place on the west coast in California. In September 2006, California
adopted greenhouse gas legislation that prohibits long-term base-load
generation from having a greenhouse gas emissions rate greater
than that
of a combined cycle natural gas generator and that allows for long-term
deals with generators that sequester carbon emissions. In October
2006, a
trading partnership between California and the states participating
in
RGGI was announced. In December 2006, the California Public Utility
Commission proposed regulations proposing to set a 1,000 lb/MWh
carbon
dioxide emission standard. The California Public Utility Commission
is
expected to adopt final regulations implementing California’s greenhouse
gas legislation for investor-owned utilities in February 2007.
These and
other state climate change rules will likely require additional
controls
on coal-fired utilities and industrial boilers and may even cause
some
users of our coal to switch from coal to a lower carbon fuel. 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. Each state affected by this EPA program
must
develop and submit to EPA by mid-2007 a plan to achieve the goals
of the
program. The program may result in additional emissions restrictions
from
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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Wastewater
Discharge 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.
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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 state’s anti-degradation regulations would prohibit the diminution of
water quality in these streams. In general, waters discharged from coal mines
to
high quality streams may be required to meet 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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Dredge
and Fill Permits Act:
Many mining activities, such as the development of refuse impoundments,
fresh water impoundments, refuse fills, valley fills, and other
similar
structures, may result in impacts to Jurisdictional Waters. Jurisdictional
Waters typically include wetlands, streams (including intermittent
streams
and their tributaries) and may, in certain instances, include man-made
conveyances that have a hydrologic connection to such streams or
wetlands.
Prior to conducting such mining activities in jurisdictional waters,
coal
companies are required to obtain a Section 404 authorization (referred
to
as a dredge or fill permit) from the Army Corps of Engineers (“COE”). The
COE is authorized to issue two types of Section 404 permits: a
general
permit referred to as a nationwide permit, more specifically a
Nationwide
Permit 21 (“NWP 21”) for surface mining activities and an individual
permit. The COE may issue nationwide permits for any category of
activities involving the discharge of dredge or fill material if
the COE
determines that such activities are similar in nature and will
cause only
minimal adverse environmental effects individually or cumulatively.
Generally, the COE has used the NWP 21 to authorize impacts to
jurisdictional waters from mining activities because the NWP process
is a
more streamlined permitting approach and consumes less COE resources.
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The
use of the NWP 21 to authorize stream impacts from mining activities was
challenged in October 2003 in federal court in southern West Virginia. Although
the challenge was successful at the district court level, the challenge was
later overturned at the court of appeals. During the appeal period only,
the COE
was enjoined (only in the southern district of West Virginia) from using
the NWP
21 to authorize dredge and fill activities for mining impacts. A similar
challenge was filed in January 2005 prior to the court of appeals overturning
the West Virginia district court) in federal court in eastern Kentucky and
no
decision has been rendered. Although we had operations in both states subject
to
the litigation, our Section 404 permits were in place and no production
activities were interrupted. As a precaution to mitigate the uncertainty
surrounding the use of the NWP 21 in these areas, we converted certain ongoing
permits, pending applications, and planned applications from NWP 21 permits
to
individual permits. This precautionary step was taken to minimize the potential
for future production interruptions.
Mine
Safety and Health.
Stringent health and safety standards have been in effect since Congress
enacted
the Coal Mine Health and Safety Act of 1969. The Federal Mine Safety and
Health
Act of 1977 significantly expanded the enforcement of safety and health
standards and imposed safety and health standards on all aspects of mining
operations. In addition to federal regulatory programs, all of the states
in
which we operate also have state programs for mine safety and health regulation
and enforcement. Collectively, federal and state safety and health regulation
in
the coal mining industry is perhaps the most comprehensive and pervasive
system
for protection of employee health and safety affecting any segment of
U.S. industry. In reaction to the recent mine accidents in West Virginia,
state and federal legislatures and regulatory authorities have increased
scrutiny of mine safety matters and passed more stringent laws governing
mining.
For example, in 2006, Congress enacted the Mine Improvement and New Emergency
Response Act of 2006 (“MINER Act”), which imposed additional burdens on coal
operators, including (i) obligations related to (a) the development of new
emergency response plans that address post-accident communications, tracking
of
miners, breathable air, lifelines, training and communication with local
emergency response personnel, (b) establishing additional requirements for
mine
rescue teams, and (c) promptly notifying federal authorities in the event
of a
certain events, (ii) increased penalties for violations of the applicable
federal laws and regulations, and (iii) the requirement that new standards be
implemented regarding the manner in which closed areas of underground mines
are
sealed, and (iv) other matters. Various states also have enacted their own
new
laws and regulations addressing many of these same subjects. While existing
and
proposed regulations have a significant effect on our operating costs, our
U.S. competitors are subject to the same degree of regulation.
Under
the Black Lung Benefits Revenue Act of 1977 and the Black Lung Benefits Reform
Act of 1977, as amended in 1981, each coal mine operator must secure payment
of
federal black lung benefits to claimants who are current and former employees
and to a trust fund for the payment of benefits and medical expenses to
claimants who last worked in the coal industry prior to July 1, 1973. The
trust fund is funded by an excise tax on production of up to $1.10 per
ton for deep-mined coal and up to $0.55 per ton for surface- mined coal,
neither amount to exceed 4.4% of the gross sales price. The excise tax does
not
apply to coal shipped outside the United States. In 2006, we recorded
$14.8 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. The U. S. Fish and Wildlife Service is working closely with OSM and
State
regulatory agencies to insure that Threatened and Endangered (T&E) species
are protected from mining-related impacts. Should more stringent protective
measures be applied to these T&E species or to their critical habitat, then
we could experience increased operating costs or difficulty in obtaining
future
mining permits.
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, and OSM is currently developing these regulations. 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 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 Russia’s 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 5.4% of our sales volume in 2006, 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 Protocol’s 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 and California, 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
SEC’s
website, at www.sec.gov. You may also read and copy any document we file
at the
SEC’s public reference room located at 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 them.
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Item 1A.
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Risk
Factors
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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.
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Declines
in the prices we receive for our coal could adversely affect our operating
results and our ability to generate the cash flows we require to improve
our
productivity and invest in our operations.
Our
coal mining production and delivery is subject to conditions and events beyond
our control, which could result in higher operating expenses and/or decreased
production and sales and adversely affect our operating
results.
A
majority of our coal mining operations are conducted in underground mines
and
the balance of our operations are 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.
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 66% and 62% of our coal sales volume during
2006 and 2005, respectively. The majority of our sales of steam coal for
2006
and 2005 were to
U.S.
and Canadian electric power generators. The amount of coal consumed for U.S.
and
Canadian electric power generation is affected primarily by the overall demand
for electricity, the location, availability, quality and price of competing
fuels for power such as natural gas, nuclear, fuel oil and alternative energy
sources such as hydroelectric power, technological developments, and
environmental and other governmental regulations. We expect many new power
plants will be built to produce electricity during peak periods of demand,
when
the demand for electricity rises above the “base load demand,” or minimum amount
of electricity required if consumption occurred at a steady rate. However,
we
also expect that many of these new power plants will be fired by natural
gas
because they are cheaper to construct than coal-fired plants and because
natural
gas is a cleaner burning fuel. In addition, the increasingly stringent
requirements of the Clean Air Act may result in more electric power generators
shifting from coal to natural gas-fired power plants. Any reduction in the
amount of coal consumed by North American electric power generators could
reduce
the price of steam coal that we mine and sell, thereby reducing our revenues
and
adversely impacting our earnings and the value of our coal reserves.
We
produce metallurgical coal that is used in both the U.S. and foreign steel
industries. Metallurgical coal accounted for approximately 34% and 38% of
our
coal sales volume during 2006 and 2005, respectively. In recent years,
U.S. steel producers have experienced a substantial decline in the prices
received for their products, due at least in part to a heavy volume of foreign
steel imported into the United States. 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. 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 2005, the EIA reported
that 2005 steel production in China has been well above projections, resulting
in a glut of steel despite China’s current position as the world’s largest
consumer of steel. If the demand and pricing for metallurgical coal in
international markets decreases in the future, the amount of metallurgical
coal
that we sell and the prices that we receive for it could decrease, thereby
reducing our revenues and adversely impacting our earnings and the value
of our
coal reserves.
Forward
sales and forward purchase contracts that are not accounted for as a hedge
could cause earnings volatility in our statement of income for a given
period.
We
participate in forward purchase and forward sales contracts that are considered
derivative
instruments under SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities
(“SFAS
133”) that do not qualify under the “normal purchase and normal sales”
exception. Transactions that do not qualify for this exception are required
to
be marked to market. Changes in fair value are recognized either in earnings
or
equity, depending on whether these transactions qualify for hedge accounting.
Our contracts do not currently qualify for hedge accounting. Accordingly,
changes in fair value have been recognized in earnings. During 2006, we
increased coal sales revenue related to mark-to-market gains on open over
the
counter (“OTC”) coal sales contracts in the amount of $6.1 million and increased
expense related to mark-to-market losses on open OTC coal purchase contracts
as
cost of coal sales in the amount of $5.7 million, resulting in an increase
in
pretax earnings of $0.4 million. At December 31, 2006, we had unrealized
gains
(losses) on open sales and purchase contracts in the amount of $6.1 million
and
($5.9 million), respectively. These amounts are recorded in prepaid expenses
and
other current assets and accrued expenses and other current liabilities,
respectively. Due to market price fluctuations, we could see earnings
volatility that we would normally not incur.
A
decline in demand for metallurgical coal would limit our ability to sell
our
high quality steam coal as higher-priced metallurgical coal and could affect
the
economic viability of certain of our mines that have higher operating
costs.
Portions
of our coal reserves possess quality characteristics that enable us to mine,
process and market them as either metallurgical coal or high quality steam
coal,
depending on the prevailing conditions in the metallurgical and steam coal
markets. We decide whether to mine, process and market these coals as
metallurgical or steam coal based on management’s assessment as to which market
is likely to provide us with a higher margin. We consider a number of factors
when making this assessment, including the difference between the current
and
anticipated future market prices of steam coal and metallurgical coal, the
lower
volume of saleable tons that results from producing a given quantity of reserves
for sale in the metallurgical market instead of the steam market, the increased
costs incurred in producing coal for sale in the metallurgical market instead
of
the steam market, the likelihood of being able to secure a longer-term sales
commitment by selling coal into the steam market and our contractual commitments
to deliver different types of coals to our customers. 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.
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.
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 and acquisition expenses and the first installment of principal
due on the promissory notes. In addition, future acquisitions could result
in
our assuming more long-term liabilities relative to the value of the acquired
assets than we have assumed in our previous acquisitions.
The
inability of the sellers of our Predecessor and acquired companies to fulfill
their indemnification obligations to us under our acquisition agreements
could
increase our liabilities and adversely affect our results of operations and
financial position.
In
the acquisition agreements we entered into with the sellers of our Predecessor
and acquired companies, including the acquisition agreements we entered into
related to the Nicewonder, Progress and Gallatin acquisitions, the
respective sellers and, in some of our acquisitions, their parent companies,
agreed to retain responsibility for and indemnify us against damages resulting
from certain third-party claims or other liabilities, such as workers’
compensation liabilities, black lung liabilities, postretirement medical
liabilities and certain environmental or mine safety liabilities. The failure
of
any seller and, if applicable, its parent company, to satisfy their obligations
with respect to claims and retained liabilities covered by the acquisition
agreements could have an adverse effect on our results of operations and
financial position if claimants successfully assert that we are liable for
those
claims and/or retained liabilities. The obligations of the sellers and, in
some
instances, their parent companies, to indemnify us with respect to their
retained liabilities will continue for a substantial period of time, and
in some
cases indefinitely. The sellers’ indemnification obligations with respect to
breaches of their representations and warranties in the acquisition agreements
will terminate upon expiration of the applicable indemnification period
(generally 18-24 months from the acquisition date for most representations
and warranties, and from two to five years from the acquisition date for
environmental representations and warranties), are subject to deductible
amounts
and will not cover damages in excess of the applicable coverage limit. The
assertion of third-party claims after the expiration of the applicable
indemnification period or in excess of the applicable coverage limit, or
the
failure of any seller to satisfy its indemnification obligations with respect
to
breaches of its representations and warranties, could have an adverse effect
on
our results of operations and financial position. See “— If our assumptions
regarding our likely future expenses related to benefits for non-active
employees are incorrect, then expenditures for these benefits could be
materially higher than we have predicted.
Our
inability to continue or expand the existing road construction and mining
business of the Nicewonder Companies could adversely affect the expected
benefits from the Nicewonder Acquisition.
One
of our subsidiaries acquired the business of Nicewonder Contracting, Inc.
(“NCI”) pursuant to the Nicewonder acquisition. NCI operates a road construction
business under a contract with the State of West Virginia. Pursuant to the
contract, NCI is building approximately
11 miles of rough grade highway in West Virginia over the next four to five
years and, in exchange, NCI will be compensated by West Virginia based on
the
number of cubic yards of material excavated and/or filled to create a road
bed,
as well as for certain other cost components. In the course of the road
construction, NCI will recover any coal encountered and sell the coal to
its
customers, subject to certain costs, including coal loading, transportation,
coal royalty payments and applicable taxes and fees.
The
State
of West Virginia has only approved funding for a portion of this
road construction. If West Virginia does not fund the remaining sections of
the highway project, it would adversely affect NCI’s earnings. Even if West
Virginia funds the remainder of this project through the next four to five
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.
The
loss of, or significant reduction in, purchases by our largest customers
could
adversely affect our revenues and profitability.
Our
largest customer during 2006 accounted for approximately 7% of our total
revenues. We derived approximately 38%
of
our 2006 total revenues from sales to our ten largest customers. These customers
may not continue to purchase coal from us under our current coal supply
agreements, or at all. If these customers were to significantly reduce their
purchases of coal from us, or if we were unable to sell coal to them on terms
as
favorable to us as the terms under our current agreements, our revenues and
profitability could suffer materially.
Changes
in purchasing patterns in the coal industry may make it difficult for us
to
extend existing supply contracts or enter into new long-term supply contracts
with customers, which could adversely affect the capability and profitability
of
our operations.
We
sell a significant portion of our coal under long-term coal supply agreements,
which are contracts with a term greater than 12 months. The execution of a
satisfactory long-term coal supply agreement is frequently the basis on which
we
undertake the development of coal reserves required to be supplied under
the
contract. We believe that approximately 56% of our 2006 sales volume was
sold
under long-term coal supply agreements. At December 31, 2006, our long-term
coal
supply agreements had remaining terms of up to 10 years and an average
remaining term of approximately two years. When our current contracts with
customers expire or are otherwise renegotiated, our customers may decide
to
purchase fewer tons of coal than in the past or on different terms, including
pricing terms less favorable to us. As of February
05, 2007, approximately 10% and 57%, respectively, of our planned production
for
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.
Certain
provisions in our long-term supply contracts may reduce the protection these
contracts provide us during adverse economic conditions or may result in
economic penalties upon our failure to meet
specifications.
Price
adjustment, “price reopener” and other similar provisions in long-term supply
contracts may reduce the protection from short-term coal price volatility
traditionally provided by these contracts. Price reopener provisions are
particularly common in international metallurgical coal sales contracts.
Some of
our coal supply contracts contain provisions that allow for the price to
be
renegotiated at periodic intervals. Price reopener provisions may automatically
set a new price based on the prevailing market price or, in some instances,
require the parties to agree on a new price, sometimes between a pre-set
“floor”
and “ceiling.” In some circumstances, failure of the parties to agree on a price
under a price reopener provision can lead to termination of the contract.
Any
adjustment or renegotiation leading to a significantly lower contract price
could result in decreased revenues. Accordingly, supply contracts with terms
of
one year or more may provide only limited protection during adverse market
conditions.
Coal
supply agreements also typically contain force majeure provisions allowing
temporary suspension of performance by us or the customer during the duration
of
specified events beyond the control of the affected party. Most of our coal
supply agreements contain provisions requiring us to deliver coal meeting
quality thresholds for certain characteristics such as Btu, sulfur content,
ash
content, grindability and ash fusion temperature. Failure to meet these
specifications could result in economic penalties, including price adjustments,
the rejection of deliveries or termination of the contracts. Moreover, some
of
our agreements where the customer bears transportation costs permit the customer
to terminate the contract if the transportation costs borne by them increase
substantially. In addition, some of these contracts allow our customers to
terminate their contracts in the event of changes in regulations affecting
our
industry that increase the price of coal beyond specified limits.
Due
to the risks mentioned above with respect to long-term supply contracts,
we may
not achieve the revenue or profit we expect to achieve from these sales
commitments.
Disruption
in supplies of coal produced by contractors and other third parties could
temporarily impair our ability to fill customers’ orders or increase our
costs.
In
addition to marketing coal that is produced by our subsidiaries’ employees, we
utilize contractors to operate some of our mines. Operational difficulties
at
contractor-operated mines, changes in demand for contract miners from other
coal
producers, and other factors beyond our control could affect the availability,
pricing, and quality of coal produced for us by contractors. For example,
during
2005, production at our contractor operations ran approximately 25% behind
plan,
primarily due to shortages in the supply of labor. As a result of this
shortfall, we were forced to purchase coal at a higher cost than planned
so that
we could meet commitments to customers. To meet customer specifications and
increase efficiency in fulfillment of coal contracts, we also purchase and
resell coal produced by third parties from their controlled reserves. The
majority of the coal that we purchase from third parties is blended with
coal
produced from our mines prior to resale and we also process (which includes
washing, crushing or blending coal at one of our preparation plants or loading
facilities) a portion of the coal that we purchase from third parties prior
to
resale. We sold 5.8 million tons of coal purchased from third parties
during 2006, representing approximately 20% of our total sales during 2006.
We
believe that approximately 68% of our purchased coal sales in 2006 was blended
with coal produced from our mines prior to resale, and approximately 5% of
our
total sales in 2006 consisted of coal purchased from third parties that we
processed before resale. The availability of specified qualities of this
purchased coal may decrease and prices may increase as a result of, among
other
things, changes in overall coal supply and demand levels, consolidation in
the
coal industry and new laws or regulations. Disruption in our supply of
contractor-produced coal and purchased coal could temporarily impair our
ability
to fill our customers’ orders or require us to pay higher prices in order to
obtain the required coal from other sources. Any increase in the prices we
pay
for contractor-produced coal or purchased coal could increase our costs and
therefore lower our earnings. Although increases in market prices for coal
generally benefit us by allowing us to sell coal at higher prices, those
increases also increase our costs to acquire purchased coal, which lowers
our
earnings.
Competition
within the coal industry may adversely affect our ability to sell coal, and
excess production capacity in the industry could put downward pressure on
coal
prices.
We
compete with numerous other coal producers in various regions of the United
States for domestic and international sales. During the mid-1970s and early
1980s, increased demand for coal attracted new investors to the coal industry,
spurred the development of new mines and resulted in additional production
capacity throughout the industry, all of which led to increased competition
and
lower coal prices. Recent increases in coal prices could encourage the
development of expanded capacity by new or existing coal producers. Any
resulting overcapacity could reduce coal prices and therefore reduce our
revenues.
Coal
with lower production costs shipped east from western coal mines and from
offshore sources has resulted in increased competition for coal sales in
the
Appalachian region. In addition, coal companies with larger mines that utilize
the long-wall mining method typically have lower mine operating costs than
we do
and may be able to compete more effectively on price, particularly if the
current favorable market weakens. This competition could result in a decrease
in
our market share in this region and a decrease in our revenues.
Demand
for our low sulfur coal and the prices that we can obtain for it are also
affected by, among other things, the price of emissions allowances. Decreases
in
the prices of these emissions allowances could make low sulfur coal less
attractive to our customers. In addition, more widespread installation by
electric utilities of technology that reduces sulfur emissions (which could
be
accelerated by increases in the prices of emissions allowances), may make
high
sulfur coal more competitive with our low sulfur coal. This competition could
adversely affect our business and results of operations.
We
also compete in international markets against coal produced in other countries.
Measured by tons sold, exports accounted for approximately 25% of our sales
in
2006. The demand for U.S. coal exports is dependent upon a number of
factors outside of our control, including the overall demand for electricity
in
foreign markets, currency exchange rates, the demand for foreign-produced
steel
both in foreign markets and in the U.S. market (which is dependent in part
on tariff rates on steel), general economic conditions in foreign countries,
technological developments, and environmental and other governmental
regulations. For example, if the value of the U.S. dollar were to rise
against other currencies in the future, our coal would become relatively
more
expensive and less competitive in international markets, which could reduce
our
foreign sales and negatively impact our revenues and net income. In addition,
if
the amount of coal exported from the United States were to decline, this
decline
could cause competition among coal producers in the United States to intensify,
potentially resulting in additional downward pressure on domestic coal
prices.
Fluctuations
in transportation costs and the availability or reliability of transportation
could affect the demand for our coal or temporarily impair our ability to
supply
coal to our customers.
Transportation
costs represent a significant portion of the total cost of coal for our
customers. Increases in transportation costs, such as those experienced
during
2005 and 2006, could make coal a less competitive source of energy or could
make
our coal production less competitive than coal produced from other sources.
On
the other hand, significant decreases in transportation costs could result
in
increased competition from coal producers in other parts of the country.
For
instance, coordination of the many eastern loading facilities, the large
number
of small shipments, terrain and labor issues all combine to make shipments
originating in the eastern United States inherently more expensive on a per-mile
basis than shipments originating in the western United States.
Historically,
high coal transportation rates from the western coal producing areas into
Central Appalachian markets limited the use of western coal in those markets.
More recently, however, lower rail rates from the western coal producing
areas
to markets served by eastern U.S. producers have created major competitive
challenges for eastern producers. This increased competition could have a
material adverse effect on our business, financial condition and results
of
operations.
We
depend
upon railroads, trucks, beltlines, ocean vessels and barges to deliver coal
to
our customers. Disruption of these transportation services due to
weather-related problems, mechanical difficulties, strikes, lockouts,
bottlenecks, terrorist attacks, and other events could temporarily impair
our
ability to supply coal to our customers, resulting in decreased shipments.
Certain shipments of our coal to customers were delayed by hurricanes in
the
Gulf Coast in 2005. 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
2006,
73% of our produced and processed coal volume was transported from the
preparation plant to the customer by rail. In the past, we have experienced
a
general deterioration in the reliability of the service provided by rail
carriers, which increased our internal coal handling costs. If there are
continued disruptions of the transportation services provided by the railroad
companies we use and we are unable to find alternative transportation providers
to ship our coal, our business could be adversely affected.
We
have
investments in mines, loading facilities, and ports that in most cases are
serviced by a single rail carrier. Our operations that are serviced by a
single
rail carrier are particularly at risk to disruptions in the transportation
services provided by that rail carrier, due to the difficulty in arranging
alternative transportation. If a single rail carrier servicing our operations
does not provide sufficient capacity, revenue from these operations and our
return on investment could be adversely impacted. 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.
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, 2006, we owned or leased 548.6 million tons
of proven and probable coal reserves that we believe will support current
production levels for more than 20 years,
which is less than the publicly reported amount of proven and probable coal
reserves and reserve lives (based on current publicly reported production
levels) of the other large publicly traded coal companies. We have not yet
applied for the permits required, or developed the mines necessary, to mine
all
of our reserves. Permits are becoming increasingly more difficult and expensive
to obtain and the review process continues to lengthen. In addition, we may
not
be able to mine all of our reserves as profitably as we do at our current
operations.
Because
our reserves are depleted as we mine our coal, our future success and growth
depend, in part, upon our ability to acquire additional coal reserves that
are
economically recoverable. If we are unable to replace or increase our coal
reserves on acceptable terms, our production and revenues will decline as
our
reserves are depleted. Exhaustion of reserves at particular mines also may
have
an adverse effect on our operating results that is disproportionate to the
percentage of overall production represented by such mines. Our ability to
acquire additional coal reserves through acquisitions in the future also
could
be limited by restrictions under our existing or future debt agreements,
competition from other coal companies for attractive properties, or the lack
of
suitable acquisition candidates.
We
face numerous uncertainties in estimating our recoverable coal reserves,
and
inaccuracies in our estimates could result in decreased profitability from
lower
than expected revenues or higher than expected costs.
Forecasts
of our future performance are based on, among other things, estimates of
our
recoverable coal reserves. We base our estimates of reserve information on
engineering, economic and geological data assembled and analyzed by our internal
engineers and which is periodically reviewed by third-party consultants.
There
are numerous uncertainties inherent in estimating the quantities and qualities
of, and costs to mine, recoverable reserves, including many factors beyond
our
control. Estimates of economically recoverable coal reserves and net cash
flows
necessarily depend upon a number of variable factors and assumptions, any
one of
which may, if incorrect, result in an estimate that varies considerably from
actual results. These factors and assumptions include:
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future
mining technology improvements;
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the
effects of regulation by governmental
agencies;
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geologic
and mining conditions, which may not be fully identified by available
exploration data and may differ from our experiences in areas we
currently
mine. As a result, actual coal tonnage recovered from identified
reserve
areas or properties, and costs associated with our mining operations,
may
vary from estimates. Any inaccuracy in our estimates related to
our
reserves could result in decreased profitability from lower than
expected
revenues or higher than expected costs; and
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Defects
in title of any leasehold interests in our properties could limit our ability
to
mine these properties or result in significant unanticipated
costs.
We
conduct a significant part of our mining operations on properties that we
lease.
Title to most of our leased properties and mineral rights is not thoroughly
verified until a permit to mine the property is obtained, and in some cases
title with respect to leased properties is not verified at all. Our right
to
mine some of our reserves may be materially adversely affected by defects
in
title or boundaries. In order to obtain leases or mining contracts to conduct
our mining operations on property where these defects exist, we may in the
future have to incur unanticipated costs or could even lose our right to
mine,
which could adversely affect our profitability.
Mining
in Central and Northern Appalachia is more complex and involves more regulatory
constraints than mining in other areas of the United States, which could
affect
our mining operations and cost structures in these
areas.
The
geological characteristics of Central and Northern Appalachian coal reserves,
such as depth of overburden and coal seam thickness, make them complex and
costly to mine. As mines become depleted, replacement reserves may not be
available when required or, if available, may not be capable of being mined
at
costs comparable to those characteristic of the depleting mines. In addition,
as
compared to mines in other regions, permitting, licensing and other
environmental and regulatory requirements are more costly and time consuming
to
satisfy. These factors could materially adversely affect the mining operations
and cost structures of, and our customers’ ability to use coal produced by, our
mines in Central and Northern Appalachia.
Our
work force could become increasingly unionized in the future, which could
adversely affect the stability of our production and reduce our
profitability.
Approximately
94% of our 2006 coal production came from mines operated by union-free
employees. As of December 31, 2006, over 92% of our 3,546 employees are
union-free. However, our subsidiaries’ employees have the right at any time
under the National Labor Relations Act to form or affiliate with a union.
Any
further unionization of our subsidiaries’ employees, or the employees of
third-party contractors who mine coal for us, could adversely affect the
stability of our production and reduce our profitability.
Our
unionized 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 275 employees as of
December 31, 2006, expire on December 31, 2009. One of our other
subsidiaries is currently negotiating a wage agreement with the UMWA covering
an
aggregate of 24 employees that expired on December 31, 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. Also, one of our other subsidiaries, that is idle,
had a
wage agreement with the UMWA that could be terminated by our subsidiary
or the
UMWA with notice but since it is idle, no employees are effected at this
time.
However, if the operation becomes active again, these employees could be
affected.
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 2006, we had $0.7 million 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.
The
government extensively regulates our mining operations, which imposes
significant costs on us, and future regulations could increase those costs
or
limit our ability to produce and sell coal.
The
coal mining industry is subject to increasingly strict regulation by federal,
state and local authorities with respect to matters such as:
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employee
health and safety;
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mandated
benefits for retired coal miners;
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mine
permitting and licensing
requirements;
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reclamation
and restoration of mining properties after mining is
completed;
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air
quality standards;
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water
pollution;
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plant
and wildlife protection;
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the
discharge of materials into the
environment;
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surface
subsidence from underground mining;
and
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the
effects of mining on groundwater quality and
availability.
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The
costs, liabilities and requirements associated with these regulations may
be
costly and time consuming and may delay commencement or continuation of
exploration or production operations. Failure to comply with these regulations
may result in the assessment of administrative, civil and criminal penalties,
the imposition of cleanup and site restoration costs and liens, the issuance
of
injunctions to limit or cease operations, the suspension or revocation of
permits and other enforcement measures that could have the effect of limiting
production from our operations. We may also incur costs and liabilities
resulting from claims for damages to property or injury to persons arising
from
our operations. If we are pursued for these sanctions, costs and liabilities,
our mining operations and, as a result, our profitability could be adversely
affected.
The
possibility exists that new legislation and/or regulations and orders may
be
adopted that may materially adversely affect our mining operations, our cost
structure and/or our customers’ ability to use coal. For example, in reaction to
recent mine accidents in West Virginia, state and federal legislatures and
regulatory authorities have increased scrutiny of mine safety matters and
passed
more stringent laws governing mining. In 2006, Congress enacted the MINER
Act,
which imposed additional burdens on coal operators, including (i) obligations
related to (a) the development of new emergency response plans that address
post-accident communications, tracking of miners, breathable air, lifelines,
training and communication with local emergency response personnel, (b) insuring
the availability of mine rescue teams, and (c) promptly notifying federal
authorities in the event of a certain events, (ii) increased penalties for
violations of the applicable federal laws and regulations, and (iii) the
requirement that new standards be implemented regarding the manner in which
closed areas of underground mines are sealed and (iv) other matters. Various
states also have enacted their own new laws and regulations addressing many
of
these same subjects. Our compliance with these or any new mine health and
safety
regulations could increase our mining costs. New legislation or administrative
regulations (or new judicial interpretations or administrative enforcement
of
existing laws and regulations), including proposals related to the protection
of
the environment that would further regulate and tax the coal industry, may
also
require us or our customers to change operations significantly or incur
increased costs. These regulations, if proposed and enacted in the future,
could
have a material adverse effect on our financial condition and results of
operations.
Extensive
environmental regulations affect our customers and could reduce the demand
for
coal as a fuel source and cause our sales to decline.
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 purchaser’s 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 Russia’s 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
5.3% of our 2006 sales volume, 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 Protocol’s 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.”
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.
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 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 court’s decision required us to convert
certain current and planned applications for Nationwide 21 permits to
applications for individual permits. A similar lawsuit was filed on
January 27, 2005 in the U.S. District Court for the Eastern District
of Kentucky and remains pending, and other lawsuits may be filed in other
states
where we operate. Although it is not possible to predict the results of the
Kentucky litigation, it could adversely affect our Kentucky
operations.
Due
to political and economic uncertainties in Venezuela, our investment in Excelven
Pty Ltd could be at risk for loss
In
2004, we acquired a 24.5% interest in Excelven Pty Ltd, which, through its
subsidiaries, controls
the rights to the Las Carmelitas mining venture in Venezuela and the related
Palmarejo export port facility on Lake Maracaibo in Venezuela. The project
is currently in the development stage, and final governmental approval of
the project has not yet been obtained. Political and economic
uncertainties in Venezuela could delay or prevent such
governmental approval from being obtained or otherwise impede execution of
the
project. Such political and economic uncertainties could also lead
to events such as civil unrest, work stoppages or the
nationalization or other expropriation of private enterprises by the Venezuelan
government, which could result in a loss of all or a portion of
our investment in Excelven, which is in excess of $5.8 million to
date.
Our
mining operations consume significant quantities of commodities. If commodity
prices increase significantly or rapidly, it could impact our cost of
production.
Coal
mines consume large quantities of commodities such as steel, copper, rubber
products and liquid fuels. Some commodities, such as steel, are needed
to comply
with roof control plans required by regulation. The prices we pay for these
products are strongly impacted by the global commodities market. A rapid
or
significant increase in cost of some commodities could impact our mining
costs
because we have limited ability to negotiate lower prices, and, in some
cases,
do no have a ready substitute for these commodities.
We
have reclamation and mine closure obligations. If the assumptions underlying
our
accruals are inaccurate, we could be required to expend greater amounts
than
anticipated.
The
Surface Mining Control and Reclamation Act establish operational, reclamation
and closure standards for all aspects of surface mining as well as most
aspects
of deep mining. We accrue for the costs of current mine disturbance and
of final
mine closure, including the cost of treating mine water discharge where
necessary. Estimates of our total reclamation and mine-closing liabilities
are
based upon permit requirements and our experience. The amounts recorded
are
dependent upon a number of variables, including the estimated future
retirement
costs, estimated proven reserves, assumptions involving profit margins,
inflation rates, and the assumed credit-adjusted risk-free interest rates.
Furthermore, these obligations are unfunded. If these accruals are insufficient
or our liability in a particular year is greater than currently anticipated,
our
future operating results could be adversely
affected.
Our
ability to operate our company effectively could be impaired if we fail to
attract and retain key personnel.
Our
ability to operate our business and implement our strategies depends, in
part,
on the efforts of our executive officers and other key employees. In addition,
our future success will depend on, among other factors, our ability to attract
and retain other qualified personnel. The loss of the services of any of
our
executive officers or other key employees or the inability to attract or
retain
other qualified personnel in the future could have a material adverse effect
on
our business or business prospects.
A
shortage of skilled labor in the Appalachian region could pose a risk to
achieving improved labor productivity and competitive costs and could adversely
affect our profitability.
Efficient
coal mining using modern techniques and equipment requires skilled laborers,
preferably with at least a year of experience and proficiency in multiple
mining
tasks. In recent years, a shortage of trained coal miners in the Appalachian
region has caused us to operate certain units without full staff, which
decreases our productivity and increases our costs. 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.
Our
amount of indebtedness could harm our business by limiting our available
cash
and our access to additional capital and could force us to sell material
assets
or take other actions to attempt to reduce our
indebtedness.
Our
financial performance could be affected by our amount of indebtedness. At
December 31, 2006, we had $445.7 million of indebtedness outstanding,
representing 56% of our total capitalization. This indebtedness consisted
of
$175.0 million principal of our 10% senior notes due 2012, a $247.5
term loan under our credit facility and $23.2 million of other
indebtedness, including $1.5 million of capital lease obligations extending
through March 2009, $0.7 million principal amount that we incurred in
connection with the Gallatin Acquisition related to funds loaned by an unrelated
third party to assist in the construction of the kiln and $21.0 million
payable to an insurance premium finance company. In addition, under our credit
facility we had $81.1 million of letters of credit outstanding at
December 31, 2006.
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, which have been paid in
full. 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.
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If
our cash flows and capital resources are insufficient to fund our debt service
obligations or our requirements under our other long-term liabilities, we
may be
forced to sell assets, seek additional capital or seek to restructure or
refinance our indebtedness. These alternative measures may not be successful
and
may not permit us to meet our scheduled debt service obligations, including
our
obligations with respect to the notes, or our requirements under our other
long
term liabilities. In the absence of such operating results and resources,
we
could face substantial liquidity problems and might be required to sell material
assets or operations to attempt to meet our debt service and other obligations.
Our credit facility and the indenture 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 current credit
facility.
Despite
our current leverage, we may still be able to incur substantially more debt.
This could further exacerbate the risks associated with our significant
indebtedness.
We
may be able to incur substantial additional indebtedness in the future. The
terms of our new credit facility and the indenture governing our senior notes
do
not prohibit us from doing so. Our current credit facility provides for a
revolving line of credit of up to $275.0 million,
of which $193.9 million was available as of December 31, 2006. The
addition of new debt to our current debt levels could increase the related
risks
that we now face. For example, the spread over the variable interest rate
applicable to loans under our credit facility is dependent on our leverage
ratio, and it would increase if our leverage ratio increases. Additional
drawings under our revolving line of credit could also limit the amount
available for letters of credit in support of our bonding obligations, which
we
will require as we develop and acquire new mines.
The
covenants in our credit facility and the indenture governing the notes impose
restrictions that may limit our operating and financial
flexibility.
Our
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.
Failure
to obtain or renew surety bonds on acceptable terms could affect our ability
to
secure reclamation and coal lease obligations, which could adversely affect
our
ability to mine or lease coal.
Federal
and state laws require us to obtain surety bonds to secure payment of certain
long-term obligations such as mine closure or reclamation costs, federal
and
state workers’ compensation costs, coal leases and other obligations. These
bonds are typically renewable annually. Surety bond issuers and holders may
not
continue to renew the bonds or may demand additional collateral or other
less
favorable terms upon those renewals. The ability of surety bond issuers and
holders to demand additional collateral or other less favorable terms has
increased as the number of companies willing to issue these bonds has decreased
over time. Our failure to maintain, or our inability to acquire, surety bonds
that are required by state and federal law would affect our ability to secure
reclamation and coal lease obligations, which could adversely affect our
ability
to mine or lease coal. That failure could result from a variety of factors
including, without limitation:
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lack
of availability, higher expense or unfavorable market terms of
new
bonds;
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restrictions
on availability of collateral for current and future third-party
surety
bond issuers under the terms of our credit facility or the indenture
governing our senior notes; and
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the
exercise by third-party surety bond issuers of their right to refuse
to
renew the surety.
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Failure
to maintain capacity for required letters of credit could limit our available
borrowing capacity under our credit facility, limit our ability to obtain
or
renew surety bonds and negatively impact our ability to obtain additional
financing to fund future working capital, capital expenditure or other general
corporate requirements.
At
December 31, 2006, we had $81.1 million of letters of credit in place,
of which $70.7 million served as collateral for reclamation surety bonds
and $10.4 million secured miscellaneous obligations. Our credit facility
provides for revolving commitments of up to $275.0 million,
all of which can be used to issue additional letters of credit. In addition,
obligations secured by letters of credit may increase in the future. Any
such
increase would limit our available borrowing capacity under our current or
future credit facilities and could negatively impact our ability to obtain
additional financing to fund future working capital, capital expenditure
or
other general corporate requirements. Moreover, if we do not maintain sufficient
borrowing capacity under our revolving credit facility for additional letters
of
credit, we may be unable to obtain or renew surety bonds required for our
mining
operations.
If
our assumptions regarding our likely future expenses related to benefits
for
non-active employees are incorrect, then expenditures for these benefits
could
be materially higher than we have predicted.
At
the times that we acquired the assets of our Predecessor and acquired companies,
the Predecessor and acquired operations were subject to long-term liabilities
under a variety of benefit plans and other arrangements with active and inactive
employees. We assumed a portion of these long-term obligations and are
continuing to incur additional costs from our operations for postretirement,
workers’ compensation and black lung liabilities. The current and non-current
accrued portions of these long-term obligations, as reflected in our
consolidated financial statements as of December 31, 2006, included
$50.8 million of postretirement medical obligations and $8.3 million
of self-insured workers’ compensation and black lung obligations. These
obligations have been estimated based on assumptions that are described in
the
notes to our consolidated financial statements included elsewhere in this
annual
report. However, if our assumptions are incorrect, we could be required to
expend greater amounts than anticipated.
Several
states in which we operate consider changes in workers’ compensation laws from
time to time, which, if enacted, could adversely affect us. In addition,
if any
of the sellers from whom we acquired our operations fail to satisfy their
indemnification obligations to us with respect to postretirement claims and
retained liabilities, then we could be required to expend greater amounts
than
anticipated. 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.
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.
Terrorist
attacks and threats, escalation of military activity in response to such
attacks
or acts of war may negatively affect our business, financial condition and
results of operations.
Terrorist
attacks and threats, escalation of military activity in response to such
attacks
or acts of war may negatively affect our business, financial condition, and
results of operations. Our business is affected by general economic conditions,
fluctuations in consumer confidence and spending, and market liquidity, which
can decline as a result of numerous factors outside of our control, such
as
terrorist attacks and acts of war. Future terrorist attacks against
U.S. targets, rumors or threats of war, actual conflicts involving the
United States or its allies, or military or trade disruptions affecting our
customers may materially adversely affect our operations and those of our
customers. As a result, there could be delays or losses in transportation
and
deliveries of coal to our customers, decreased sales of our coal and extension
of time for payment of accounts receivable from our customers. Strategic
targets
such as energy-related assets may be at greater risk of future terrorist
attacks
than other targets in the United States. In addition, disruption or significant
increases in energy prices could result in government-imposed price controls.
It
is possible that any of these occurrences, or a combination of them, could
have
a material adverse effect on our business, financial condition and results
of
operations.
If
we are unable to accurately estimate the overall risks or costs when we bid
on a
road construction contract which is ultimately awarded to us, we may achieve
a
lower than anticipated profit or incur a loss on the
contract.
A
larger percentage
of our
road construction revenues and contract backlog are typically derived from
fixed
unit price contracts. Fixed unit price contracts require us to perform the
contract for a fixed unit price irrespective of our actual costs. As a result,
we realize a profit on these contracts only if we successfully estimate our
costs and then successfully control actual costs and avoid cost overruns.
If our
cost estimates for a contract are inaccurate, or if we do not execute the
contract within our cost estimates, then cost overruns may cause us to incur
losses or cause the contract not to be as profitable as we expected. This,
in
turn, could negatively affect our cash flow, earnings and financial position.
The
costs incurred and gross profit realized on those contracts can vary, sometimes
substantially, from the original projections due to a variety of factors,
including, but not limited to:
|
•
|
onsite
conditions that differ from those assumed in the original bid;
|
|
•
|
delays
caused by weather conditions;
|
|
•
|
contract
modifications creating unanticipated costs not covered by change
orders;
|
|
•
|
changes
in availability, proximity and costs of materials, including diesel
fuel,
explosives, and parts and supplies for our equipment;
|
|
•
|
coal
recovery which impacts the allocation of cost to road construction;
|
|
•
|
availability
and skill level of workers in the geographic location of a project;
|
|
•
|
our
suppliers’ or subcontractors’ failure to perform;
|
|
•
|
mechanical
problems with our machinery or equipment;
|
|
•
|
citations
issued by a governmental authority, including the Occupational
Safety and
Health Administration and the Mine Safety and Health Administration;
|
|
•
|
difficulties
in obtaining required governmental permits or approvals;
|
|
•
|
changes
in applicable laws and regulations; and
|
|
•
|
claims
or demands from third parties alleging damages arising from our
work.
|
|
Item
1B.
|
Unresolved
Staff Issues
|
None
|
Item
2.
|
Properties
|
Coal
Reserves
We
estimate that, as of December 31, 2006, we owned or leased total proven and
probable coal reserves of approximately 548.6 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 and Progress reserves was completed in November 2004, and we
obtained an independent third party review of the Callaway reserves that
was
completed in September 2005 as well as an independent third party review
of the
Progress reserves upon acquisition in May 2006. 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.
Five percent of our reserve holdings are owned and require no royalty or
per-ton
payment to other parties. The average royalties paid by us for coal reserves
from our producing properties was $3.24
per ton
in 2006, representing 4.5% of our 2006 coal sales revenue.
Although
our coal leases have varying renewal terms and conditions, they generally
last
for the economic life of the reserves. According to our current mine plans,
any
leased reserves assigned to a currently active operation will be mined during
the tenure of the applicable lease. Because the great majority of our leased
or
owned properties and mineral rights are covered by detailed title abstracts
prepared when the respective properties were acquired by predecessors in
title
to us and our current lessors, we generally do not thoroughly verify title
to,
or maintain title insurance policies on, our leased or owned properties and
mineral rights.
The
following table provides the “quality” (sulfur content and average Btu content
per pound) of our coal reserves as of December 31, 2006.
|
Recoverable
Reserves Proven&
|
Sulfur
Content
|
Average
Btu
|
||||||||||||||||||||
|
Regional
Business Unit
|
State
|
Probable(1)
|
<1%
|
1.0%-1.5%
|
>1.5%
|
>12,500
|
<12,500
|
|||||||||||||||
|
(In
millions of tons)
|
||||||||||||||||||||||
|
(In
millions of tons)
|
(In
millions of tons)
|
|||||||||||||||||||||
|
Paramont/
Alpha Land and Reserves(2)
|
Virginia |
141.7
|
102.3
|
29.8
|
9.6
|
139.4
|
2.3
|
|||||||||||||||
|
Dickenson-Russell
|
Virginia |
27.7
|
27.7
|
0
|
0
|
27.7
|
0
|
|||||||||||||||
|
Kingwood
|
West Virginia |
28.0
|
0
|
17.0
|
11.0
|
28.0
|
0
|
|||||||||||||||
|
Brooks
Run
|
West Virginia |
25.2
|
6.4
|
18.8
|
0
|
10.1
|
15.1
|
|||||||||||||||
|
Welch
|
West Virginia |
89.3
|
89.3
|
0
|
0
|
89.3
|
0
|
|||||||||||||||
|
AMFIRE
|
Pennsylvania |
64.5
|
14.0
|
21.7
|
28.8
|
55.1
|
9.4
|
|||||||||||||||
|
Enterprise/Enterprise
Land & Reserve, Inc(3)
|
Kentucky |
151.1
|
49.8
|
49.2
|
52.1
|
140.5
|
10.6
|
|||||||||||||||
|
Callaway
|
West Virginia and Virginia |
21.1
|
21.1
|
0
|
0
|
9.0
|
12.1
|
|||||||||||||||
|
Totals
|
548.6
|
310.6
|
136.5
|
101.5
|
499.1
|
49.5
|
||||||||||||||||
|
Percentages
|
57
|
%
|
25
|
%
|
18
|
%
|
91
|
%
|
9
|
%
|
||||||||||||
________________
|
(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. Alpha Land and Reserves, LLC subleases
a
portion of the mining rights to its proven and probable reserves
in
Virginia to our subsidiary Paramont Coal Company Virginia,
LLC.
|
|
(3)
|
Includes
proven and probable reserves in Kentucky controlled by our subsidiary
Enterprise Land & Reserve Inc obtained from the Progress Energy
acquisition.
|
The
following table summarizes, by regional business unit, the tonnage of our
coal
reserves that is assigned to our operating mines, our property interest in
those
reserves and whether the reserves consist of steam or metallurgical coal,
as of
December 31, 2006.
|
Recoverable
|
||||||||||||||||||||||
|
Reserves
Proven &
|
Total
Tons
|
Total
Tons
|
||||||||||||||||||||
|
Regional
Business Unit
|
State
|
Probable(1)
|
Assigned(2)
|
Unassigned(2)
|
Owned
|
Leased
|
Coal
Type(3)
|
|||||||||||||||
|
|
(In
millions of tons)
|
|||||||||||||||||||||
|
(In
millions of tons)
|
(In
millions of tons)
|
|||||||||||||||||||||
|
Paramont/
Alpha Land and Reserves(4)
|
Virginia |
141.7
|
56.5
|
85.2
|
0
|
141.7
|
Steam
and Metallurgical
|
|||||||||||||||
|
Dickenson-Russell
|
Virginia |
27.7
|
27.7
|
0
|
0
|
27.7
|
Steam
and Metallurgical
|
|||||||||||||||
|
Kingwood
|
West Virginia |
28.0
|
19.6
|
8.4
|
0
|
28.0
|
Steam
and Metallurgical
|
|||||||||||||||
|
Brooks
Run
|
West Virginia |
25.2
|
12.5
|
12.7
|
2.4
|
22.8
|
Steam
and Metallurgical
|
|||||||||||||||
|
Welch
|
West Virginia |
89.3
|
43.4
|
45.9
|
1.1
|
88.2
|
Steam
and Metallurgical
|
|||||||||||||||
|
AMFIRE.
|
Pennsylvania |
64.5
|
60.2
|
4.3
|
3.5
|
61.0
|
Steam
and Metallurgical
|
|||||||||||||||
|
Enterprise/Enterprise
Land and Reserve Inc(5)
|
Kentucky |
151.1
|
17.9
|
133.2
|
20.2
|
130.9
|
Steam
|
|||||||||||||||
|
Callaway
|
West Virginia and Virginia |
21.1
|
18.9
|
2.2
|
1.1
|
20.0
|
Steam
and Metallurgical
|
|||||||||||||||
|
Totals
|
548.6
|
256.7
|
291.9
|
28.3
|
520.3
|
|||||||||||||||||
|
Percentages
|
47
|
%
|
53
|
%
|
5
|
%
|
95
|
%
|
||||||||||||||
________________
|
(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. Alpha Land and Reserves, LLC subleases
a
portion of the mining rights to its proven and probable reserves
in
Virginia to our subsidiary Paramont Coal Company Virginia,
LLC.
|
|
(5)
|
Includes
proven and probable reserves in Kentucky controlled by our subsidiary
Enterprise Land & Reserve Inc obtained from the Progress Energy
acquisition.
|
The
following map shows the locations of Alpha’s properties, including the number of
mines and preparation plants as of February 1, 2007 and 2006 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.
|
Item 3.
|
Legal
Proceedings
|
General.
We are a
party to a number of legal proceedings incident to our normal business
activities. While we cannot predict the outcome of these proceedings, we
do not
believe that any liability arising from these matters individually or in
the
aggregate should have a material impact upon our consolidated cash flows,
results of operations or financial condition.
|
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 Company’s fiscal year ended December 31, 2006.
PART II
|
Item 5.
|
Market
for Registrant’s 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 Company’s common stock has been listed on the New York Stock Exchange since
that time under the symbol “ANR.” There was no public market for our common
stock prior to this date.
Price
range of our common stock
Trading
in our common stock commenced on the New York Stock Exchange on
February 15, 2005 under the symbol “ANR”. The following table sets forth,
for the periods indicated, the high and low sales prices per share of our
common
stock reported in the New York Stock Exchange consolidated tape.
|
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
|
|||||
|
2006
|
High
|
Low
|
|||||
|
First
Quarter
|
$
|
23.43
|
$
|
19.48
|
|||
|
Second
Quarter
|
25.50
|
20.37
|
|||||
|
Third
Quarter
|
19.14
|
15.10
|
|||||
|
Fourth
Quarter
|
16.51
|
14.42
|
|||||
As
of January 15, 2007, there were approximately 255 registered holders of record
of our common stock, including 192 unvested restricted stock positions. The
transfer agent and registrar for our common stock is Computershare Trust
Company, N.A.
Dividend
Policy
We
do not presently pay dividends on our common stock.
Equity
Compensation Plan Information
|
Plan
Category
|
(a)
Number of
securities
to be issued
upon
exercise of
outstanding
options,
warrants
and rights
|
(b)
Weighted-
average
exercise
price
of
outstanding
options,
warrants
and
rights
|
(c)
Number of securities
remaining
available for
future
issuance under
equity
compensation
plans
(excluding
securities
reflected in
column
(a))
|
|||||||
|
Equity
compensation plans approved by security holders
|
1,608,739
|
$
|
18.02
|
1,955,318
|
(1)
|
|||||
|
Equity
compensation plans not approved by security holders
|
—
|
—
|
—
|
|||||||
|
Total
|
1,608,739
|
$
|
18.02
|
1,955,318
|
||||||
|
(1)
|
The
Alpha Natural Resources, Inc. 2005 Long-Term Incentive Plan has
1,955,318 shares of common stock available for future issuance to
qualified participants as of December 31,
2006.
|
|
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, 2006 and 2005 and for the years then ended have been derived
from the audited consolidated financial statements and related footnotes
of
Alpha Natural Resources, Inc. and subsidiaries included in this annual report.
The selected historical financial data as of December 31, 2004 and for the
year
then ended have been derived from the combined financial statements of ANR
Fund
IX Holdings, L.P. and Alpha NR Holding, Inc. and subsidiaries (the owners
of a
majority of the membership interests of ANR Holdings prior to the Internal
Restructuring) and the related notes, included elsewhere in this annual report.
The selected historical financial data as of December 31, 2003 and for the
year
then ended and for the period from December 14, 2002 to 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 Predecessor’s 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 “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.”
The
results of operations for the historical periods included in the following
table
are not necessarily indicative of the results to be expected for future periods.
In addition, see Item 1A “Risk Factors” of this report for a discussion of
risk factors that could impact our future results of
operations.
|
Alpha
Natural Resources, Inc and Subsidiaries
|
ANR
FUND IX Holdings, L.P. and Alpha NR Holding, Inc. and
Subsidiaries
|
Predecessor
|
|||||||||||||||||
|
Year
Ended December 31, 2006
|
Year
Ended December 31, 2005
|
Year
Ended December 31, 2004
|
Year
Ended December 31, 2003
|
December
14, 2002 to December 31, 2002
|
January
1, 2002 to December 13, 2002
|
||||||||||||||
|
(In
thousands, except per share
amounts)
|
|||||||||||||||||||
|
Statement
of Operations Data:
|
|||||||||||||||||||
|
Revenues:
|
|||||||||||||||||||
|
Coal
revenues
|
$
|
1,687,553
|
$
|
1,413,174
|
$
|
1,079,981
|
$
|
694,596
|
$
|
6,260
|
$
|
154,715
|
|||||||
|
Freight
and handling revenues
|
188,366
|
185,555
|
141,100
|
73,800
|
1,009
|
17,001
|
|||||||||||||
|
Other
revenues
|
34,743
|
27,926
|
28,347
|
13,453
|
101
|
6,031
|
|||||||||||||
|
Total
revenues
|
1,910,662
|
1,626,655
|
1,249,428
|
781,849
|
7,370
|
177,747
|
|||||||||||||
|
Costs
and expenses:
|
|||||||||||||||||||
|
Cost
of coal sales (exclusive of items shown separately below)
|
1,352,450
|
1,184,092
|
920,359
|
626,265
|
6,268
|
158,924
|
|||||||||||||
|
Freight
and handling costs
|
188,366
|
185,555
|
141,100
|
73,800
|
1,009
|
17,001
|
|||||||||||||
|
Cost
of other revenues
|
22,982
|
23,675
|
22,994
|
12,488
|
120
|
7,973
|
|||||||||||||
|
Depreciation,
depletion and amortization
|
140,851
|
73,122
|
55,261
|
35,385
|
274
|
6,814
|
|||||||||||||
|
Selling,
general and administrative expenses (exclusive of depreciation
and
amortization shown separately above)
|
67,952
|
88,132
|
40,607
|
21,926
|
471
|
8,797
|
|||||||||||||
|
Costs
to exit business
|
—
|
—
|
—
|
—
|
—
|
25,274
|
|||||||||||||
|
Total
costs and expenses
|
1,772,601
|
1,554,576
|
1,180,321
|
769,864
|
8,142
|
224,783
|
|||||||||||||
|
Refund
of federal black lung excise tax
|
—
|
—
|
—
|
—
|
—
|
2,049
|
|||||||||||||
|
Other
operating income, net
|
—
|
—
|
—
|
—
|
—
|
1,430
|
|||||||||||||
|
Income
(loss) from operations
|
138,061
|
72,079
|
69,
107
|
11,985
|
(772
|
)
|
(45,557
|
)
|
|||||||||||
|
Other
income (expense):
|
|||||||||||||||||||
|
Interest
expense
|
(41,774
|
)
|
(29,937
|
)
|
(20,041
|
)
|
(7,848
|
)
|
(203
|
)
|
(35
|
)
|
|||||||
|
Interest
income
|
839
|
1,064
|
531
|
103
|
6
|
2,072
|
|||||||||||||
|
Miscellaneous
income
|
523
|
91
|
722
|
574
|
—
|
—
|
|||||||||||||
|
Total
other income (expense), net
|
(40,412
|
)
|
(28,782
|
)
|
(18,788
|
)
|
(7,171
|
)
|
(197
|
)
|
2,037
|
||||||||
|
Income
(loss) before income taxes and minority interest
|
97,649
|
43,297
|
50,319
|
4,814
|
(969
|
)
|
(41,520
|
)
|
|||||||||||
|
Income
tax expense (benefit)
|
(30,519
|
)
|
18,953
|
5,150
|
898
|
(334
|
)
|
(17,198
|
)
|
||||||||||
|
Minority
interest
|
—
|
2,918
|
22,781
|
1,164
|
—
|
—
|
|||||||||||||
|
Income
(loss) from continuing operations
|
128,168
|
21,426
|
22,388
|
2,752
|
(635
|
)
|
(24,322
|
)
|
|||||||||||
|
Loss
from discontinued operations
|
—
|
(213
|
)
|
(2,373
|
)
|
(490
|
)
|
—
|
—
|
||||||||||
|
Net
income (loss)
|
$
|
128,168
|
$
|
21,213
|
$
|
20,015
|
$
|
2,262
|
$
|
(635
|
)
|
$
|
(24,322
|
)
|
|||||
|
Alpha
Natural Resources, Inc and Subsidiaries
|
ANR
FUND IX Holdings, L.P. and Alpha NR Holding, Inc. and
Subsidiaries
|
Predecessor
|
|||||||||||||||||
|
Year
Ended December 31, 2006
|
Year
Ended December 31, 2005
|
Year
Ended December 31, 2004
|
Year
Ended December 31, 2003
|
December
14, 2002 to December 31, 2002
|
January
1, 2002 to December 13, 2002
|
||||||||||||||
|
(In
thousands, except per share and per ton
amounts)
|
|||||||||||||||||||
|
Earnings
per share data:
|
|||||||||||||||||||
|
Net
income (loss) per share, as adjusted(1)
|
|||||||||||||||||||
|
Basic
and diluted:
|
|||||||||||||||||||
|
Income
from continuing operations
|
$
|
2.00
|
$
|
0.38
|
$
|
1.52
|
$
|
0.19
|
|||||||||||
|
Loss
from discontinued operations
|
—
|
—
|
(0.16
|
)
|
(0.04
|
)
|
|||||||||||||
|
Net
income per basic and diluted share
|
$
|
2.00
|
$
|
0.38
|
$
|
1.36
|
$
|
0.15
|
|||||||||||
|
Pro
forma net income (loss) per share(2)
|
|||||||||||||||||||
|
Basic
and diluted:
|
|||||||||||||||||||
|
Income
from continuing operations
|
$
|
0.35
|
$
|
0.25
|
|||||||||||||||
|
Loss
from discontinued operations
|
—
|
(0.07
|
)
|
||||||||||||||||
|
Net
income per basic and diluted share
|
$
|
0.35
|
$
|
0.18
|
|||||||||||||||
|
Balance
sheet data (at period end):
|
|||||||||||||||||||
|
Cash
and cash equivalents
|
$
|
33,256
|
$
|
39,622
|
$
|
7,391
|
$
|
11,246
|
$
|
8,444
|
$
|
88
|
|||||||
|
Operating
and working capital
|
116,464
|
35,074
|
56,257
|
32,714
|
(12,223
|
)
|
4,268
|
)
|
|||||||||||
|
Total
assets
|
1,145,793
|
1,013,658
|
477,121
|
379,336
|
108,442
|
156,328
|
|||||||||||||
|
Notes
payable and long-term debt, including current portion
|
445,651
|
485,803
|
201,705
|
84,964
|
25,743
|
—
|
|||||||||||||
|
Stockholders’
equity and partners’ capital (deficit)
|
344,049
|
212,765
|
45,933
|
86,367
|
23,384
|
(132,997
|
)
|
||||||||||||
|
Statement
of cash flows data:
|
|||||||||||||||||||
|
Net
cash provided by (used in):
|
|||||||||||||||||||
|
Operating
activities
|
$
|
210,081
|
$
|
149,643
|
$
|
106,776
|
$
|
54,104
|
$
|
(295
|
)
|
$
|
(13,816
|
)
|
|||||
|
Investing
activities
|
(160,046
|
)
|
(339,387
|
)
|
(86,202
|
)
|
(100,072
|
)
|
(38,893
|
)
|
(22,054
|
)
|
|||||||
|
Financing
activities
|
(56,401
|
)
|
221,975
|
(24,429
|
)
|
48,770
|
47,632
|
35,783
|
)
|
||||||||||
|
Capital
expenditures
|
131,943
|
122,342
|
72,046
|
27,719
|
960
|
21,866
|
|||||||||||||
|
Other
data
|
|||||||||||||||||||
|
Production:
|
|||||||||||||||||||
|
Produced/processed
|
24,827
|
20,602
|
19,069
|
17,199
|
|||||||||||||||
|
Purchased
|
4,090
|
6,284
|
6,543
|
3,938
|
|||||||||||||||
|
Total
|
28,917
|
26,886
|
25,612
|
21,137
|
|||||||||||||||
|
Tons
Sold:
|
|||||||||||||||||||
|
Steam
|
19,050
|
16,674
|
15,836
|
14,809
|
|||||||||||||||
|
Met
|
10,029
|
10,023
|
9,490
|
6,804
|
|||||||||||||||
|
Total
|
29,079
|
26,697
|
25,326
|
21,613
|
|||||||||||||||
|
Coal
sales realization/ton:
|
|||||||||||||||||||
|
Steam
|
$
|
49.05
|
$
|
41.33
|
$
|
32.66
|
$
|
27.14
|
|||||||||||
|
Met
|
$
|
75.09
|
$
|
72.24
|
$
|
59.31
|
$
|
37.35
|
|||||||||||
|
Total
|
$
|
58.03
|
$
|
52.93
|
$
|
42.64
|
$
|
32.14
|
|||||||||||
|
Cost
of coal sales/ton
|
$
|
46.51
|
$
|
44.35
|
$
|
36.34
|
$
|
28.98
|
|||||||||||
|
Coal
margin/ton
|
$ | 11.52 | $ | 8.58 | $ | 6.30 | $ |
3.16
|
|||||||||||
|
EBITDA,
as adjusted(3)
|
$
|
279,435
|
$
|
145,197
|
$
|
119,327
|
$
|
47,663
|
|
|
|
||||||||
|
(1)
|
Basic
earnings per share is computed by dividing net income or loss by
the
weighted average number of shares of common stock outstanding during
the
periods. Diluted earnings per share is computed by dividing net
income or
loss by the weighted average number of shares of common stock and
dilutive
common stock equivalents outstanding during the periods. Common
stock
equivalents include the number of shares issuable on exercise of
outstanding options less the number of shares that could have been
purchased with the proceeds from the exercise of the options based
on the
average price of common stock during the period. Due to the Internal
Restructuring on February 11, 2005 and initial public offering of
common stock completed on February 18, 2005, the calculation of
earnings per share for 2005, 2004, and 2003 reflects certain adjustments,
as described below.
|
|
|
|
|
The
numerator for purposes of computing basic and diluted net income
(loss)
per share, as adjusted, includes the reported net income (loss)
and a pro
forma adjustment for income taxes to reflect the pro forma income
taxes
for ANR Fund IX Holdings, L.P.’s portion of reported pre-tax income
(loss), which would have been recorded if the issuance of the shares
of
common stock received by the FR Affiliates in exchange for their
ownership
in ANR Holdings in connection with the Internal Restructuring had
occurred
as of January 1, 2003. For purposes of the computation of basic and
diluted net income (loss) per share, as adjusted, the pro forma
adjustment
for income taxes only applies to the percentage interest owned
by ANR
Fund IX Holding, L.P., the non-taxable FR Affiliate. No pro forma
adjustment for income taxes is required for the percentage interest
owned
by Alpha NR Holding, Inc., the taxable FR Affiliate, because income
taxes
have already been recorded in the historical results of operations.
Furthermore, no pro forma adjustment to reported net income (loss)
is
necessary subsequent to February 11, 2005 because we are
subject to income taxes.
|
|
|
|
|
The
denominator for purposes of computing basic net income (loss) per
share,
as adjusted, reflects the retroactive impact of the common shares
received
by the FR Affiliates in exchange for their ownership in ANR Holdings
in
connection with the Internal Restructuring on a weighted-average
outstanding share basis as being outstanding as of January 1, 2003.
The common shares issued to the minority interest owners of ANR
Holdings
in connection with the Internal Restructuring, including the immediately
vested shares granted to management, have been reflected as being
outstanding as of February 11, 2005 for purposes of computing the
basic net income (loss) per share, as adjusted. The unvested shares
granted to management on February 11, 2005 that vest monthly over the
two-year period from January 1, 2005 to December 31, 2006 are
included in the basic net income (loss) per share, as adjusted,
computation as they vest on a weighted-average outstanding share
basis
starting on February 11, 2005. The 33,925,000 new shares issued in
connection with the initial public offering have been reflected
as being
outstanding since February 14, 2005, the date of the initial public
offering, for purposes of computing the basic net income (loss)
per share,
as adjusted.
|
|
|
|
|
The
unvested shares issued to management are considered options for
purposes
of computing diluted net income (loss) per share, as adjusted.
Therefore,
for diluted purposes, all remaining unvested shares granted to
management
are added to the denominator subsequent to February 11, 2005 using
the treasury stock method, if the effect is dilutive. In addition,
the
treasury stock method is used for outstanding stock options, if
dilutive,
beginning with the November 10, 2004 grant of options to management
to purchase units in ACM that were automatically converted into
options to
purchase up to 596,985 shares of Alpha Natural Resources, Inc. common
stock at an exercise price of $12.73 per
share.
|
The
computations of basic and diluted net income (loss) per share, as adjusted
for
2005, 2004 and 2003 are set forth below:
|
Year
Ended December 31,
|
||||||||||
|
2005
|
2004
|
2003
|
||||||||
|
(in
thousands, except 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
is defined as net income (loss) plus interest expense, income tax
expense
(benefit), depreciation, depletion and amortization, less interest
income.
EBITDA, as adjusted is EBITDA, further adjusted for minority interest.
EBITDA and EBITDA, as adjusted, are non-GAAP measures used by management
to measure operating performance, and management also believes
it is a
useful indicator of our ability to meet debt service and capital
expenditure requirements. Because EBITDA and EBITDA, as adjusted,
are not
calculated identically by all companies, our calculation may not
be
comparable to similarly titled measures of other
companies.
|
EBITDA
and EBITDA, as adjusted, are calculated as follows (unaudited, in
thousands):
|
Year
Ended December 31,
|
|||||||||||||
|
2006
|
2005
|
2004
|
2003
|
||||||||||
|
Net
income
|
$
|
128,168
|
$
|
21,213
|
$
|
20,015
|
$
|
2,262
|
|||||
|
Interest
expense
|
41,774
|
29,937
|
20,041
|
7,848
|
|||||||||
|
Interest
income
|
(839
|
)
|
(1,064
|
)
|
(531
|
)
|
(103
|
)
|
|||||
|
Income
tax expense (benefit)
|
(30,519
|
)
|
18,860
|
3,960
|
668
|
||||||||
|
Depreciation,
depletion and amortization
|
140,851
|
73,405
|
56,012
|
36,054
|
|||||||||
|
EBITDA
|
279,435
|
142,351
|
99,497
|
46,729
|
|||||||||
|
Minority
interest
|
—
|
2,846
|
19,830
|
934
|
|||||||||
|
EBITDA,
as adjusted
|
$
|
279,435
|
$
|
145,197
|
$
|
119,327
|
$
|
47,663
|
|||||
|
Item 7.
|
Management’s
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 on a combined basis, which prior
to
the completion of our Internal Restructuring were the owners of a majority
of
the membership interests of ANR Holdings, our top-tier holding company, and
for
Alpha Natural Resources, Inc. and subsidiaries on a consolidated basis for
periods from and after the completion of our Internal
Restructuring.
Overview
We
produce, process and sell steam and metallurgical (met) coal from eight regional
business units, which, as of February 1, 2007, are supported by 38 active
underground mines, 27 active surface mines and 10 preparation plants located
throughout Virginia, West Virginia, Kentucky, and Pennsylvania, as well as
a
road construction business in West Virginia that recovers coal. We also sell
coal produced by others, the majority of which we process and/or blend with
coal
produced from our mines prior to resale, providing us with a higher overall
margin for the blended product than if we had sold the coals separately.
Our
sales of steam coal in 2006 and 2005 accounted for approximately 66% and
62%,
respectively, of our annual coal sales volume, and our sales of metallurgical
coal in 2006 and 2005, which generally sells at a premium over steam coal,
accounted for approximately 34% and 38%, respectively, of our annual coal
sales
volume. The increase in our percentage of steam coal sold was mainly due
to our
recent acquisitions which lead to an overall increase in tons sold while
total
met tons sold remained unchanged. Our sales of steam coal during 2006 and
2005
were made primarily to large utilities and industrial customers in the Eastern
region of the United States, and our sales of met coal during those years
were
made primarily to steel companies in the Northeastern and Midwestern regions
of
the United States and in several countries in Europe, Asia and South America.
Approximately 35% of our sales revenue in 2006 and
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. This decrease is due to a 6% decrease in export tons sold combined
with
an increase in our overall sales revenue.
In
addition, we generate other revenues from equipment and parts sales, equipment
repair, road construction, rentals, royalties, commissions, coal handling,
terminal and processing fees, and coal and environmental analysis fees. We
also
record revenue for freight and handling charges incurred in delivering coal
to
our customers, which we treat as being reimbursed by our customers. However,
these freight and handling revenues are offset by equivalent freight and
handling costs and do not contribute to our profitability.
Our
business is seasonal, with operating results varying from quarter to quarter.
We
generally experience lower sales and hence build coal inventory during the
winter months primarily due to the freezing of lakes that we use to transport
coal to some of our customers.
Our
primary expenses are for wages and benefits, supply costs, repair and
maintenance expenditures, cost of purchased coal, royalties, freight and
handling costs, and taxes incurred in selling our coal. Historically, our
cost
of coal sales per ton is lower for sales of our produced and processed coal
than
for sales of purchased coal that we do not process prior to resale.
We
have
one reportable segment, Coal Operations, which includes all of our revenues
and
costs from coal production and sales, freight and handling, rentals,
commissions, coal handling and processing operations and coal recovery
incidental to our road construction operations. These revenues and costs
included in our Coal Operations segment are reported by us in our coal revenues
and cost of coal sales, except for the revenues and costs from rentals,
commissions, and coal handling and processing operations, which we report
in our
other revenues and cost of other revenues, respectively.
Internal
Restructuring and Our Initial Public Offering.
On
February 11, 2005, we completed a series of transactions in connection with
the Internal Restructuring for the purpose of transitioning our top-tier
holding
company from a limited liability company to a corporation, and on
February 18, 2005, we completed the initial public offering of our common
stock. Further information regarding our Internal Restructuring and our initial
public offering can be found in Note 2 to our consolidated financial
statements included in this annual report. As a result of our initial public
offering and our Internal Restructuring, we have incurred during the period
after the initial public offering and Internal Restructuring and will continue
to incur additional expenses that we did not incur in prior periods, including
expenses associated with compliance with corporate governance and periodic
financial reporting requirements for public companies. Moreover, all of our
income is now subject to income tax and therefore the effective tax rates
reflected in our financial statements for periods prior to the Internal
Restructuring are not indicative of our effective tax rates after our Internal
Restructuring.
As
part
of our Internal Restructuring, our executive officers and certain other key
employees exchanged their interests in ANR Holdings for shares of our common
stock and the right to participate in a distribution of the proceeds we received
from the underwriters as a result of the underwriters’ exercise of their
over-allotment option in connection with the initial public offering. As
a
result, we recorded stock-based compensation expense equal to the fair value
of
the unrestricted shares issued and distributions paid in the amount of
$45.8 million for the year ended December 31, 2005. In addition, as a
result of the conversion of outstanding options held by members of our
management to purchase units of Alpha Coal Management into the ACM Converted
Options, we recorded stock-based compensation of $0.7 million in 2005. The
aggregate amount of stock-based compensation expense we recorded in 2005
was
$46.5 million, equal to the $45.8 million of expense associated with
distributions paid and the vested portions of shares issued in the Internal
Restructuring and amortization expense from the unvested portions of shares
issued in the Internal Restructuring, and $0.7 million of amortization
expense from the ACM Converted Options. In addition, we had deferred stock-based
compensation of $15.6 million, including $12.8 million and
$2.6 million related to our Internal Restructuring and the ACM Converted
Options, respectively, that we will record as non-cash stock-based compensation
expense over the remaining term of the applicable two-year and five-year
vesting
periods, respectively, thereby reducing our earnings in those
periods.
In
connection with our Internal Restructuring, we assumed the obligation of
ANR
Holdings to make distributions to (1) affiliates of AMCI in an aggregate
amount of $6.0 million, representing the approximate incremental tax
resulting from the recognition of additional tax liability resulting from
our
Internal Restructuring, and (2) First Reserve Fund IX, L.P. in an
aggregate amount of approximately $4.5 million, representing the
approximate value of tax attributes conveyed as a result of the Internal
Restructuring (collectively, the “Tax Distributions”). The Tax Distributions to
affiliates of AMCI were paid in cash in five equal installments of $1.2 million
on April 15, 2005, June 15, 2005, September 15, 2005,
January 13, 2006 and April 17, 2006. The Tax Distributions to First Reserve
Fund IX, L.P. are in three installments of approximately $2.1 million,
$2.1 million and $0.3 million on December 15, 2007, 2008 and
2009, respectively. 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 NKC’s coal inventory, and the assumption by the buyer of
certain liabilities of NKC. For the six months ended June 30, 2005, NKC
contributed revenues of $4.5 million, an after-tax and minority interest
loss of $0.2 million on sales of 0.1 million tons of steam coal sold.
In connection with the closing of the transaction, National King Coal, LLC
was
renamed NatCoal LLC, and Gallup Transportation and Transloading Company,
LLC was
renamed GTTC LLC. We recorded a gain on this sale of $0.7 million and have
reported NKC as discontinued operations for all periods presented
herein.
Nicewonder
Acquisition and 2005 Financing.
On
October 26, 2005, we completed the acquisition of certain privately held
coal reserves and operations of the Nicewonder Coal Group in southern West
Virginia and southwestern Virginia for an aggregate purchase price of
$328.2 million, consisting of cash at closing in the amount of
$35.2 million, a cash payment of $1.9 million made to the sellers
in April 2006, transaction costs of $4.7 million, $221.0 million
principal amount of promissory installment notes of one of our indirect,
wholly
owned subsidiaries (of which $181.1 million was paid on November 2,
2005 and $39.9 million was paid on January 13, 2006), a payment on
February 6, 2006 in the amount of $12.3 million for working capital,
and 2,180,233 shares of our common stock valued at approximately
$53.2 million for accounting purposes. For this purpose, the value of the
common stock issued was based on the average closing prices of our common
stock
for the five trading days surrounding October 20, 2005, the date the number
of shares to be issued under the terms of the acquisition agreement became
fixed
without subsequent revision. In connection with the Nicewonder Acquisition,
we
also agreed to make royalty payments to the former owners of the acquired
companies in the amount of $0.10 per ton of coal mined and sold from White
Flame Energy’s Surface Mine No. 10. The Nicewonder Acquisition consisted of
the purchase of the outstanding capital stock of White Flame Energy, Inc.,
Twin
Star Mining, Inc. and Nicewonder Contracting, Inc., the equity interests
of
Powers Shop, LLC and Buchanan Energy, LLC and substantially all of the assets
of
Mate Creek Energy of W. Va., Inc. and Virginia Energy Company, and the business
of Premium Energy, Inc. by merger.
Also
on
October 26, 2005, in connection with our acquisition of the Nicewonder Coal
Group, 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.
Progress
Acquisition
On May
1, 2006, we completed the acquisition of certain coal mining operations in
eastern Kentucky from Progress Fuels Corp, a subsidiary of Progress Energy,
for
$28.8 million, including an adjustment for working capital. The Progress
acquisition consisted of the purchase of the outstanding capital stock of
Diamond May Coal Co. and Progress Land Corp. and the assets of Kentucky May
Coal
Co., Inc. The operations acquired are adjacent to Alpha’s Enterprise business
unit and have been integrated into Enterprise.
Gallatin
Acquisition
On
December 28, 2006, we paid $3.3 million and we are obligated to make an
additional contribution of $7.0 million in 2007 for a 94% ownership interest
in
Gallatin Materials LLC (Gallatin), a lime manufacturing venture near Cincinnati,
Ohio. Gallatin plans to construct two rotary pre-heater lime kilns to
produce lime to be sold primarily to coal-burning utilities as a scrubbing
agent
for removing sulfur dioxide from flue gas. The lime is also expected to be
sold
to steel producers for use as flux in electric arc and basic oxygen furnaces.
The minority owners were granted restricted member interests in Gallatin
which
vest based on performance criteria over approximately three years from the
closing date and which, if earned in their entirety, would reduce our ownership
to 77.5%. We are committed to providing financing to Gallatin through a $3.8
million subordinated loan and provided a $2.6 million letter of credit to
cover
cost overruns.
Forward
Purchase and Forward Sales Contracts In
the
course of preparing our second quarter financial statements, we and our
independent auditors identified certain forward purchase and forward sales
contracts that considered derivative instruments under SFAS No. 133,
Accounting
for Derivative Instruments and Hedging Activities,
that did
not qualify under the “normal purchase and normal sales” exception. Transactions
that do not qualify for this exception are required to be marked to market.
Accordingly we reviewed these contracts to assess the impact, if any, which
mark to market adjustments would have had on previously issued financial
statements. Upon completion of that review, we concluded that previously
issued
financial statements were not materially misstated. At the beginning of the
second quarter of 2006, we recorded adjustments to mark-to-market all of
our
open contracts for coal sales and purchases in the over-the-counter market
(OTC)
and certain third party purchases and sales contracts. These adjustments
resulted in an decrease in coal sales revenues of $0.5 million and a
decrease in cost of coal sales of $2.3 million, resulting in a net after-tax
increase to net income in the amount of $1.0 million.
Staff
Accounting Bulletin No. 108 On
September 13, 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 108, “Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements”
(“SAB
108”), which provides interpretive guidance on the consideration of effects of
prior year misstatements in quantifying current year misstatements for the
purpose of a materiality assessment. SAB 108 is effective for us for the
year
ended December 31, 2006 and provided for a one time transitional cumulative
effect adjustment to retained earnings as of January 1, 2006 for errors which
were not previously deemed to be material, but which are material under the
guidance of SAB 108. As a result of the adoption of SAB 108, we changed our
method of accounting for costs related to acid mine drainage and also for
certain materials and supplies which are used in mining operations. We recorded
a cumulative effect adjustment to increase beginning retained earnings by
$0.7
million (net of income tax effect of $0.2 million) for the combined effect
of
these accounting changes.
Coal
Pricing Trends, Uncertainties and Outlook
The
strong coal pricing environment that has contributed to our growth in revenues
during 2006 and 2005 began to moderate in the second half of 2006 due to
an
increase in customer stockpiles, mild weather and increased coal production
which lead to an oversupply of coal in the marketplace. With utilities
adjusting
their coal inventories to more normalized levels, and U.S. coal supply
outpacing
consumption in 2006, the market has softened for steam coal with little
indication of when conditions might improve and support price improvements.
Met
coal markets have been more insulated from significant price movement,
and we
have contracted most of our met business for 2007, including virtually
all
domestic business. Met coal sales are expected to account for 30-35 percent
of
expected 2007 sales volumes.
While
our
outlook on coal pricing remains positive, future coal prices are subject
to
factors beyond our control and we cannot predict whether and for how long
this
current coal pricing environment will continue. As of February 5, 2007, 83
percent of our planned 2007 production was committed and priced and 7 percent
was committed and unpriced, with approximately 2.0 million tons uncommitted.
Committed steam coal prices for 2007 average $48 to $49 per ton and met coal
prices average $72 to $73 per ton. Approximately 42 percent of our planned
production in 2008 is committed.
We
are
exercising production discipline during this weaker market period and we
are
also reviewing all of our projected capital expenditures for 2007 in order
to
prioritize those expenditures in favor of operations that are able to achieve
sustainable operating margins in a softer pricing environment. We have
made a
number of changes to our operating subsidiaries mine plans which in the
aggregate should reduce our annual production going forward by about 1.0
million
tons. Our business is very sensitive to changes in supply and demand and
we will
be carefully managing our mines in 2007 to preserve profit margins. Events
beyond our control could impact our profit margins.
During
the second half of 2006, we experienced growing productivity challenges
due to
geology issues related to the high quality, high revenue reserves we choose
to
mine and the unavailability of experienced labor at certain locations.
As a
result, productivity levels declined and costs increased. Additionally,
training
and integrating new miners takes time and their productivity levels during
this
period are not equal to that of more experienced miners.
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 basic shares
|
63,359,431
|
63,047,913
|
|||||
|
Pro
Forma weighted average diluted shares
|
63,895,431
|
63,394,263
|
|||||
Year
Ended December 31, 2006 Compared to Year Ended December 31,
2005
Summary
For
the year ended December 31, 2006, we recorded revenues of
$1,910.7 million compared to $1,626.7 million for the year ended
December 31, 2005, an increase of $284.0 million. Net income increased
from $21.2 million in 2005 to $128.2 million in 2006 and operating
income increased $66.0 million to $138.1 million. Included in our 2006
results was a tax benefit from the reversal of a portion of our valuation
allowance for deferred tax assets in the amount of $55.6 million, after-tax
stock-based compensation charges of $12.8 million related to our IPO, as
well as $5.2 million after-tax charge for the buyout of a multi-year legacy
coal
supply agreement. Our results for 2005 were unfavorably impacted by an after-tax
charge of $46.5 million for stock based compensation also related to our
IPO.
Tons sold increased from 26.7 million tons in 2005 to 29.1 million
tons in 2006 mainly due to the impact of the Nicewonder and Progress
acquisitions, representing 5.3 million tons, partially offset by a reduction
of
1.7 million tons of purchased coal sold. Coal margin, which we define as
coal
revenues less cost of coal sales, divided by coal revenues, increased from
16.2%
in 2005 to 19.9% in 2006.
Revenues
|
Year
Ended December 31,
|
Increase
(Decrease)
|
||||||||||||
|
2006
|
2005
|
$
or Tons
|
%
|
||||||||||
|
(In
thousands, except per ton data)
|
|||||||||||||
|
Coal
revenues
|
$
|
1,687,553
|
$
|
1,413,174
|
$
|
274,379
|
19
|
%
|
|||||
|
Freight
and handling revenues
|
188,366
|
185,555
|
2,811
|
2
|
%
|
||||||||
|
Other
revenues
|
34,743
|
27,926
|
6,817
|
24
|
%
|
||||||||
|
Total
revenues
|
$
|
1,910,662
|
$
|
1,626,655
|
$
|
284,007
|
17
|
%
|
|||||
|
Tons
sold
|
29,079
|
26,698
|
2,381
|
9
|
%
|
||||||||
|
Coal
sales realization per ton sold
|
$
|
58.03
|
$
|
52.93
|
$
|
5.10
|
10
|
%
|
|||||
Coal
Revenues.
Coal revenues increased for the year ended December 31, 2006 by
$274.4 million or 19%, to $1,687.6 million, as compared to the year
ended December 31, 2005. This increase was due primarily to a
$5.10 per ton increase in the average sales price of our coal and the sale
of 2.4 million additional tons over the comparable period last year. Tons
sold increased from 26.7 million tons in 2005 to 29.1 million tons in
2006 mainly due to the addition of the Nicewonder and Progress acquisitions,
representing 5.3 million tons, partially offset by a reduction of 1.7 million
tons of purchased coal sold.
The
mark-to-market adjustment for certain forward sales contracts increased revenues
by $6.1 million. The
increase in the average sales price of our coal was due to the general increase
in coal prices during the period. Met coal prices increased by $2.85 per
ton to $75.09 per ton and steam coal prices increased by $7.72 per ton
to an average of $49.05 per ton including the effects of the $7.0 million
payment to terminate a multi-year coal contract, which was recorded as a
reduction in steam coal revenues. Our sales mix of met coal and steam coal
based
on volume in 2006 was 34% and 66%, respectively compared with 38% and 62%
in
2005.
Freight
and Handling Revenues.
Freight
and handling revenues increased to $188.4 million for the year ended
December 31, 2006, an increase of $2.8 million compared to the year
ended December 31, 2005 due to an increase in freight costs, arising
primarily from fuel surcharges. These revenues are offset by equivalent costs
and do not contribute to our profitability.
Other
Revenues.
Other
revenues increased for the year ended December 31, 2006 by
$6.8 million, or 24%, to $34.7 million, as compared to the same period
for 2005. Revenues from our road construction operations were $24.0 million,
a
$20.2 million increase mainly due to a full year of operations in 2006.
This increase was mostly offset by a decrease in revenues from outside sales
by
Maxxim Rebuild of $7.1 million, a decrease in fees from coal processing and
handling operations of $7.6 million, net of an increase in rents, royalties
and
other in the amount of $1.3 million. Other revenues attributable to our Coal
Operations segment were $4.3 million in 2006 and $10.4 million in
2005.
Costs
and Expenses
|
Year
Ended December 31.
|
Increase
(Decrease)
|
||||||||||||
|
2006
|
2005
|
$
|
%
|
||||||||||
|
(In
thousands, except per ton data)
|
|||||||||||||
|
Cost
of coal sales (exclusive of items shown separately below)
|
$
|
1,352,450
|
$
|
1,184,092
|
$
|
168,358
|
14
|
%
|
|||||
|
Freight
and handling costs
|
188,366
|
185,555
|
2,811
|
2
|
%
|
||||||||
|
Cost
of other revenues
|
22,982
|
23,675
|
(693
|
)
|
(3
|
)%
|
|||||||
|
Depreciation,
depletion and amortization
|
140,851
|
73,122
|
67,729
|
93
|
%
|
||||||||
|
Selling,
general and administrative expenses (exclusive of depreciation
and
amortization shown separately above)
|
67,952
|
88,132
|
(20,180
|
)
|
(23
|
)%
|
|||||||
|
Total
costs and expenses
|
$
|
1,772,601
|
$
|
1,554,576
|
$
|
218,025
|
14
|
%
|
|||||
|
Cost
of coal sales per ton sold
|
$
|
46.51
|
$ | 44.35 | $ | 2.16 | 5 | % | |||||
Cost
of Coal Sales.
For the
year ended December 31, 2006, our cost of coal sales, which excludes
charges for depreciation, depletion and amortization, increased
$168.4 million, or 14%, to $1,352.5 million compared to the year ended
December 31, 2005. The mark-to-market adjustment on certain forward
purchase contracts increased cost of coal sales by $5.7 million. Approximately
$208.2 million of the year ended December 31, 2006 increase in costs were
associated with our Nicewonder and Progress acquisitions, partially offset
by a
reduction in spending for purchased coal of $100.0 million. In addition,
our
cost of coal sales increased as a result of increased prices for labor, diesel
fuel and other mine supplies, the performance and cost of contract mining
services, and increased variable sales-related costs, such as royalties and
severance taxes. The average cost per ton sold increased 5% from $44.35 per
ton in 2005 to $46.51 per ton in 2006. Our cost of coal sales as a
percentage of coal revenues decreased from 84% in 2005 to 80% in 2006. For
the
years ended December 31, 2006 and 2005 our average cost per ton for our
produced and processed coal sales was $44.33 and $40.07, respectively, and
our
average cost per ton for coal that we purchased from third parties and resold
without processing was $58.76 and $58.88, respectively.
Freight
and Handling Costs.
Freight
and handling costs increased $2.8 million to $188.4 million during
2006 as compared to 2005 due to an increase in freight costs, arising primarily
from fuel surcharges. These costs were offset by an equivalent amount of
freight
and handling revenue.
Cost
of Other Revenues.
Cost of
other revenues decreased $0.7 million, or 3%, to $23.0 million for the
year ended December 31, 2006 as compared to the prior year due to a
decrease in costs associated with lower coal processing and handling volumes
in
the amount of $7.3 million, a decrease in Maxxim Rebuild’s outside sales
activity of $7.0 million mostly offset by a $13.9 million increase in costs
associated with our road construction operations primarily driven by a full
year
of road construction activity in 2006. This margin does not included
related charges for depreciation and amortization.
Depreciation,
Depletion and Amortization.
Depreciation, depletion, and amortization increased $67.7 million, or 93%,
to $140.9 million for the year ended December 31, 2006 as compared to
the same period of 2005 due to capital additions resulting in additional
depreciation and due to the impact of the Nicewonder and Progress acquisitions.
Depreciation, depletion and amortization attributable to our Coal Operations
segment were $133.0 million in 2006 and $70.8 million 2005.
Depreciation, depletion and amortization per ton sold for our produced and
processed coal increased from $3.55 per ton for the year ended
December 31, 2005 to $5.71 per ton in the same period of 2006 mainly
due to our acquisitions.
Selling,
General and Administrative Expenses.
Selling,
general and administrative expenses (SG&A) decreased $20.2 million, or
23%, to $68.0 million for the year ended December 31, 2006 compared to the
same period in 2005 primarily due to a decrease in stock-based compensation
charges. Stock-based compensation charges included in SG&A totaled $18.2
million and $46.5 million in 2006 and 2005, respectively. Stock-based
compensation charges in the amount of $12.8 and $46.5 million in 2006 and
2005,
respectively, are related to our IPO. These charges ended at December 31,
2006.
This decrease was mostly offset by an increase in wages and benefits in the
amount of $5.3 million driven by a 7.5% increase in administrative personnel
and
the additional expense related to our key employee retention plan and an
increase in professional fees ($1.1 million) related to being a public company.
Our SG&A expenses as a percentage of total revenues decreased from 5.4% in
2005 to 3.6% in 2006.
Interest
Expense
Interest
expense increased $11.8 million to $41.8 million due to an increase in our
average amount of debt outstanding in 2006 related to Nicewonder Acquisition
and
a general increase in interest rates.
Interest
Income
Interest
income decreased $0.2 million to $0.8 million. This decrease is due to
the reduction in the average amount outstanding on an interest bearing note
receivable from a coal supplier mostly offset by additional interest earned
on
invested cash.
Income
Tax Expense (Benefit)
Income
tax benefit for the year ended December 31, 2006 was $30.5 million as
compared to income tax expense from continuing operations of $19.0 million
for
the year ended December 31, 2005. Our effective tax rates for the year
ended December 31, 2006 and 2005 were (31.3%) and 43.8%, respectively. The
effective tax rate for 2006 was lower than the statutory federal tax rate
due
primarily to the reversal of a portion of the valuation allowance for deferred
tax assets, the additional tax benefits associated with percentage depletion,
and the extraterritorial income exclusion - partially offset by non-deductible
stock-based compensation charges associated with the IPO and state income
taxes.
Since
our formation and through the third quarter of 2006, we did not weigh
significantly our forecast of future taxable income (subjective evidence)
as we
had not yet established an adequate earnings history (defined by us as at
least
three years) to provide objective evidence of the ability to generate future
income. Accordingly, we had recorded a valuation allowance against a substantial
portion of our deferred tax asset. As of December 31, 2006, we have a three
year
history of cumulative earnings. As a result, we believe we are able to place
a
higher degree of reliance on our projections of future taxable income. Based
on
the results of a comprehensive analysis completed in the fourth quarter of
2006,
we have concluded that it was more likely than not that a portion of it’s
deferred tax asset previously reserved through a valuation allowance will
be
realized. As a result, we recorded a tax benefit in the fourth quarter 2006
of
$55.6 million.
Excluding
this reversal of the valuation allowance, the effective tax rate would have
been
approximately 25.7% for 2006.
The
effective tax rate for 2005 is higher than the statutory federal tax rate
due
primarily to the portion of the stock-based compensation charge associated
with
the issuance of common stock to management in connection with the Internal
Restructuring and initial public offering that is not deductible for tax
purposes. To a much lesser extent, state income taxes contributed to the
increase in the effective tax rate above the statutory rate. The increase
in
expected income tax expense related to the stock-based compensation charge
and
state income taxes is offset in part by the tax benefits associated with
percentage depletion, the extraterritorial income exclusion, a reduction
in
valuation allowance of $6.1 million, and the effect of not providing taxes
on the minority interest and pass-through entity prior to the Internal
Restructuring.
Year
Ended December 31, 2005 Compared to Year Ended December 31,
2004
Summary
For
the year ended December 31, 2005, we recorded revenues of $1,626.7 million
compared to $1,249.4 million for the year ended December 31, 2004, an
increase of $377.2 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 16.2% in
2005.
Revenues
|
Year
Ended December 31,
|
Increase
(Decrease)
|
||||||||||||
|
2005
|
2004
|
$
or Tons
|
%
|
||||||||||
|
(In
thousands, except per ton data)
|
|||||||||||||
|
Coal
revenues
|
$
|
1,413,174
|
$
|
1,079,981
|
$
|
333,193
|
31
|
%
|
|||||
|
Freight
and handling revenues
|
185,555
|
141,100
|
44,455
|
32
|
%
|
||||||||
|
Other
revenues
|
27,926
|
28,347
|
(421
|
)
|
(2
|
%)
|
|||||||
|
Total
revenues
|
$
|
1,626,655
|
$
|
1,249,428
|
$
|
377,227
|
30
|
%
|
|||||
|
Tons
sold
|
26,698
|
25,326
|
1,372
|
5
|
%
|
||||||||
|
Coal
sales realization per ton sold
|
$
|
52.93
|
$
|
42.64
|
$
|
10.29
|
24
|
%
|
|||||
Coal
Revenues.
Coal
revenues increased for the year ended December 31, 2005 by
$333.2 million or 31%, to $1,413.2 million, as compared to the year
ended December 31, 2004. This increase was due to a $10.29 per ton
increase in the average sales price of our coal and the sale of 1.4 million
additional tons over the comparable 2004 period. 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
$12.93 per ton to $72.24 per ton as steam coal prices increased by
$8.67 per ton to an average of $41.33 per ton. Our sales mix of met
coal and steam coal in 2005 was essentially unchanged from 2004 at 38% and
62%,
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
$0.4 million, or 2%, to $27.9 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. In addition to this decrease, 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 this decrease were increases in our coal processing
and
handling revenues of $1.9 million and road construction revenues in the
amount of $3.8 million. The road construction revenues began with our
acquisition of the Nicewonder Coal Group. Other revenues attributable to
our
Coal Operations segment were $10.4 million in 2005 and $10.4 million
in 2004.
Costs
and Expenses
|
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)
|
88,132
|
40,607
|
47,525
|
117
|
%
|
||||||||
|
Total
costs and expenses
|
$
|
1,554,576
|
$
|
1,180,321
|
$
|
374,255
|
32
|
%
|
|||||
|
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 and 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
road 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. This margin does not
included related charges for depreciation and amortization.
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 $47.5 million, or 117%, to
$88.1 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. Our
selling, general and administrative expenses as a percentage of total revenues
increased from 3.3% in 2004 to 5.4% in 2005.
Interest
Expense
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
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
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 by the tax benefits associated with percentage depletion, the
extraterritorial income exclusion, a reduction in valuation allowance of
$6.1 million, and the effect of not providing taxes on the minority
interest and pass-through entity prior to the Internal
Restructuring.
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 interest’s 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.
Liquidity and Capital Resources
Our
primary liquidity and capital resource requirements are to finance the cost
of
our coal production and purchases, make capital expenditures, pay income
taxes,
and service our debt and reclamation obligations. Our primary sources of
liquidity are cash flow from sales of our produced and purchased coal, other
revenue and borrowings under our senior credit facility.
At
December 31, 2006, our available liquidity was $227.2 million,
including cash and cash equivalents of $33.3 million and
$193.9 million available under our credit facility. Our total indebtedness
was $445.7 million at December 31, 2006, a decrease of
$40.2 million from the year ended December 31, 2005
primarily due to our payment of the final installment of the notes associated
with the Nicewonder acquisition. Our cash capital spending for the year ended
December 31, 2006 was $131.9 million, and we expect to spend from
$120 million to $150 million in cash capital spending in 2007,
including capital expenditures for our lime manufacturing venture. In addition,
we have secured non-recourse project financing of $20.6 million for our lime
manufacturing venture.
Based
on
the terms of our outstanding capital lease obligations and indebtedness as
of
December 31, 2006, projected 2007 payments of principal on capital lease
obligations and indebtedness are $24.2 million in the aggregate, of which
$7.7 million, $7.8 million, $7.9 million and $0.8 million due in each of
the
four quarters of 2007, respectively. Based on our projection of cash to be
generated from operations in 2007 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
2007.
Cash
Flows
Net
cash provided by operating activities in 2006 was $210.1 million, an increase
of
$60.4 million from the
$149.6 million of net cash provided by operations during 2005. This
increase is due to an increase in net income of $107.0 million and a decrease
in
non-cash charges of $6.2 million, offset in part by an increase in cash required
for operating assets and liabilities in the amount of $40.4 million due to
an
increase in our overall business activity.
Net
cash
used in investing activities was $179.3 million less in 2006 over the year
ago period mainly due to a decrease in the cash required for acquisitions
offset
by an increase in cash used for capital expenditures.
Net
cash
provided by financing activities decreased by $278.4 million to in 2006
from 2005. In 2005, we completed our previously discussed Internal Restructuring
and initial public offering. The proceeds from the IPO were used to repay
shareholders’ notes issued as part of the Internal Restructuring. During 2006,
we made payments on notes payable in the amount of $58.3 million, a net
repayment of $3.4 million of long-term debt and paid $2.4 million in
distributions to former members of ANR Holding, LLC.
Net
cash
provided by operating activities 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 in
2005.
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
($221.9 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.
Credit
Facility and Long-term Debt
As
of December 31, 2006, our total long-term indebtedness, including capital
lease obligations, consisted of the following (in thousands):
|
December
31,
|
||||
|
2006
|
||||
|
10%
Senior notes due 2012
|
$
|
175,000
|
||
|
Term
Loan
|
247,500
|
|||
|
Capital
lease obligation
|
1,510
|
|||
|
Other
|
700
|
|||
|
Total
long-term debt
|
424,710
|
|||
|
Less
current portion
|
3,254
|
|||
|
Long-term
debt, net of current portion
|
$
|
421,456
|
||
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 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.
Other
As
a regular part of our business, we review opportunities for, and engage in
discussions and negotiations concerning, the acquisition of coal mining assets
and interests in coal mining companies and related businesses, and acquisitions
of, or combinations with, coal mining companies and related businesses. When
we
believe that these opportunities are consistent with our growth plans and
our
acquisition criteria, we will make bids or proposals and/or enter into letters
of intent and other similar agreements, which may be binding or nonbinding,
that
are customarily subject to a variety of conditions and usually permit us
to
terminate the discussions and any related agreement if, among other things,
we
are not satisfied with the results of our due diligence investigation. Any
acquisition opportunities we pursue could materially affect our liquidity
and
capital resources and may require us to incur indebtedness, seek equity capital
or both. There can be no assurance that additional financing will be available
on terms acceptable to us, or at all.
Analysis
of Material Debt Covenants
We
were in compliance with all covenants under our current credit facility and
the
indenture governing our senior notes as of December 31, 2006.
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, 2006 were 1.44
and
7.52, 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 EBITDA
applied in presenting Adjusted EBITDA is appropriate to provide additional
information to investors to demonstrate compliance with our financial
covenants.
|
Three
Months
Ended
March
31,
2006
|
Three
Months
Ended
June
30,
2006
|
Three
Months
Ended
September
30,
2006
|
Three
Months
Ended
December
31,
2006
|
Twelve
Months
Ended
December
31,
2006
|
||||||||||||
|
(In
thousands)
|
||||||||||||||||
|
Net
Income
|
$
|
27,212
|
$
|
23,128
|
$
|
14,544
|
$
|
63,284
|
$
|
128,168
|
||||||
|
Interest
expense, net
|
10,089
|
10,615
|
10,579
|
9,652
|
40,935
|
|||||||||||
|
Income
tax expense (benefit)
|
9,620
|
8,676
|
4,744
|
(53,559
|
)
|
(30,519
|
)
|
|||||||||
|
Depreciation,
depletion, and amortization
|
33,634
|
34,207
|
36,422
|
36,588
|
140,851
|
|||||||||||
|
EBITDA
|
80,555
|
76,626
|
66,289
|
55,965
|
279,435
|
|||||||||||
|
Fair
value of forward purchase and sales coal contract
|
—
|
(4,336
|
)
|
2,060
|
2,097
|
(179
|
)
|
|||||||||
|
Other
allowable adjustments
|
529
|
531
|
(379
|
)
|
(467
|
)
|
214
|
|||||||||
|
Accretion
expense
|
1,077
|
1,169
|
1,226
|
1,402
|
4,874
|
|||||||||||
|
Amortization
of deferred gains
|
(393
|
)
|
(249
|
)
|
(257
|
)
|
(97
|
)
|
(996
|
)
|
||||||
|
Stock-based
compensation charges
|
3,833
|
6,112
|
5,814
|
4,622
|
20,381
|
|||||||||||
|
Adjusted
EBITDA
|
$
|
85,601
|
$
|
79,853
|
$
|
74,753
|
$
|
63,522
|
$
|
303,729
|
||||||
|
Leverage
ratio(1)
|
1.44
|
|||||||||||||||
|
Interest
coverage ratio(2)
|
7.52
|
|||||||||||||||
|
(1)
|
Leverage
ratio is defined in our credit facility as total debt divided by
Adjusted
EBITDA.
|
|
(2)
|
Interest
coverage ratio is defined in our credit facility as Adjusted EBITDA
divided by cash interest expense.
|
Contractual
Obligations
The
following is a summary of our significant contractual obligations as of
December 31, 2006 (in thousands):
|
2007
|
2008-2009
|
2010-2011
|
After
2011
|
Total
|
||||||||||||
|
Long-term
debt and capital leases(1)
|
$
|
3,254
|
$
|
6,456
|
$
|
5,000
|
$
|
410,000
|
$
|
424,710
|
||||||
|
Equipment
purchase commitments
|
38,264
|
—
|
—
|
—
|
38,264
|
|||||||||||
|
Operating
leases
|
6,454
|
3,952
|
2,390
|
8,652
|
21,448
|
|||||||||||
|
Minimum
royalties
|
12,475
|
24,643
|
23,129
|
34,791
|
95,038
|
|||||||||||
|
Coal
purchase commitments
|
118,797
|
—
|
—
|
—
|
118,797
|
|||||||||||
|
Gallatin
commitments
|
10,800
|
—
|
—
|
—
|
10,800
|
|||||||||||
|
Coal
contract buyout
|
680
|
1,304
|
624
|
—
|
2,608
|
|||||||||||
|
Total
|
$
|
190,724
|
$
|
36,355
|
$
|
31,143
|
$
|
453,443
|
$
|
711,665
|
||||||
|
(1)
|
Long-term
debt and capital leases include principal amounts due in the years
shown.
Interest payable on these obligations, with interest rates ranging
between
8.0% and 12.15% on our loans and capital leases, would be approximately
$37.3 million in 2007, $74.1 million in 2008 to 2009,
$73.0 million in 2010 to 2011, and $26.0 million after
2011.
|
Additionally,
we have long-term liabilities relating to asset retirement obligations, workers’
compensation and black lung benefits and postretirement benefits. The table
below reflects the estimated payments for these obligations (in
thousands):
|
Within
|
||||||||||||||||
|
1
Year
|
2-3
Years
|
4-5
Years
|
After
5 Years
|
Total
|
||||||||||||
|
Asset
retirement obligation
|
$
|
7,842
|
14,284
|
19,629
|
65,671
|
107,426
|
||||||||||
|
Postretirement
|
135
|
1,395
|
3,565
|
304,279
|
309,374
|
|||||||||||
|
Workers’
compensation benefits and black lung benefits
|
1,055
|
1,620
|
963
|
4,705
|
8,343
|
|||||||||||
|
Total
|
$
|
9,032
|
17,299
|
24,157
|
374,655
|
425,143
|
||||||||||
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, 2006, 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. During the fourth quarter of 2006, we also
entered into a committed bonding facility with the Chubb Group of Insurance
Companies. Chubb has agreed, subject to certain conditions, to issue surety
bonds on our behalf in a maximum amount of $50.0 million. As of
December 31, 2006, we have posted an aggregate of $138.0 million in
reclamation bonds and $10.4 million of other types of bonds under these
facilities. We maintained letters of credit as of December 31, 2006
totaling $81.1 million to secure reclamation and other surety bond
obligations.
Critical
Accounting Policies and Estimates
Our
discussion and analysis of our financial condition, results of operations,
liquidity and capital resources is based upon our consolidated financial
statements, which have been prepared in accordance with U.S. generally
accepted accounting principles (“GAAP”). GAAP requires that we make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities.
On an
ongoing basis, we evaluate our estimates. We base our estimates on historical
experience and on various other assumptions that we believe are reasonable
under
the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these
estimates.
Reclamation.
Our
asset retirement obligations arise from the federal Surface Mining Control
and
Reclamation Act of 1977 and similar state statutes, which require that mine
property be restored in accordance with specified standards and an approved
reclamation plan. Significant reclamation activities include reclaiming refuse
and slurry ponds, reclaiming the pit and support acreage at surface mines,
and
sealing portals at deep mines. We account for the costs of our reclamation
activities in accordance with the provisions of SFAS No. 143,
“Accounting
for Asset Retirement Obligations.”
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 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, 2006, we had recorded asset retirement obligation liabilities
of $77.3 million, including amounts reported as current. While the precise
amount of these future costs cannot be determined with certainty, as of
December 31, 2006, we estimate that the aggregate undiscounted cost of
final mine closures is approximately $107.4 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 is determined
from a
published yield-curve table matched to the timing of our projected cash out
flows. The discount rate used to determine the net periodic benefit cost
for
postretirement benefits other than pensions was 5.50% for the year ended
December 31, 2006 and 5.75% for the year ended December 31, 2005. 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-
Point
Increase
|
One-Percentage-
Point
Decrease
|
||||||
|
Effect
on total service and interest cost components
|
$
|
83
|
$
|
(65
|
)
|
||
|
Effect
on accumulated postretirement benefit obligation
|
692
|
(562
|
)
|
||||
|
Discount
rate (dollars in thousands):
|
One
Half-
Percentage-
Point
Increase
|
One
Half-
Percentage-
Point
Decrease
|
|||||
|
Effect
on total service and interest cost components
|
$
|
(293
|
)
|
$
|
292
|
||
|
Effect
on accumulated postretirement benefit obligation
|
(3,968
|
)
|
4,309
|
||||
We
recorded an additional liability of $17.5 million (13.2, net of tax) as a
result
of the adoption of SFAS No. 158, Employers’
Accounting for Defined Benefit Pension and Other Postretirement
Plans,
which
requires that any unfunded portion of the Accumulated Pension Benefit Obligation
(“APBO”) be, recognized on the balance sheet as additional liabilities.
Workers’
Compensation.
Workers’
compensation is a system by which individuals who sustain personal injuries
due
to job-related accidents are compensated for their disabilities, medical
costs,
and on some occasions, for the costs of their rehabilitation, and by which
the
survivors of workers who suffer fatal injuries receive compensation for lost
financial support. The workers’ compensation laws are administered by state
agencies with each state having its own set of rules and regulations regarding
compensation that is owed to an employee who is injured in the course of
employment. Our operations are covered through a combination of a self-insurance
program and an insurance policy. We accrue for any self-insured liability
by
recognizing costs when it is probable that a covered liability has been incurred
and the cost can be reasonably estimated. Our estimates of these costs are
adjusted based upon actuarial studies. Actual losses may differ from these
estimates, which could increase or decrease our costs.
Coal
Workers’ Pneumoconiosis.
We are
required by federal and state statutes to provide benefits to employees for
awards related to coal workers’ pneumoconiosis disease (black lung). These
claims are covered by a third-party insurance provider in all locations where
we
operate with the exception of West Virginia. The Company is self-insured
for
state black lung related claims at certain locations in West Virginia. We
account for black lung benefits under the provisions of SFAS No. 106,
Employers’
Accounting for Postretirement Benefit Other than Pension,
and
SFAS No. 158, Employers’
Accounting for Defined Benefit Pension and Other Postretirement
Plans.
Charges
are made to operations for state black lung claims in West Virginia, as
determined by an independent actuary at the present value of the actuarially
computed liability for such benefits over the employee’s applicable term of
service. Effective December 31, 2006, we adopted Statement of Financial
Accounting Standards No. 158 (“FASB 158”), Employers’
Accounting for Defined Benefit Pension and Other Postretirement
Plans,
which
requires that we recognize on its balance sheet the amount of the Company’s
unfunded Accumulated Benefit Obligation (“ABO”) at the end of the year.
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 analyze both positive and negative evidence
as
required by SFAS No. 109. Such evidence includes objective evidence obtained
from our historical earnings, future sales commitments, outlooks on the coal
industry by us and third parties, expected level of future earnings (with
sensitivities on expectations considered), timing of temporary difference
reversals, ability or inability to meet forecasted earnings, unsettled industry
circumstances, ability to carry back and utilize a future tax loss (if a
loss
were to occur), available tax planning strategies, limitations on deductibility
of temporary differences, and the impact the alternative minimum tax has
on
utilization of deferred tax assets. As further described in Note 30, we reported
three consecutive years of positive earnings history in the fourth quarter
of
2006. This objective evidence, coupled with a review of the aforementioned
areas
in the fourth quarter, resulted in our recording of a reversal of a significant
portion of the valuation allowance. The valuation allowance is monitored
and
reviewed quarterly. If our conclusions change in the future regarding the
realization of a portion or all of our net deferred tax assets, we may record
a
change to the valuation allowance through income tax expense in the period
the
determination is made.
New
Accounting Pronouncements
In
July
2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB
Statement No. 109 (FIN 48), which clarifies the accounting for
uncertainty in tax positions. FIN 48 requires that we recognize in our financial
statements the impact of a tax position if it is more likely than not the
position will be sustained on audit, based on the technical merits of the
position. The provisions of FIN 48 are effective as of the beginning of our
2007
fiscal year, with the cumulative effect of the change in accounting principle
recorded as an adjustment to beginning retained earnings. We do not expect
the
adoption of FIN 48 to have a material effect on our financial
statements.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measures” (“SFAS
157”). SFAS 157 defines fair value, establishes a framework for measuring fair
value and enhances disclosures about fair value measures required under other
accounting pronouncements, but does not change existing guidance as to whether
or not an instrument is carried at fair value. SFAS No. 157 is effective
for
fiscal years beginning after November 15, 2007. We are currently reviewing
the
provisions of SFAS 157 to determine the impact on our financial statements,
if
any.
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 and diesel fuel prices and interest rates.
Commodity
Price Risk
We
are exposed to market price risk in the normal course of selling coal. As
of
February
5, 2007, less than 10% and 60% of our estimated 2007 and 2008 expected
production, respectively, was uncommitted. As compared to prior years, we
have
increased the proportion of our planned future production in 2007 and 2008
for
which we have contracts to sell coal, which has the effect of reducing our
market price risk.
We
use significant quantities of diesel fuel in our operations and are also
exposed
to risk in the market price for diesel fuel. We
have
entered into a forward physical purchase contract and diesel fuel swap agreement
to reduce the volatility in the price of diesel fuel for our operations.
The
diesel fuel swap agreement is not designated as a hedge and therefore the
changes in the fair value for this derivative instrument contract is
required to be recorded in cost of sales. As of December 31, 2006 approximately
11.0 million gallons or 40 percent of the Company’s anticipated 2007 fuel usage
has been fixed with the physical purchase and swap agreements. Included
in the 11.0 million gallons is the physical purchase of 9.0 million gallons
at
$1.79 per gallon for the first six months of 2007 and the notional amount
of 2.0
million gallons at $1.87 per gallon for the last six months of
2007.
We
purchase coal in the OTC market and directly from third parties to supplement
and blend with our produced and processed coal in order to provide coal of
the
quality and quantity to meet certain of our customer’s requirements. We also
sell in the OTC market to fix the price of uncommitted future production
from
our mines. Certain of these purchase and sale contracts meet the definition
of a
derivative instrument. Any derivative instruments that we hold are held for
purposes other than trading. Our risk management policy prohibits the use
of
derivatives for speculative purpose. The use of purchase and sales contracts
which are considered derivative instruments could materially affect our results
of operations as a result of the requirement to mark them to market at the
end
of each reporting period. However, we believe that use of these instruments
will
not have a material adverse effect on our financial position or results of
operations because these transactions account for only a small portion of
our
business.
These
transactions
give rise to commodity price risk, which represents the potential loss that
can
be caused by an adverse change in the price of coal. Outstanding purchase
and
sales contracts at December31, 2006 that are considered derivative instruments
are summarized as follows:
|
Purchase
Contracts
|
Purchase
Price Range
|
Tons
Outstanding
|
Delivery
Period
|
Mark-To-Market
Adjustment
(In Millions)
|
|||||||||
|
$40.00-$50.00
|
630,000
|
01/01/07-12/31/07 |
$
|
(5.6
|
)
|
||||||||
|
$51.00-$60.00
|
17,500
|
01/01/07-12/31/07 |
$
|
(0.3
|
)
|
||||||||
|
647,500
|
$
|
(5.9
|
)
|
||||||||||
|
Sales
Contracts
|
Selling
Price Range
|
Tons
Outstanding
|
Delivery
Period
|
Mark-To-Market
Adjustment (In
Millions)
|
|||||||||
|
$45.00-$50.00
|
240,000
|
01/01/07-12/31/07 |
$
|
1.7
|
|||||||||
|
$51.00-60.00
|
300,500
|
10/01/06-12/31/07 |
$
|
4.4
|
|||||||||
|
540,500
|
$
|
6.1
|
|||||||||||
Interest
Rate Risk
All
of
our borrowings under our New
Citicorp Credit Facility
are at a
variable rate, exposing us to the effect of rising interest rates in the
United
States. As of December 31, 2006, we have a $247.5 million term loan outstanding
with a variable interest rate based upon the 3-month London Interbank Offered
Rate (“LIBOR”) (5.36% at December 31, 2006) plus an applicable margin (1.75% at
December 31, 2006). To reduce our exposure to rising interest rates,
effective May 22, 2006 we entered into a pay-fixed, receive variable interest
rate swap on the notional amount of $233.1 million for a period of approximately
six and one-half years. In effect, this swap converted the variable interest
rates based on the LIBOR to a fixed interest rate of 5.59% plus the applicable
margin defined in the debt agreement (1.75%, at December 31, 2006) for a
portion
of our term loan. A one percentage point increase in interest rates would
result in an annualized increase in interest expense of approximately $0.1
million based on our variable rate borrowing as of December 31, 2006 in excess
of the notional amount of the interest rate swap of $ 233.1 million at December
31, 2006. We account for the interest rate swap as a cash flow hedge and
accordingly changes in fair value of the swap are recorded to other
comprehensive income (loss). The fair value of the swap at year end
December 31, 2006 was a liability of $7.2 million ($5.4 million net of
tax).
|
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 (the Company) as of December 31, 2006 and 2005,
and the related consolidated statements of income, stockholders’ equity and
partners’ capital and comprehensive income, and cash flows for each of the years
in the three-year period ended December 31, 2006. These consolidated
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present
fairly,
in all material respects, the financial position of Alpha Natural Resources,
Inc. and subsidiaries as of December 31, 2006 and 2005, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 2006, in conformity with U.S. generally accepted
accounting principles.
As
discussed in notes 3 and 18 to the consolidated financial statements, the
Company changed its method for accounting and reporting for share-based payments
and its method of accounting for postretirement benefits, respectively in
2006.
Also, as discussed in note 3 to the consolidated financial statements, the
Company changed its method of quantifying errors in 2006.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2006, based on criteria
established in Internal
Control - Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
and our report dated February 27, 2007 expressed an unqualified opinion on
management’s assessment of, and the effective operation of, internal control
over financial reporting.
/s/KPMG
LLP
Roanoke,
Virginia
February
27, 2007
Report
of Independent Registered Public Accounting Firm
The
Board
of Directors
Alpha
Natural Resources, Inc.:
We
have
audited management's assessment, included in Management’s Report on Internal
Control Over Financial Reporting included in Item 9A of the Company’s 2006 Form
10K, that Alpha Natural Resources, Inc. and subsidiaries (the Company)
maintained effective internal control over financial reporting as of
December 31, 2006, based on criteria established in Internal
Control - Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
The Company's management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness
of
internal control over financial reporting. Our responsibility is to express
an
opinion on management's assessment and an opinion on the effectiveness of
the
Company’s internal control over financial reporting based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing
such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company's internal control over financial reporting is a process designed
to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control
over
financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly
reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures
of
the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use,
or
disposition of the company’s assets that could have a material effect on the
financial statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In
our
opinion, management's assessment that the Company maintained effective internal
control over financial reporting as of December 31, 2006, is fairly stated,
in all material respects, based on criteria established in Internal
Control - Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Also, in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31,
2006, based on criteria established in Internal
Control - Integrated Framework
issued
by COSO.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of the Company
as of December 31, 2006 and 2005, and the related consolidated statements
of income, stockholders’ equity and partners' capital and comprehensive income,
and cash flows for each of the years in the three-year period ended
December 31, 2006, and our report dated February 27, 2007 expressed an
unqualified opinion on those consolidated financial statements. Our report
refers to a change in the methods of accounting and reporting for share-based
payments, postretirement benefits and quantifying errors in 2006.
/s/KPMG
LLP
Roanoke,
Virginia
February
27, 2007
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
December
31,
|
|||||||
|
2006
|
2005
|
||||||
|
(In
thousands)
|
|||||||
|
ASSETS
|
|||||||
|
Current
assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
33,256
|
$
|
39,622
|
|||
|
Trade
accounts receivable, net
|
171,195
|
147,961
|
|||||
|
Notes
and other receivables
|
6,466
|
10,330
|
|||||
|
Inventories
|
76,844
|
76,788
|
|||||
|
Prepaid
expenses and other current assets
|
50,893
|
44,214
|
|||||
|
Total
current assets
|
338,654
|
318,915
|
|||||
|
Property,
plant, and equipment, net
|
637,136
|
582,750
|
|||||
|
Goodwill
|
20,547
|
18,641
|
|||||
|
Other
intangibles, net
|
11,720
|
11,014
|
|||||
|
Deferred
income taxes
|
94,897
|
38,967
|
|||||
|
Other
assets
|
42,839
|
43,371
|
|||||
|
Total
assets
|
$
|
1,145,793
|
1,013,658
|
||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|||||||
|
Current
liabilities:
|
|||||||
|
Current
portion of long-term debt
|
$
|
3,254
|
$
|
3,242
|
|||
|
Notes
payable
|
20,941
|
59,014
|
|||||
|
Bank
overdraft
|
23,814
|
17,065
|
|||||
|
Trade
accounts payable
|
75,986
|
99,746
|
|||||
|
Deferred
income taxes
|
7,601
|
11,243
|
|||||
|
Accrued
expenses and other current liabilities
|
90,594
|
93,531
|
|||||
|
Total
current liabilities
|
222,190
|
283,841
|
|||||
|
Long-term
debt
|
421,456
|
423,547
|
|||||
|
Workers’
compensation benefits
|
7,169
|
5,901
|
|||||
|
Postretirement
medical benefits
|
50,712
|
24,461
|
|||||
|
Asset
retirement obligations
|
69,495
|
46,296
|
|||||
|
Deferred
gains on sale of property interests
|
3,885
|
5,762
|
|||||
|
Other
liabilities
|
26,837
|
11,085
|
|||||
|
Total
liabilities
|
801,744
|
800,893
|
|||||
|
Stockholders’
equity:
|
|||||||
|
Preferred
stock— par value $0.01, 10,000,000 shares authorized, none
issued
|
—
|
—
|
|||||
|
Common
stock— par value $0.01, 100,000,000 shares authorized, 64,964,287 and
64,420,414 shares issued and outstanding in 2006 and 2005,
respectively
|
650
|
644
|
|||||
|
Additional
paid-in capital
|
215,020
|
193,608
|
|||||
|
Accumulated
other comprehensive loss
|
(19,019
|
)
|
—
|
||||
|
Retained
earnings
|
147,398
|
18,513
|
|||||
|
Total
stockholders’ equity
|
344,049
|
212,765
|
|||||
|
Total
liabilities and stockholders’ equity
|
$
|
1,145,793
|
$
|
1,013,658
|
|||
See
accompanying notes to consolidated financial statements.
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
|
Year
Ended December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
(In
thousands, except per share amounts)
|
||||||||||
|
Revenues:
|
||||||||||
|
Coal
revenues
|
$
|
1,687,553
|
$
|
1,413,174
|
$
|
1,079,981
|
||||
|
Freight
and handling revenues
|
188,366
|
185,555
|
141,100
|
|||||||
|
Other
revenues
|
34,743
|
27,926
|
28,347
|
|||||||
|
Total
revenues
|
1,910,662
|
1,626,655
|
1,249,428
|
|||||||
|
Costs
and expenses:
|
||||||||||
|
Cost
of coal sales (exclusive of items shown separately below)
|
1,352,450
|
1,184,092
|
920,359
|
|||||||
|
Freight
and handling costs
|
188,366
|
185,555
|
141,100
|
|||||||
|
Cost
of other revenues
|
22,982
|
23,675
|
22,994
|
|||||||
|
Depreciation,
depletion and amortization
|
140,851
|
73,122
|
55,261
|
|||||||
|
Selling,
general and administrative expenses (exclusive of depreciation
and
amortization shown separately above)
|
67,952
|
88,132
|
40,607
|
|||||||
|
Total
costs and expenses
|
1,772,601
|
1,554,576
|
1,180,321
|
|||||||
|
Income
from operations
|
138,061
|
72,079
|
69,107
|
|||||||
|
Other
income (expense):
|
||||||||||
|
Interest
expense
|
(41,774
|
)
|
(29,937
|
)
|
(20,041
|
)
|
||||
|
Interest
income
|
839
|
1,064
|
531
|
|||||||
|
Miscellaneous
income
|
523
|
91
|
722
|
|||||||
|
Total
other income (expense), net
|
(40,412
|
)
|
(28,782
|
)
|
(18,788
|
)
|
||||
|
Income
from continuing operations before income taxes and minority
interest
|
97,649
|
43,297
|
50,319
|
|||||||
|
Income
tax expense (benefit)
|
(30,519
|
)
|
18,953
|
5,150
|
||||||
|
Income
before minority interest
|
128,168
|
24,344
|
45,169
|
|||||||
|
Minority
interest
|
—
|
2,918
|
22,781
|
|||||||
|
Income
from continuing operations
|
128,168
|
21,426
|
22,388
|
|||||||
|
Discontinued
operations (Note26):
|
||||||||||
|
Loss
from discontinued operations before income taxes and minority
interest
|
—
|
(378
|
)
|
(6,514
|
)
|
|||||
|
Income
tax benefit
|
—
|
(93
|
)
|
(1,190
|
)
|
|||||
|
Minority
interest
|
—
|
(72
|
)
|
(2,951
|
)
|
|||||
|
Loss
from discontinued operations
|
—
|
(213
|
)
|
(2,373
|
)
|
|||||
|
Net
income
|
$
|
128,168
|
$
|
21,213
|
$
|
20,015
|
||||
|
Net
income per share, as adjusted (Note4):
|
||||||||||
|
Basic
and diluted:
|
||||||||||
|
Income
from continuing operations
|
$
|
2.00
|
$
|
0.38
|
$
|
1.52
|
||||
|
Loss
from discontinued operations
|
—
|
—
|
(0.16
|
)
|
||||||
|
Net
income, as adjusted in 2005 and 2004
|
$
|
2.00
|
$
|
0.38
|
$
|
1.36
|
||||
See
accompanying notes to consolidated financial statements.
|
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
|
||||||||||||||||||||||||||||||||||||||||
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY AND PARTNERS’ CAPITAL AND COMPREHENSIVE
INCOME
|
||||||||||||||||||||||||||||||||||||||||
|
Alpha
Natural Resources, Inc.
|
Alpha
NR Holding, Inc
|
ANR
Fund IX Holdings, L.P.
|
||||||||||||||||||||||||||||||||||||||
|
Common
Stock
|
Additional
Paid in
|
Unearned
Stock Based
|
Accumulated
Other Comprehensive
|
Retained
|
Total
Stockholders'
|
Common
|
Additional
Paid in
|
|
Total
Stockholders'
|
Partners'
|
Total
Stockholders' Equity and Partners'
|
|||||||||||||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Compensation
|
Loss
|
Earnings
|
Equity
|
Stock
|
Capital
|
Retained
Earnings
|
Equity
|
Capital
|
Capital
|
||||||||||||||||||||||||||||
|
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
|
)
|
—
|
||||||||||||||||||||||||||
|
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
|
||||||||||||||||||||||||||
See
accompanying notes to consolidated financial statements.
|
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
|
||||||||||||||||||||||||||||||||||||||||
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY AND PARTNERS’ CAPITAL AND COMPREHENSIVE
INCOME
|
||||||||||||||||||||||||||||||||||||||||
|
Alpha
Natural Resources, Inc.
|
Alpha
NR Holding, Inc
|
ANR
Fund IX Holdings, L.P.
|
||||||||||||||||||||||||||||||||||||||
|
Common
Stock
|
Additional
Paid in
|
Unearned
Stock Based
|
Accumulated
Other Comprehensive
|
Retained
|
Total
Stockholders'
|
Common
|
Additional
Paid in
|
|
Total
Stockholders'
|
Partners'
|
Total
Stockholders' Equity and Partners'
|
|||||||||||||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Compensation
|
Loss
|
Earnings
|
Equity
|
Stock
|
Capital
|
Retained
Earnings
|
Equity
|
Capital
|
Capital
|
||||||||||||||||||||||||||||
|
Issuance
of Restructuring Notes
|
—
|
—
|
(517,692
|
)
|
—
|
—
|
—
|
(517,692
|
)
|
—
|
—
|
—
|
—
|
—
|
(517,692
|
)
|
||||||||||||||||||||||||
|
Tax
Distributions payable recorded upon the completion of the Internal
Restructuring
|
—
|
—
|
(10,500
|
)
|
—
|
—
|
—
|
(10,500
|
)
|
—
|
—
|
—
|
—
|
—
|
(10,500
|
)
|
||||||||||||||||||||||||
|
Change
in net deferred income taxes recognized upon the completion of
the
Internal Restructuring
|
—
|
—
|
34,504
|
—
|
—
|
—
|
34,504
|
—
|
—
|
—
|
—
|
—
|
34,504
|
|||||||||||||||||||||||||||
|
Proceeds
from initial public offering of common shares ($19 per share), net of
offering costs of $48,296
|
33,925
|
339
|
596,072
|
—
|
—
|
—
|
596,411
|
—
|
—
|
—
|
—
|
—
|
596,411
|
|||||||||||||||||||||||||||
|
Distribution
of net proceeds received from underwriters’ exercise of over-allotment
option
|
—
|
—
|
(71,135
|
)
|
—
|
—
|
—
|
(71,135
|
)
|
—
|
—
|
—
|
—
|
—
|
(71,135
|
)
|
||||||||||||||||||||||||
|
Issuance
of restricted shares
|
12
|
—
|
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
|
||||||||||||||||||||||||||||||||||||||||
|
ALPHA
NATURAL RESOURCES, INC. AND
SUBSIDIARIES
|
||||||||||||||||||||||||||||||||||||||||
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY AND PARTNERS’ CAPITAL AND COMPREHENSIVE
INCOME
|
||||||||||||||||||||||||||||||||||||||||
|
Alpha
Natural Resources Inc.
|
Alpha
NR Holding, Inc
|
ANR
Fund IX Holdings, L.P.
|
||||||||||||||||||||||||||||||||||||||
|
Common
Stock
|
Additional
Paid in
|
Unearned
Stock Based
|
Accumulated
Other Comprehensive
|
Retained
|
Total
Stockholders'
|
Common
|
Additional
Paid in
|
|
Total
Stockholders'
|
Partners'
|
Total
Stockholders' Equity and Partners'
|
|||||||||||||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Compensation
|
Loss
|
|
Earnings
|
Equity
|
Stock
|
Capital
|
Retained
Earnings
|
Equity
|
Capital
|
Capital
|
|||||||||||||||||||||||||||
|
Comprehensive
Income
|
||||||||||||||||||||||||||||||||||||||||
|
Net
Income
|
—
|
—
|
—
|
—
|
—
|
128,168
|
128,168
|
—
|
—
|
—
|
—
|
—
|
128,168
|
|||||||||||||||||||||||||||
|
Change
in derivative financial instrument, net of income tax of
$1,787
|
—
|
—
|
—
|
—
|
(5,437
|
)
|
—
|
(5,437
|
)
|
—
|
—
|
—
|
—
|
—
|
(5,437
|
)
|
||||||||||||||||||||||||
|
Total
Comprehensive Income
|
122,731
|
|||||||||||||||||||||||||||||||||||||||
|
Elimination
of Unearned Stock-Based Compensation
|
(15,602
|
)
|
15,602
|
|||||||||||||||||||||||||||||||||||||
|
Initial
impact of adoption of Staff Accounting Bulletin No. 108, net of
income tax
(note 3 (t))
|
—
|
—
|
—
|
—
|
—
|
717
|
717
|
—
|
—
|
—
|
—
|
—
|
717
|
|||||||||||||||||||||||||||
|
Exercise
of stock options
|
60
|
1
|
953
|
—
|
—
|
—
|
954
|
—
|
—
|
—
|
—
|
—
|
954
|
|||||||||||||||||||||||||||
|
Amortization
of unearned stock-based compensation
|
484
|
5
|
20,459
|
—
|
—
|
—
|
20,464
|
—
|
—
|
—
|
—
|
—
|
20,464
|
|||||||||||||||||||||||||||
|
Initial
impact of adoption of Statement of Financial Accounting Standards
No. 158,
net of income tax
|
—
|
—
|
—
|
—
|
(13,582
|
)
|
—
|
(13,582
|
)
|
—
|
—
|
—
|
—
|
—
|
(13,582
|
)
|
||||||||||||||||||||||||
|
Balances,
December 31, 2006
|
64,964
|
$
|
650
|
215,020
|
$
|
—
|
$
|
(19,019
|
)
|
$
|
147,398
|
$
|
344,049
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
344,049
|
|||||||||||||||
|
See
accompanying notes to consolidated financial
statements
|
||||||||||||||||||||||||||||||||||||||||
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
Year
Ended December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
(In
thousands)
|
||||||||||
|
Operating
activities:
|
||||||||||
|
Net
income
|
$
|
128,168
|
$
|
21,213
|
$
|
20,015
|
||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||
|
Depreciation,
depletion and amortization
|
140,851
|
73,405
|
56,012
|
|||||||
|
Amortization
and write-off of debt issuance costs
|
2,282
|
3,357
|
4,474
|
|||||||
|
Minority
interest
|
—
|
2,846
|
19,830
|
|||||||
|
Accretion
of asset retirement obligation
|
4,874
|
3,514
|
3,301
|
|||||||
|
Virginia
tax credit
|
—
|
(343
|
)
|
(4,872
|
)
|
|||||
|
Stock-based
compensation— non-cash
|
20,464
|
39,045
|
91
|
|||||||
|
Gain
on sale of discontinued operations
|
—
|
(704)
|
)
|
—
|
||||||
|
Impairment
charge
|
—
|
—
|
5,100
|
|||||||
|
Deferred
income tax expense (benefit)
|
(48,720
|
)
|
3,736
|
2,711
|
||||||
|
Gain
on sale of fixed assets
|
(972
|
)
|
(1,585
|
)
|
(666
|
)
|
||||
|
Other
non-cash items
|
(553
|
)
|
1,070
|
708
|
||||||
|
Changes
in operating assets and liabilities:
|
||||||||||
|
Trade
accounts receivable
|
(24,101
|
)
|
(52,102
|
)
|
(25,775
|
)
|
||||
|
Notes
and other receivables
|
3,124
|
13,276
|
(1,062
|
)
|
||||||
|
Inventories
|
7,943
|
(16,182
|
)
|
(21,040
|
)
|
|||||
|
Prepaid
expenses and other current assets
|
14,803
|
4,348
|
5,568
|
|||||||
|
Other
assets
|
(3,688
|
)
|
(6,033
|
)
|
805
|
|||||
|
Trade
accounts payable
|
(28,359
|
)
|
48,462
|
9,742
|
||||||
|
Accrued
expenses and other current liabilities
|
(14,088
|
)
|
5,453
|
27,243
|
||||||
|
Workers’
compensation benefits
|
875
|
1,155
|
3,018
|
|||||||
|
Postretirement
medical benefits
|
8,716
|
8,824
|
4,975
|
|||||||
|
Asset
retirement obligation expenditures
|
(3,187
|
)
|
(4,142
|
)
|
(3,306
|
)
|
||||
|
Other
liabilities
|
1,649
|
1,030
|
(96
|
)
|
||||||
|
Net
cash provided by operating activities
|
210,081
|
149,643
|
106,776
|
|||||||
|
Investing
activities:
|
||||||||||
|
Capital
expenditures
|
(131,943
|
)
|
(122,342
|
)
|
(72,046
|
)
|
||||
|
Proceeds
from disposition of property, plant, and equipment
|
1,471
|
5,450
|
1,096
|
|||||||
|
Purchase
of net assets of acquired companies
|
(31,532
|
)
|
(221,869
|
)
|
(2,891
|
)
|
||||
|
Investment
in affiliate
|
(344
|
)
|
(1,234
|
)
|
(4,500
|
)
|
||||
|
Issuance
of note receivable to coal supplier
|
—
|
—
|
(10,000
|
)
|
||||||
|
Collections
on note receivable from coal supplier
|
3,000
|
5,608
|
1,519
|
|||||||
|
Payment
of additional consideration on previous acquisition
|
—
|
(5,000
|
)
|
—
|
||||||
|
Decrease
in due from affiliate
|
—
|
—
|
620
|
|||||||
|
Other
|
(698
|
)
|
—
|
—
|
||||||
|
Net
cash used in investing activities
|
(160,046
|
)
|
(339,387
|
)
|
(86,202
|
)
|
||||
See
accompanying notes to consolidated financial statements.
(Continued)
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS - (continued)
|
Year
Ended December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
(In
thousands)
|
||||||||||
|
Financing
activities:
|
||||||||||
|
Repayments
on notes payable
|
(58,315
|
)
|
(15,228
|
)
|
(14,425
|
)
|
||||
|
Proceeds
from issuance of long-term debt
|
286,821
|
323,000
|
175,000
|
|||||||
|
Repayment
of long-term debt
|
(290,210
|
)
|
(82,743
|
)
|
(61,422
|
)
|
||||
|
Increase
in bank overdraft
|
6,749
|
7,041
|
4,170
|
|||||||
|
Proceeds
from initial public offering, net of offering costs
|
—
|
598,066
|
—
|
|||||||
|
Proceeds
from exercise of stock options
|
954
|
199
|
—
|
|||||||
|
Repayment
of restructuring notes payable
|
—
|
(517,692
|
)
|
—
|
||||||
|
Distributions
to prior members of ANR Holdings, LLC subsequent to Internal
Restructuring
|
—
|
(71,135
|
)
|
—
|
||||||
|
Payment
of Sponsor Distributions related to Internal Restructuring
|
(2,400
|
)
|
(3,600
|
)
|
—
|
|||||
|
Distributions
to prior members of ANR Holdings, LLC prior to Internal
Restructuring
|
—
|
(7,732
|
)
|
(115,572
|
)
|
|||||
|
Debt
issuance costs
|
—
|
(8,201
|
)
|
(10,525
|
)
|
|||||
|
Other
|
—
|
—
|
(1,655
|
)
|
||||||
|
Net
cash provided by (used in) financing activities
|
(56,401
|
)
|
221,975
|
(24,429
|
)
|
|||||
|
Net
increase (decrease) in cash and cash equivalents
|
(6,366
|
)
|
32,231
|
(3,855
|
)
|
|||||
|
Cash
and cash equivalents at beginning of year
|
39,622
|
7,391
|
11,246
|
|||||||
|
Cash
and cash equivalents at end of year
|
$
|
33,256
|
$
|
39,622
|
$
|
7,391
|
||||
See
accompanying notes to consolidated financial statements.
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except percentages and share data)
|
(1)
|
Business
and Basis of Presentation
|
Organization
and Business
Alpha
Natural Resources, Inc. and its operating subsidiaries are engaged in the
business of extracting, processing and marketing coal from deep and surface
mines, located in the Central and Northern Appalachian regions of the United
States, for sale to utility and steel companies in the United States and
in
international markets.
On
February 11, 2005, Alpha Natural Resources, Inc., a Delaware corporation
(Alpha) succeeded to the business of ANR Holdings, LLC, a Delaware limited
liability company (ANR Holdings) in a series of internal restructuring
transactions, and on February 18, 2005, Alpha completed the initial public
offering of its common stock. The internal restructuring and initial public
offering are discussed in Note (2). Prior to the internal restructuring
transactions, ANR Fund IX Holdings, L.P. and Alpha NR Holding, Inc. (the FR
Affiliates), entities under the common control of First Reserve GP IX, Inc.,
were the owners of 54.7% of the membership interests in ANR Holdings, and
the
remaining membership interests in ANR Holdings were held by affiliates of
American Metals & Coal International, Inc. (AMCI), Alpha Coal
Management, LLC (ACM) and Madison Capital Funding, LLC.
The
FR Affiliates were entities under the common control of First Reserve GP
IX,
Inc. and were formed in 2002 to acquire coal mining assets in the Appalachian
region of the United States. In December 2002, the FR Affiliates formed ANR
Holdings, LLC (ANR Holdings). ANR Holdings was the parent of Alpha Natural
Resources, LLC and the latter entity and its subsidiaries acquired our
predecessor, the majority of the Virginia coal operations of Pittston Coal
Company, a subsidiary of The Brink’s Company (formerly known as The Pittston
Company), on December 13, 2002.
The
acquisition of Coastal Coal Company, LLC was completed on January 31, 2003
by subsidiaries of ANR Holdings. The acquisition of the majority of the North
American operations of American Metals and Coal International, Inc. (U.S.
AMCI)
was completed on March 11, 2003. Concurrent with the acquisition of
U.S. AMCI, ANR Holdings issued additional membership interests in the
aggregate amount of 45.3% to the former owners of U.S. AMCI, Madison
Capital Funding, LLC and members of management in exchange for the net assets
of
U.S. AMCI and cash. After completion of this transaction, the FR Affiliates
owned 54.7% of ANR Holdings. Other major acquisitions include the acquisition
of
Mears Enterprises, Inc. and affiliated entities on November 17, 2003, and
the acquisition of the Nicewonder Coal Group on October 26, 2005. See
Note 22 for further discussion concerning acquisitions.
On
May 1,
2006, the Company completed the acquisition of certain coal mining operations
in
eastern Kentucky from Progress Fuels Corp, a subsidiary of Progress Energy
for
$28,795, including an adjustment for working capital. The Progress acquisition
consisted of the purchase of the outstanding capital stock of Diamond May
Coal
Co. and Progress Land Corp. and the assets of Kentucky May Coal Co., Inc.
The
operations acquired are adjacent to the Company’s Enterprise business unit and
have been integrated into Enterprise.
On
December 28, 2006, the Company paid $3,300 and is obligated to make an
additional contribution of $7,000 in 2007 for a 94% ownership interest in
Gallatin Materials LLC (Gallatin), a lime manufacturing venture near Cincinnati,
Ohio. Gallatin plans to construct two rotary pre-heater lime kilns to
produce lime to be sold to coal-burning utilities as a scrubbing agent for
removing sulfur dioxide from flue gas. The lime will also be sold to steel
producers for use as flux in electric arc and basic oxygen furnaces. The
minority owners were granted restricted member interest which vest based
on
performance criteria over a period of approximately three years from the
closing
date and which, if earned in their entirety, would reduce the Company’s
ownership to 77.5%.
Basis
of Presentation
The
consolidated financial statements for the year ended December 31, 2006 include
Alpha and its majority owned and controlled subsidiaries. The financial
statements for the year ended December 31, 2005 include the combined
financial results for the FR Affiliates and subsidiaries for the period from
January 1, 2005 to
February 11, 2005, and the consolidated results for Alpha and subsidiaries
from February 12, 2005 to December 31, 2005. The financial statements
for the year ended December 31, 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 and 2004 have been
reported as discontinued operations. See also Note 26.
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 Company’s top-tier holding company was a limited
liability company, ANR Holdings, to one in which the top-tier holding company
is
a corporation, Alpha Natural Resources, Inc., which was formed on
November 29, 2004. These transactions are referred to collectively as the
Internal Restructuring, and they included the following:
|
•
|
Alpha
Coal Management, LLC (ACM) was dissolved and liquidated, after which
(1) the interests in ANR Holdings previously held by ACM were
distributed to and held directly by the Company’s officers and employees
who were owners of ACM prior to its dissolution and (2) outstanding
options to purchase units in ACM were automatically converted into
options
to purchase up to 596,985 shares
of Alpha Natural Resources, Inc. common stock at an exercise price
of
$12.73 per share, and Alpha Natural Resources, Inc. assumed the
obligations of ACM under the Alpha Coal Management, LLC 2004 Long-Term
Incentive Plan.
|
|
|
|
|
•
|
Alpha
Natural Resources, Inc. assumed the obligations of ANR Holdings
to make
distributions to (1) affiliates of AMCI in an aggregate amount of
$6,000, representing the approximate incremental tax resulting
from the
recognition of additional tax liability resulting from the Internal
Restructuring and (2) First Reserve Fund IX, L.P. in an
aggregate amount of approximately $4,500, representing the approximate
value of tax attributes conveyed as a result of the Internal Restructuring
(collectively, the Sponsor Distributions). The Sponsor Distributions
to
affiliates of AMCI were paid in cash in five equal installments
on the
dates for which estimated income tax payments 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
Company’s stock on February 18, 2005), or $25,554 in total. The
remaining 1,344,930 shares vested over the two year period ending
December 31, 2006. The $25,554 in compensation expense related to
these shares was deferred and amortized to expense over the vesting
period
through December 31, 2006.
|
|
|
|
|
•
|
The
Board of Directors of Alpha Natural Resources, Inc. declared a
pro rata
distribution to the former members of ANR Holdings in an aggregate
amount
equal to the net proceeds Alpha Natural Resources, Inc. received
upon the
exercise by the underwriters of their over-allotment option with
respect
to the public offering described
below.
|
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
Company’s
acquisition of U.S. AMCI.
|
|
|
|
|
•
|
Alpha
Natural Resources, Inc. contributed the membership interests in
ANR
Holdings received in the Internal Restructuring to Alpha NR Holding,
Inc.
and another indirect wholly-owned subsidiary of Alpha Natural Resources,
Inc.
|
On
February 18, 2005, Alpha Natural Resources, Inc. completed the initial
public offering of 33,925,000 shares of its common stock, including
4,425,000 shares issued pursuant to the exercise in full of the
underwriters’ over-allotment option. Alpha Natural Resources, Inc. received net
proceeds (after deducting issuance costs) of $598,066 from the offering.
Alpha
Natural Resources, Inc. used $517,692 of the net proceeds to repay all
outstanding principal and accrued interest on its demand promissory notes
issued
in the Internal Restructuring to the FR Affiliates, affiliates of AMCI and
Madison Capital Funding LLC. In addition, $78,610 of the net proceeds were
distributed by Alpha Natural Resources, Inc. on a pro rata basis to its
stockholders of record as of the close of business on February 11, 2005
pursuant to the distribution declared by Alpha Natural Resources, Inc.’s Board
of Directors in connection with the Internal Restructuring. Included in the
pro
rata distribution was $7,475 distributed to officers and employees who were
the
members of ACM, which was recorded as compensation expense.
On
January 24, 2006, a secondary public offering of the common stock of Alpha
Natural Resources, Inc. was completed in which an aggregate of
14,163,527 shares of its common stock were sold by First Reserve
Fund IX, L.P., ANR Fund IX Holdings, L.P. and Madison Capital Funding,
LLC. The Company received no proceeds from the secondary offering.
|
(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 Company’s best estimate of
the amount of probable credit losses in the Company’s existing accounts
receivable. The Company establishes provisions for losses on accounts receivable
when it is probable that all or part of the outstanding balance will not
be
collected. The Company regularly reviews collectibility and establishes or
adjusts the allowance as necessary using the specific identification method.
Account balances are charged off against the allowance after all means of
collection have been exhausted and the potential for recovery is considered
remote. The allowance for doubtful accounts was $323 and $25
at
December 31, 2006 and 2005, respectively. Credit losses were insignificant
in the three-year period ending December 31, 2006. The Company does not
have off-balance-sheet credit exposure related to its customers.
|
(c)
|
Inventories
|
Coal
inventories are stated at the lower of cost or market. The cost of coal
inventories is determined based on average cost of production, which includes
all costs incurred to extract, transport and process the coal. Coal is
classified as inventory at the point in time the coal is extracted from the
mine
and weighed at a loading facility.
Material
and supplies inventories are valued at average cost, less an allowance for
obsolete and surplus items.
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
(d)
|
Property,
Plant, and Equipment
|
Costs
for mineral properties, mineral rights, and mine development incurred to
expand
capacity of operating mines or to develop new mines are capitalized and charged
to operations on the units-of-production method over the estimated proven
and
probable reserve tons. Mine development costs include costs incurred for
site
preparation and development of the mines during the development stage. Mobile
mining equipment and other fixed assets are stated at cost and depreciated
on a
straight-line basis over estimated useful lives ranging from 2
to
20 years. Leasehold improvements are amortized, using the straight-line
method, over their estimated useful lives or the term of the lease, whichever
is
shorter. Major repairs and betterments that significantly extend original
useful
lives or improve productivity are capitalized and depreciated over the period
benefited. Maintenance and repairs are expensed as incurred.
|
(e)
|
Impairment
of Long-Lived Assets
|
In
accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-lived Assets,
long-lived assets, such as property, plant, equipment, and purchased intangibles
subject to amortization, are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by
a
comparison of the carrying amount of an asset to estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying amount
of an
asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds
the
fair value of the asset. Assets to be disposed of would be separately presented
in the balance sheet and reported at the lower of the carrying amount or
fair
value less costs to sell, and would no longer be depreciated. The assets
and
liabilities of a disposal group classified as held for sale would be presented
separately in the appropriate asset and liability sections of the balance
sheet.
|
(f)
|
Goodwill
|
Goodwill
represents the excess of costs over fair value of net assets of businesses
acquired. Pursuant to SFAS No. 142,
Goodwill and Other Intangible Assets,
goodwill and intangible assets acquired in a purchase business combination
and
determined to have an indefinite useful life are not amortized, but instead
tested for impairment at least annually (as of August 31) in accordance with
the
provisions of SFAS No. 142. The impairment review in 2006 supported
the carrying value of goodwill.
|
(g)
|
Health
Insurance Programs
|
The
Company is principally self-insured for costs of health and medical claims.
The
Company utilizes commercial insurance to cover specific claims in excess
of
$500
($250
prior to January 1, 2005). Estimated liabilities for health and medical
claims are recorded based on the Company’s historical experience and includes a
component for incurred but not reported claims.
|
(h)
|
Income
Taxes
|
The
Company accounts for income taxes in accordance with SFAS No. 109,
“Accounting
for Income Taxes”,
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, the Company takes
into account various factors, including objective evidence obtained from
historical earnings, future sales commitments, the expected level of future
taxable income and available tax planning strategies, and the impact the
alternative minimum tax has on utilization of deferred tax assets. If future
taxable income is lower than expected or if expected tax planning strategies
are
not available as anticipated, we may record a change to the valuation allowance
through income tax expense in the period the determination is made.
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
(i)
|
Asset
Retirement Obligation
|
Minimum
standards for mine reclamation have been established by various regulatory
agencies and dictate the reclamation requirements at the Company’s operations.
The Company records these reclamation obligations under the provisions of
SFAS No. 143,
Accounting for Asset Retirement Obligations.
SFAS 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 22,
the Company recorded the fair value of the reclamation liabilities assumed
as
part of the acquisitions in accordance with SFAS No. 143.
|
(j)
|
Royalties
|
Lease
rights to coal lands are often acquired in exchange for royalty payments.
Advance mining royalties are advance payments made to lessors under terms
of
mineral lease agreements that are recoupable against future production. These
advance payments are deferred and charged to operations as the coal reserves
are
mined. The Company regularly reviews recoverability of advance mining royalties
and establishes or adjusts the allowance for advance mining royalties as
necessary using the specific identification method. In instances where advance
payments are not expected to be offset against future production royalties,
the
Company establishes a provision for losses on the advance payments that have
been paid and the scheduled future minimum payments are expensed and recognized
as liabilities. Advance royalty balances are charged off against the allowance
when the lease rights are either terminated or expire.
The
changes in the allowance for advance mining royalties were as
follows:
|
Balance
at December31, 2003
|
$
|
4,694
|
||
|
Provision
for non-recoupable advance mining royalties
|
758
|
|||
|
Write-offs
of advance mining royalties
|
(11
|
)
|
||
|
Balance
at December31, 2004
|
5,441
|
|||
|
Provision
for non-recoupable advance mining royalties
|
580
|
|||
|
Write-offs
of advance mining royalties
|
(1,191
|
)
|
||
|
Balance
at December31, 2005
|
4,830
|
|||
|
Provision
for non-recoupable advance mining royalties
|
2,215
|
|||
|
Write-offs
of advance mining royalties
|
(766
|
)
|
||
|
Balance
at December31, 2006
|
$
|
6,279
|
|
(k)
|
Revenue
Recognition
|
The
Company recognizes revenue on coal sales when title passes to the customer
in
accordance with the terms of the sales agreement. Revenue from domestic coal
sales is recorded at the time of shipment or delivery to the customer, and
the
customer takes ownership and assumes risk of loss based on shipping terms.
Revenue from international coal sales is recorded at the time coal is loaded
onto the shipping vessel, when the customer takes ownership and assumes risk
of
loss. In the event that new contracts are negotiated with a customer and
shipments commence before the old contract is complete, the Company recognizes
as revenue the lower of the cumulative amount billed or an amount based on
the
weighted average price of the new and old contracts applied to the tons
sold.
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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 and rental income. These revenues are recognized
in
the period earned or when the service is completed. Beginning on October 26,
2005, the Company began earning revenues from the operation of a road
construction business which was acquired as part of the acquisition of the
Nicewonder Coal Group (Note 22). Revenue from road construction contracts
is recognized under the percentage of completion method of accounting for
long-term contracts in accordance with Accounting Research Bulletin No. 45
Long-Term
Construction Contracts (ARB
45)
and the American Institute of Certified Public Accountants Statement of Position
81-1, Accounting
for Performance of Construction-Type and Certain Production-Type
Contracts.
|
(l)
|
Deferred
Financing Costs
|
In
connection with obtaining financing, the Company incurred deferred financing
costs totaling $8,201
during the years ended December 31, 2005. These deferred financing costs
are being amortized to interest expense over the life of the related
indebtedness or credit facility using the straight-line method which
approximates the effective interest method. Unamortized deferred financing
costs
are included in other assets in the accompanying balance sheets. Amortization
expense for the years ended December 31, 2006, 2005 and 2004 totaled
$2,282, $3,357 and $4,474, 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 2014, Virginia companies with an economic interest
in
coal earn tax credits based upon tons sold, seam thickness, and employment
levels. The maximum credit earned equals $0.40 per ton for surface mined
coal and $1.00 or $2.00 per ton for deep mined coal depending on seam
thickness. Credits allowable are reduced from the maximum amounts if employment
levels are not maintained from the previous year, and no credit is allowed
for
coal sold to Virginia utilities. Currently, the cash benefit of the credit
is
realized three years after being earned and either offsets taxes imposed
by
Virginia at 100% or is refundable by the state at 85% of the face value to
the
extent taxes are not owed. The Company records the present value of the portion
of the credit that is refundable as a reduction of operating costs as it
is
earned. Prior to the Internal Restructuring, the portion of the credits
allocated to ANR Fund IX Holdings, L.P. and minority interest owners were
recorded as noncash distributions.
|
(n)
|
Workers’
Compensation and Pneumoconiosis (Black Lung)
Benefits
|
Workers’
Compensation
The
Company is self-insured for workers’ compensation claims at certain of its
operations in West Virginia. Workers’ compensation at all other locations in
West Virginia is insured through a third party insurance provider. Workers’
compensation claims at locations in all other states where the Company operates
are covered by a third-party insurance provider.
The
liabilities for workers’ compensation claims that are self-insured are estimates
of the ultimate losses incurred based on the Company’s experience, and include a
provision for incurred but not reported losses. Adjustments to the probable
ultimate liabilities are made annually based on an actuarial study and
adjustments to the liability are recorded based on the results of this
study.
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Black
Lung Benefits
The
Company is required by federal and state statutes to provide benefits to
employees for awards related to black lung disease. These claims are covered
by
a third-party insurance provider in all locations where the Company operates
with the exception of West Virginia. The Company is self-insured for state
black
lung related claims at certain locations in West Virginia. The Company accounts
for black lung benefits under the provisions of SFAS No. 106, Employers’
Accounting for Postretirement Benefit Other than Pension,
and
SFAS No. 158, Employers’
Accounting for Defined Benefit Pension and Other Postretirement
Plans.
Charges
are made to operations for state black lung claims in West Virginia, as
determined by an independent actuary at the present value of the actuarially
computed liability for such benefits over the employee’s applicable term of
service. The Company did not assume any responsibility for workers’ compensation
or black lung claims incurred by any of its subsidiaries prior to their
acquisition. Effective December 31, 2006, the Company adopted Statement of
Financial Accounting Standards No. 158 (“FASB 158”), Employers’
Accounting for Defined Benefit Pension and Other Postretirement
Plans,
which
requires that the Company recognize on its balance sheet the amount of the
Company’s unfunded Accumulated Benefit Obligation (“ABO”) at the end of the
year. The initial effect of the adoption of FASB No. 158 is recorded in
accumulated other comprehensive loss, net of tax. Amounts recognized in
accumulated other comprehensive loss will be adjusted out of accumulated
other
comprehensive loss when they are subsequently recognized as components of
net
periodic benefit cost.
|
(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. Effective December 31, 2006, the Company adopted Statement of
Financial Accounting Standards
No. 158
(“FASB 158”), Employers’
Accounting for Defined Benefit Pension and Other Postretirement
Plans,
which
requires that the Company recognize on its balance sheet the amount of the
Company’s unfunded Accumulated Postretirement Benefit Obligation (“APBO”) at the
end of the year. The initial effect of the adoption of FASB No. 158 is recorded
in accumulated other comprehensive loss, net of tax. Amounts recognized in
accumulated other comprehensive loss will be adjusted out of accumulated
other
comprehensive loss when they are subsequently recognized as components of
net
periodic benefit cost.
|
(p)
|
Equity
Investments
|
The
accompanying consolidated financial statements include the accounts of the
Company and its majority owned subsidiaries. Investments in unconsolidated
subsidiaries representing ownership of at least 20% but less than 50% are
accounted for under the equity method. Under the equity method of accounting,
the Company’s proportionate share of the investment company’s income or loss is
included in the Company’s net income or loss with a corresponding increase or
decrease in the carrying value of the investment.
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
(q)
|
Share-Based
Compensation
|
Effective
January 1, 2006, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 123(R), “Share-Based Payment” (SFAS 123R), which requires that the
measurement and recognition of compensation expense for all stock-based payment
awards made to employees and directors be based on the
estimated fair value of the awards over the requisite service or vesting
period.
Prior to January 1, 2006, the Company measured stock-based compensation
expense using the intrinsic value method of accounting in accordance with
Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to
Employees,” and related interpretations (APB 25).
In
adopting SFAS 123R, the Company has elected to use the modified prospective
transition method and accordingly, has not restated results from prior periods.
Under this transition method, stock-based compensation expense includes
compensation expense for all stock-based compensation awards granted prior
to,
but not yet vested as of January 1, 2006, based on the grant date fair value
estimated in accordance with the original provisions of SFAS No. 123,
“Accounting for Stock-Based Compensation” (SFAS 123). Stock-based compensation
expense for all awards granted after December 31, 2005 is also based on the
grant-date fair value estimated in accordance with the provisions of SFAS
123R.
Stock-based
compensation expense measured in accordance with SFAS 123R totaled $20,464
($15,622 on a net-of-tax basis, or $0.24 per basic and diluted share) for
the
year ended December 31, 2006. The adoption of SFAS 123R resulted in increased
expense of approximately $1,869 ($1,399 on a net-of-tax basis, or $0.02 per
basic and diluted share) for the year ended December 31, 2006 as compared
to the
stock-based compensation expense that would have been recorded pursuant to
APB 25.
Approximately
90% of stock-based compensation expense is reported as selling, general and
administrative expenses and approximately 10% of the stock-based compensation
expense was recorded as a component of cost of sales and both are included
in
the Corporate and Eliminations category for segment reporting purposes (Note
24). At December 31, 2006, approximately $135 of stock-based compensation
costs
were capitalized as a component of inventories. Under SFAS 123R the Company
is
required to report the benefits of income tax deductions that exceed recognized
compensation as cash flow from financing activities. Such excess tax benefits
were insignificant for the year ended December 31, 2006.
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 share-based compensation using the Black-Scholes
option-pricing model for the years ended December 31, 2005 and
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, the expense for which would have been the same
under
SFAS No. 123. Such amount includes $7,475, representing a cash distribution
to certain officers and employees of a portion of the net proceeds from the
Company’s initial public offering attributable to the underwriters’ exercise of
their over-allotment option. Substantially all of the remainder is non-cash
expense attributable to shares issued in connection with the Internal
Restructuring to certain officers and employees. See Note 2.
The
Company had not granted equity-based awards prior to November 2004. For purposes
of the above, the weighted average fair value of stock options granted in
the
years ended December 31, 2005 and 2004 was estimated to be $6.42 and $9.04,
respectively. The fair 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
Expected life for options represents an estimate of the period of time the
stock
options are expected to remain outstanding. The Company’s expected life is based
upon a review of academic research on employee exercise behavior on comparable
size companies with similar contractual lives and vesting periods because
of the
lack of history at the
Company.
The
Expected volatility assumption is based on stock price volatility of a group
of
publicly traded industry peers as a proxy because the Company was not publicly
traded at the time the options were granted.
The
Risk-free interest rate assumption is based upon the yield on a U.S. Treasury
strip (i.e., zero coupon bond) with a remaining life equal to the four-year
expected life of the options.
The
Expected annual dividend was based upon the Company’s expected dividend policy.
The quarterly expected dividend range is between $.02 and $.03, or $.08 and
$.12
per year. A mid-range was chosen to be included in the assumption above,
however, the Company does not currently pay a dividend.
No
stock
options were granted during the year ended December 31, 2006.
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
(r)
|
Derivative
Financial Instruments
|
Derivative
financial instruments are accounted for in accordance with SFAS No. 133,
Accounting
for Derivative Instruments and Hedging Activities.
SFAS
No. 133 requires all derivative financial instruments to be reported on the
balance sheet at fair value. Changes in fair value are recognized either
in
earnings or equity, depending on whether the transaction qualifies for hedge
accounting, and if so, the nature of the underlying exposure being hedged
and
how effective the derivatives are at offsetting price movements in the
underlying exposure.
The
Company accounts for certain forward purchase and forward sale contracts
that do
not qualify under the “normal purchase and normal sale” exception of SFAS No.
133, as derivatives and records these contracts as assets or liabilities
at fair
value. These contracts do not currently qualify for hedge accounting.
Accordingly, changes in fair value for forward sales and forward purchase
contracts have been recorded in revenue and cost of sales, respectively.
At
December 31, 2006, the Company had unrealized gains (losses) on open sales
and
purchase contracts of $6,119 and ($5,940) million, respectively. These amounts
are recorded in prepaid expenses and other current assets and accrued expenses
and other current liabilities, respectively.
The
Company has utilized interest rate swap agreements to modify the interest
characteristics of a portion of the Company’s outstanding debt. The swap
agreements essentially convert variable-rate debt to fixed-rate debt and
have
been designated as cash flow hedges.
The
Company is also exposed to the risk of fluctuations in cash flows related
to its
purchase of diesel fuel. The Company has entered into a forward physical
purchase contract and diesel fuel swap agreement to reduce the volatility
in the
price of diesel fuel for its operations. The diesel fuel swap agreement is
not
designated as a hedge and therefore the changes in the fair value for this
derivative instrument contract have been recorded in cost of sales. The
unrealized loss is recorded in other current liabilities.
As
of
December 31, 2006 approximately 11.0 million gallons or 40 percent of the
Company’s anticipated 2007 fuel usage has been fixed with the physical purchase
and swap agreements. Included
in the 11.0 million gallons is the physical purchase of 9.0 million gallons
at
$1.79 per gallon for the first six months of 2007 and the notional amount
of 2.0
million gallons at $1.87 per gallon for the last six months of
2007.
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
(s)
|
Accounting
Pronouncements with Delayed Effective
Dates
|
In
July 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, Accounting
for Uncertainty in Income Taxes—an
interpretation of FASB Statement No. 109 (FIN 48), which clarifies the
accounting for uncertainty in tax positions. FIN 48 requires that the Company
recognize in its financial statements the impact of a tax position if it
is more
likely than not the position will be sustained on audit, based on the technical
merits of the position. The provisions of FIN 48 are effective as of the
beginning of the Company’s 2007 fiscal year, with the cumulative effect of the
change in accounting principle recorded as an adjustment to beginning retained
earnings. The Company does not expect the adoption of FIN 48 to have a material
effect on its financial statements.
In
September 2006, the FASB issued SFAS No. 157, “Fair
Value Measures”
(“SFAS
157”). SFAS 157 defines fair value, establishes a framework for measuring fair
value and enhances disclosures about fair value measures required under other
accounting pronouncements, but does not change existing guidance as to whether
or not an instrument is carried at fair value. SFAS No. 157 is effective
for
fiscal years beginning after November 15, 2007. The Company is currently
reviewing the provisions of SFAS 157 to determine the impact of this standard,
in any, on the Company’s financial statements.
|
(t)
|
Adoption
of SAB 108
|
On
September 13, 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 108, “Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements”
(“SAB
108”), which provides interpretive guidance on the consideration of effects of
prior year misstatements in quantifying current year misstatements for the
purpose of assessing materiality. SAB 108 is effective for the Company for
the
year ended December 31, 2006 and provides for a one time transitional cumulative
effect adjustment to retained earnings as of January 1, 2006 for errors which
were not previously deemed to be material, but which are material under the
guidance of SAB 108. As a result of the adoption of SAB 108, the Company
changed
its method of accounting for costs related to acid mine drainage and also
for
certain materials and supplies inventories which are used in mining operations.
The Company recorded a cumulative effect adjustment to increase beginning
retained earnings by $717 (net of income tax effect of $238) for the effect
of
these accounting changes. The Company considered the impact of these errors
to
be immaterial prior to the adoption of SAB 108.
Acid
Mine Drainage
The
Company is legally obligated to treat runoff and effluence for its mines
and
preparation plants, including for closed sites, and has historically expensed
these costs as paid. The Company believes these costs should be accrued when
incurred pursuant to SFAS No. 143, Asset
Retirement Obligations.
Substantially all of these obligations existed upon formation of the Company
and
were assumed as a result of acquisitions prior to formation. Upon adoption
of
SAB 108, the Company recorded an increase to property, plant and equipment,
net
of $1,877, an increase to goodwill of $1,906, an increase to deferred tax
assets
of $678, an increase to other long-term assets of $82, a reduction of deferred
gain on sales of property interest of $1,115, an increase to asset retirement
obligation of $7,700 and a decrease in beginning retained earnings of $2,042.
Mine
Supplies Inventory
Since
its formation, the Company has not recorded as inventory certain mine supplies,
including tires, explosives and fuel, that are maintained at some of its
mines
and used in mine operations. The Company’s policy was to expense these costs
when the supplies were purchased. Since the inventory balances remained
consistent from period to period, the impact of this policy was considered
immaterial prior to the adoption of SAB 108. Upon adoption of SAB 108, the
Company changed its policy to record these amounts in inventory when purchased
and to expense the items when used in mining operations. The Company recorded
an
increase to inventory of $3,675, a decrease in deferred tax assets of $916
and
an increase in beginning retained earnings of $2,759.
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
(u)
|
Use
of Estimates
|
The
preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant items subject to such estimates and assumptions
include 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; revenue recognized using the percentage of completion method;
and
fair value of financial instruments. Due to the subjective nature of these
estimates, actual results could differ from those estimates.
|
(v)
|
Reclassifications
|
Certain
prior period amounts have been reclassified to conform to the current year
presentation.
|
(4)
|
Earnings
Per Share
|
Basic
earnings per share is computed by dividing net income or loss by the weighted
average number of shares of common stock outstanding during the periods.
Diluted
earnings per share is computed using the treasury stock method by dividing
net
income or loss by the weighted average number of shares of common stock and
dilutive common stock equivalents outstanding during the periods. Common
stock
equivalents include the number of shares issuable on exercise of outstanding
awards less the number of shares that could have been purchased with the
proceeds from the exercise of the options based on the average price of common
stock during the period. The number of stock options and restricted shares
which
were not included in the calculation of diluted earnings per share because
to do
so would have been antidilutive in 2006 were 1,137,398 and 414,132,
respectively. Due to the Internal Restructuring on
February 11, 2005 and initial public offering of common stock completed on
February 18, 2005, the calculation of earnings per share for 2005 and 2004
reflects certain adjustments, as described below.
The
numerator for purposes of computing basic and diluted net income (loss) per
share, as adjusted for 2005 and 2004, includes the reported net income (loss)
and a pro forma adjustment for income taxes to reflect the pro forma income
taxes for ANR Fund IX Holdings, L.P.’s portion of reported pre-tax income
(loss), which would have been recorded if the issuance of the shares of common
stock received by the FR Affiliates in exchange for their ownership in ANR
Holdings in connection with the Internal Restructuring had occurred as of
January 1, 2003. For purposes of the computation of basic and diluted net
income (loss) per share, as adjusted, the proforma adjustment for income
taxes
only applies to the percentage interest owned by ANR Fund IX Holding, L.P.,
the non-taxable FR Affiliate. No pro forma adjustment for income taxes is
required for the percentage interest owned by Alpha NR Holding, Inc., the
taxable FR Affiliate, because income taxes have already been recorded in
the
historical results of operations. Furthermore, no pro forma adjustment to
reported net income (loss) is necessary subsequent to
February 11, 2005 because the Company is subject to income
taxes.
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The
denominator for purposes of computing basic net income (loss) per share,
as
adjusted for 2005 and 2004, 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.
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The
computations of basic and diluted net income (loss) per share for 2006 and,
as
adjusted in 2005 and 2004, are set forth below:
|
Year
Ended December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Numerator:
|
||||||||||
|
Reported
income from continuing operations
|
$
|
128,168
|
$
|
21,426
|
$
|
22,388
|
||||
|
Deduct:
Income tax effect of ANR Fund IX Holdings, L.P. income from continuing
operations prior to Internal Restructuring
|
—
|
(91
|
)
|
(1,149
|
)
|
|||||
|
|
||||||||||
|
Income
from continuing operations, as adjusted in 2005 and 2004
|
128,168
|
21,335
|
21,239
|
|||||||
|
Reported
loss from discontinued operations
|
—
|
(213
|
)
|
(2,373
|
)
|
|||||
|
Add:
Income tax effect of ANR Fund IX Holdings, L.P. loss from discontinued
operations prior to Internal Restructuring
|
—
|
2
|
149
|
|||||||
|
Loss
from discontinued operations, as adjusted in 2005 and 2004
|
—
|
(211
|
)
|
(2,224
|
)
|
|||||
|
Net
income, as adjusted in 2005 and 2004
|
$
|
128,168
|
$
|
21,124
|
$
|
19,015
|
||||
|
|
||||||||||
|
Denominator:
|
||||||||||
|
Weighted
average shares— basic
|
64,093,571
|
55,664,081
|
13,998,911
|
|||||||
|
Dilutive
effect of stock options and restricted stock grants
|
57,209
|
385,465
|
—
|
|||||||
|
Weighted
average shares— diluted
|
64,150,780
|
56,049,546
|
13,998,911
|
|||||||
|
|
||||||||||
|
Net
income per share, as adjusted— basic and diluted:
|
||||||||||
|
Income
from continuing operations, as adjusted in 2005 and 2004
|
$
|
2.00
|
$
|
0.38
|
$
|
1.52
|
||||
|
Loss
from discontinued operations, as adjusted in 2005 and 2004
|
—
|
—
|
(0.16
|
)
|
||||||
|
Net
income per share, as adjusted in 2005 and 2004
|
$
|
2.00
|
$
|
0.38
|
$
|
1.36
|
||||
|
(5)
|
Inventories
|
Inventories
consisted of the following:
|
December
31,
|
|||||||
|
2006
|
2005
|
||||||
|
Raw
coal
|
$
|
8,868
|
$
|
6,401
|
|||
|
Saleable
coal
|
53,428
|
57,221
|
|||||
|
Materials
and supplies
|
14,548
|
13,166
|
|||||
|
Total
inventories
|
$
|
76,844
|
$
|
76,788
|
|||
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,
|
|||||||
|
2006
|
2005
|
||||||
|
Prepaid
insurance
|
$
|
23,169
|
$
|
20,448
|
|||
|
Advance
mining royalties
|
4,511
|
3,435
|
|||||
|
Refundable
income taxes
|
3,334
|
6,012
|
|||||
|
Fair
value of forward coal purchase and sale contracts
|
6,119
|
—
|
|||||
|
Prepaid
freight
|
11,299
|
8,097
|
|||||
|
Other
prepaid expenses
|
2,461
|
6,222
|
|||||
|
Total
prepaid expenses and other current assets
|
$
|
50,893
|
$
|
44,214
|
|||
|
(7)
|
Property,
Plant, and Equipment
|
Property,
plant, and equipment consisted of the following:
|
December
31,
|
|||||||
|
2006
|
2005
|
||||||
|
Land
|
$
|
14,065
|
$
|
11,986
|
|||
|
Mineral
rights
|
324,703
|
297,573
|
|||||
|
Plant
and mining equipment
|
505,056
|
372,189
|
|||||
|
Vehicles
|
4,816
|
3,351
|
|||||
|
Mine
development
|
54,350
|
39,017
|
|||||
|
Office
equipment and software
|
9,304
|
8,170
|
|||||
|
Construction
in progress
|
14,564
|
5,419
|
|||||
|
926,858
|
737,705
|
||||||
|
Less
accumulated depreciation, depletion, and amortization
|
289,722
|
154,955
|
|||||
|
Property,
plant, and equipment, net
|
$
|
637,136
|
$
|
582,750
|
|||
As
of December 31, 2006, the Company had commitments to purchase approximately
$38,264 of new equipment, expected to be acquired at various dates in
2007.
Depreciation
and amortization expense associated with property, plant and equipment was
$100,732, $60,502
and $50,679, and depletion expense was $40,716, $11,698 and $3,541, for the
years ended December 31, 2006, 2005 and 2004, respectively.
|
(8)
|
Goodwill
|
The
changes in the carrying amount of goodwill were as follows:
|
Balance
as of December 31, 2005
|
$
|
18,641
|
||
|
2006
Adjustments
|
1,906
|
|||
|
Balance
as of December 31, 2006
|
$
|
20,547
|
The
carrying amount of goodwill was increased by $1,906 during the year ended
December 31, 2006 as a result of a change in the method of accounting for
acid mine drainage costs upon the adoption of SAB No. 108 (note
3(t)).
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
(9)
|
Other
Intangibles
|
Other
intangible assets consisted of the following:
|
December
31, 2006
|
December
31, 2005
|
||||||||||||
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
||||||||||
|
Sales
contracts
|
$
|
7,546
|
$
|
3,960
|
$
|
7,227
|
$
|
1,757
|
|||||
|
Customer
relationships
|
8,678
|
1,111
|
4,762
|
159
|
|||||||||
|
Noncompete
agreements
|
1,177
|
610
|
1,177
|
236
|
|||||||||
|
$
|
17,401
|
$
|
5,681
|
$
|
13,166
|
$
|
2,152
|
||||||
Total
amortization expense for the above intangible assets was $3,210,
$1,205
and $1,792 for the years ended December 31, 2006, 2005 and 2004,
respectively, and is expected to be approximately $2,379, $2,509, $2,254,
$4,581
for the years ended December 31, 2007, 2008, 2009, and thereafter,
respectively.
|
(10)
|
Other
Assets
|
Other
assets consisted of the following:
|
December
31,
|
|||||||
|
2006
|
2005
|
||||||
|
Advance
mining royalties, net
|
$
|
10,374
|
$
|
11,557
|
|||
|
Deferred
loan costs, net of accumulated amortization of $3,927 and $1,645
in 2006
and 2005, respectively
|
12,901
|
15,081
|
|||||
|
Notes
receivable
|
—
|
102
|
|||||
|
Investment
in terminaling facility
|
1,087
|
1,005
|
|||||
|
Investment
in Excelven Pty Ltd
|
5,921
|
5,735
|
|||||
|
Virginia
tax credit receivable
|
12,105
|
9,418
|
|||||
|
Other
|
451
|
473
|
|||||
|
Total
other assets
|
$
|
42,839
|
$
|
43,371
|
|||
|
(11)
|
Notes Payable
|
At
December 31, 2006, notes payable included $20,941 that was incurred to
finance various insurance premiums. Interest, which accrues at the rate of
6.15%,
and
principal are due in monthly installments, with the final payment due in
September 2007. At December 31, 2005, notes payable included $39,955 in
promissory installment note that were issued in connection with the Nicewonder
Acquisition (Note 22). The notes bore interest at 3.82% and were repaid on
January 13, 2006. Also at December 31, 2005, notes payable included
$19,059 incurred to finance various insurance premiums. Interest, which accrued
at the rate of 5.50%, and principal were paid in monthly installments, with
the
final payment paid in November 2006.
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,
|
|||||||
|
2006
|
2005
|
||||||
|
Wages
and employee benefits
|
$
|
25,176
|
$ | 24,874 | |||
|
Current
portion of asset retirement obligation
|
7,797
|
7,190
|
|||||
|
Taxes
other than income taxes
|
12,415
|
10,697
|
|||||
|
Freight
|
10,669
|
9,717
|
|||||
|
Contractor
escrow
|
1,087
|
771
|
|||||
|
Deferred
gains on sales of property interests
|
389
|
941
|
|||||
|
Deferred
revenues
|
1,000
|
4,589
|
|||||
|
Current
portion of self-insured workers’ compensation benefits
|
1,175
|
1,019
|
|||||
|
Workers’
compensation insurance premium payable
|
4,091
|
4,320
|
|||||
|
Interest
payable
|
2,289
|
3,944
|
|||||
|
Additional
consideration for acquisition
|
549
|
13,738
|
|||||
|
Fair
value of forward coal purchase and sale contracts
|
5,940
|
—
|
|||||
|
Unamortized
portion of unfavorable coal sales contract
|
6,763
|
—
|
|||||
|
Construction
billings in excess of costs
|
2,943
|
—
|
|||||
|
Other
|
8,311
|
11,731
|
|||||
|
Total
accrued expenses and other current liabilities
|
$
|
90,594
|
$
|
93,531
|
|||
|
(13)
|
Long-Term
Debt
|
Long-term debt consisted of the following:
|
December
31,
|
|||||||
|
2006
|
2005
|
||||||
|
Term
loan
|
$
|
247,500
|
$
|
250,000
|
|||
|
10%Senior
notes due 2012
|
175,000
|
175,000
|
|||||
|
Capital
lease obligation
|
1,510
|
1,496
|
|||||
|
Other
|
700
|
293
|
|||||
|
Total
long-term debt
|
424,710
|
426,789
|
|||||
|
Less
current portion
|
3,254
|
3,242
|
|||||
|
Long-term
debt, net of current portion
|
$
|
421,456
|
$
|
423,547
|
|||
Debt
Refinancing
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 promissory notes on November 2, 2005, to
refinance the then existing Citicorp Credit Facility and to pay certain expenses
related to the Nicewonder acquisition and debt refinancing. As of
December 31, 2006 and 2005 there were $247,500 and $250,000 in borrowings,
respectively, under the term loan facility and no borrowings under the revolving
credit facility. In addition, there were $81,094 and $65,487 in letters of
credit outstanding for December 31, 2006 and 2005 respectively. At December
31,
2006, $193,906 was available for borrowing.
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Borrowings
under the New Citicorp Credit Facility bear interest at variable rates based
upon, at the Company’s 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 was 0.50% per annum in 2005 but was reduced to
0.375% on August 21, 2006. As of December 31, 2006 and 2005, the weighted
average interest rate applicable to borrowings under the term loan facility
was
7.11% and 6.32%, respectively.
Under
the term loan facility, quarterly principal payments of $625 are required,
through 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 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.
All
of
the Company borrowings under our New Citicorp Credit Facility are at a variable
rate, so the Company is exposed to the effect of rising interest rates in
the
United States. As of December 31, 2006, the Company has a $247,500 term loan
outstanding with a variable interest rate based upon the 3-month London
Interbank Offered Rate (“LIBOR”) (5.36% at December 31, 2006) plus the
applicable margin. To reduce the Company’s exposure to rising interest rates,
effective May 22, 2006 the Company entered into a pay-fixed, receive variable
interest rate swap on the notional amount of $233,125 for a period of
approximately six and one-half years. In effect, this swap converted the
variable interest rates based on the LIBOR to a fixed interest rate of 5.59%
plus the applicable margin defined in the debt agreement (1.75%, at December
31,
2006) for a portion of our term loan. The Company accounts for the interest
rate
swap as a cash flow hedge and changes in fair value of the swap are recorded
to
other comprehensive income (loss). Because the critical terms of the swap
and
the underlying debt instrument that it hedges coincide, resulting in no hedge
ineffectiveness being recognized in the income statement during the year
ended
December 31, 2006. The fair value of the swap at December 31, 2006 is $7,224
($5,437 net of tax) and is reflected in other liabilities in the consolidated
balance sheet. As interest expense is accrued on the debt obligation, amounts
in
accumulated other comprehensive loss related to the derivative hedging
instrument are reclassified into earnings to obtain a net cost on the debt
obligation of 5.59% plus the applicable margin.
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
Alpha
NR
Holding, Inc.’s wholly-owned domestic restricted subsidiaries other than the
issuers of the notes. The senior notes are the Company’s senior unsecured
obligations and rank equally in right of payment to any existing and future
unsecured indebtedness and rank senior in right of payment to any future
subordinated or senior subordinated indebtedness. The senior notes are
effectively subordinated in right of payment to the Company’s secured
indebtedness, including borrowings under the 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, among other
things, limit the ability of the Company to incur additional indebtedness,
make
certain payments, including dividends, make certain investments, and sell
certain assets or merge with or into other companies.
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Other
Indebtedness
The
Company entered into a capital lease for equipment in conjunction with the
purchase of substantially all of the assets of Moravian Run Reclamation Co.,
Inc. on April 1, 2004. The lease has a term of sixty months with monthly
payments ranging from $20
to $60
with a final balloon payment of $180 in March 2009. The effective interest
rate
on the capital lease is approximately 12.15%. The capitalized cost of the
leased
property was $1,874 at December 31, 2006. Accumulated amortization was
$1,378 and $881 at December 31, 2006 and 2005, respectively. Amortization
expense on capital leases is included with depreciation expense.
In
the
Company’s acquisition of Progress in 2006, it assumed a capital lease obligation
through Caterpillar Financial Services. The remaining lease term was 29 months
with monthly payments of $23 starting in May of 2006. The effective interest
rate on the capital lease is approximately 4.26%. The capitalized cost of
the
leased property was $512 at December 31, 2006. Accumulated amortization was
$68
at December 31, 2006. Amortization expense on capital leases is included
with
depreciation expense.
The
Company entered into a Credit agreement with Nedbank on December 28, 2006
to
provide phase one project financing for the construction of assets for Gallatin
Materials, LLC in the amount of $20,600 at an interest rate based upon the
3-month London Interbank Offered Rate (“LIBOR”) plus an applicable margin on a
non-recourse senior loan. The final maturity date is April 30, 2016. There
is no
balance outstanding under this credit agreement at December 31,
2006.
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, 2006:
|
Year
ending December 31:
|
||||
|
2007
|
$
|
3,254
|
||
|
2008
|
3,725
|
|||
|
2009
|
2,731
|
|||
|
2010
|
2,500
|
|||
|
2011
|
2,500
|
|||
|
Thereafter
|
410,000
|
|||
|
Total
long-term debt
|
$
|
424,710
|
||
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, 2006:
|
Year
ending December 31:
|
||||
|
2007
|
$
|
875
|
||
|
2008
|
566
|
|||
|
2009
|
240
|
|||
|
Total
future minimum lease payments
|
1,681
|
|||
|
Less
amount representing interest
|
(171
|
)
|
||
|
Present
value of future minimum lease payments
|
1,510
|
|||
|
Less
current portion
|
(754
|
)
|
||
|
Long-term
capital lease obligation
|
$
|
756
|
||
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
(14)
|
Asset
Retirement Obligation
|
At
December 31, 2006 and 2005, the Company has recorded asset retirement
obligation accruals for mine reclamation and closure costs (including acid
mine
drainage in connection with the adoption of SAB 108 in the current year)
totaling $77,292 and $53,487,
respectively. The portion of the costs expected to be incurred within a year
in
the amount of $7,797 and $7,190, at December 31, 2006 and 2005,
respectively, is included in accrued expenses and other current liabilities.
These regulatory obligations are secured by surety bonds in the amount of
$138,013 at December 31, 2006 and $116,680 at December 31, 2005.
Changes in the reclamation obligation were as follows:
|
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
|
|||
|
Accretion
for 2006
|
4,874
|
|||
|
2006
acquisitions
|
7,968
|
|||
|
Sites
added in 2006
|
6,070
|
|||
|
Revisions
in estimated cash flows
|
1,347
|
|||
|
Expenditures
in 2006
|
(4,154
|
)
|
||
|
Increase
in recorded liability for acid mine drainage (see note
3(t))
|
7,700
|
|||
|
Total
asset retirement obligation at December31, 2006
|
$
|
77,292
|
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
(15)
|
Other
Liabilities
|
Other
liabilities consisted of the following:
|
December
31,
|
|||||||
|
2006
|
2005
|
||||||
|
Fair
value of interest rate swap
|
$
|
7,224
|
$
|
—
|
|||
|
Unamortized
portion of unfavorable coal sales contract
|
9,430
|
—
|
|||||
|
Employee
benefits
|
1,840
|
366
|
|||||
|
Advance
royalties payable
|
1,100
|
1,513
|
|||||
|
Contractor
escrow
|
1,127
|
957
|
|||||
|
Long-term
deferred revenue
|
1,000 | 298 | |||||
|
Deferred
purchase price obligation
|
701
|
845
|
|||||
|
Payable
to former sponsor
|
2,400
|
4,500
|
|||||
|
Other
long-term liabilities
|
2,015
|
2,606
|
|||||
|
Total
other liabilities
|
$
|
26,837
|
$
|
11,085
|
|||
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
(16)
|
Deferred
Gains on Sales of Property
Interests
|
In
February 2003, the Company sold an overriding royalty interest in certain
mining
properties for $11,850. The gain on this transaction in the amount of $850
was
deferred and is being amortized over the associated remaining term of the
mineral lease. This property interest was acquired from El Paso CGP Company
in the acquisition of the Coastal Coal properties.
In
April 2003, the Company sold mineral properties for $53,625 in a sale/leaseback
transaction. These properties had originally been acquired from Pittston
Coal
Company. The gain on this transaction in the amount of $7,057 was deferred
and
is being amortized over the ten-year term of the lease.
The
Company recognized $1,001, $790
and
$959 of the above deferred gains for the years ended December 31, 2006,
2005 and 2004, 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 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. In 2006 the deferred gain was increased by $140 for a change in
the
estimated reclamation liabilities and decreased by $1,115 upon the adoption
of
SAB 108 (see note3 (t)).
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
(17)
|
Fair
Value of Financial
Instruments
|
The
estimated fair values of financial instruments under
SFAS No. 107,
Disclosures About Fair Value of Financial Instruments,
are
determined based on relevant market information. These estimates involve
uncertainty and cannot be determined with precision. The following methods
and
assumptions are used to estimate the fair value of each class of financial
instrument.
Cash
and Cash Equivalents, Trade Accounts Receivables, Note Payable, Bank
Overdraft, Trade Accounts Payable, and Other Current
Liabilities:
The
carrying amounts approximate fair value due to the short maturity of these
instruments.
Notes Receivable:
The fair
value approximates the carrying value as the rates associated with the
receivables are comparable to current market rates.
Long-term
Debt:
The fair
value of the 10% Senior notes is based on the trading price of the notes.
The fair value of debt with variable interest rates is equal to the principal
amount of the notes since the interest rates are reset periodically. The
fair
value of other long-term debt is based on the current market rate of interest
offered to the Company for debt of similar maturities.
In
connection with the long-term debt the Company entered into an interest rate
swap on May 22, 2006 which is designed to reduce the volatility of the interest
being paid on a portion of the long-term debt which bears interest at a variable
rate. This interest rate swap is recorded at fair value at December 31, 2006
based on quoted market prices.
The
estimated fair values of long-term debt were as follows:
|
December
31,
|
|||||||
|
2006
|
2005
|
||||||
|
10%
Senior notes due 2012
|
$
|
189,875
|
$
|
193,375
|
|||
|
Term
loan
|
247,500
|
250,000
|
|||||
|
Capital
lease obligation
|
1,510
|
1,496
|
|||||
|
Other
|
700
|
293
|
|||||
|
Total
long-term debt
|
$
|
439,585
|
$
|
445,164
|
|||
|
(18)
|
Employee
Benefit Plans
|
|
(a)
|
Postretirement
Benefits Other Than
Pensions
|
Three
of the Company’s subsidiaries assumed collective bargaining agreements as part
of two acquisitions that require these subsidiaries to provide postretirement
medical benefits to certain employees who retire after the acquisition closing
dates. In each case, however, the sellers, have retained the obligation to
provide postretirement medical benefits to employees who retired prior to
the
acquisition closing dates (December 13, 2002 and March 11, 2003,
respectively) and to employees who were not retained by these subsidiaries.
In
addition, the sellers retained the obligation to provide postretirement medical
benefits to a significant number of the employees who have worked for the
Company after the acquisition closing, namely, those employees who met the
eligibility criteria by December 31, 2003, even if the employees will not
retire until sometime in the future. These plans are unfunded and the
measurement date is December 31 of each year.
Effective
July 1, 2004, the Company adopted a plan offering postretirement medical
benefits to active union-free employees that will provide a credit of
$20 per month per year of service for pre-65 year old and $9 per
month per year of service for post-65 year old retirees toward the purchase
of medical benefits (as defined) from the Company. The adoption of this plan
resulted in prior service cost of $27,122. Effective April 1,
2005 and October 3, 2005, the plan was amended to replace two union retiree
medical plans with a defined dollar benefit similar to the union-free plan,
which resulted in a prior service credit of approximately $6,167. 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 additional $2,020 of prior service cost. The Company
also granted the acquired employees of Progress prior service credit under
the
plan resulting in an additional $1,040 of prior service cost.
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The
Company adopted SFAS No. 158 effective December 31, 2006. The effect of adoption
resulted in an increase in the liability for postretirement medical benefits
of
$17,534, and increase in deferred income tax asset of $4,337 and an increase
in
accumulated other comprehensive loss of $13,197. Other comprehensive income
(loss) will be adjusted in subsequent years as these amounts are later
recognized into income as components of net period benefit costs. The adoption
of this pronouncement did not effect the Company’s comprehensive income for the
year ended December 31, 2006.
The
components of the change in accumulated benefit obligations of the plans
for
postretirement benefits other than pensions were as follows:
|
December
31,
|
|||||||
|
2006
|
2005
|
||||||
|
Change
in benefit obligation:
|
|||||||
|
Accumulated
benefit obligation-beginning of period:
|
$
|
49,485
|
$
|
43,783
|
|||
|
Service
cost
|
3,734
|
3,906
|
|||||
|
Interest
cost
|
2,782
|
2,489
|
|||||
|
Actuarial
(gain) or loss
|
(6,145
|
)
|
3,514
|
||||
|
Benefits
paid
|
(49
|
)
|
(60
|
)
|
|||
|
Plan
amendments
|
1,040
|
(4,147
|
)
|
||||
|
Accumulated
benefit obligation-end of period
|
$
|
50,847
|
$
|
49,485
|
|||
|
Funded
status
|
$
|
(50,847
|
)
|
$
|
(49,485
|
)
|
|
|
Unrecognized
prior service cost
|
17,959
|
19,114
|
|||||
|
Unrecognized
net actuarial (gain) loss
|
(425
|
)
|
5,910
|
||||
|
Accumulated
other comprehensive loss
|
(17,534
|
)
|
—
|
||||
|
Accrued
postretirement medical benefits
|
$
|
(50,847
|
)
|
$
|
(24,461
|
)
|
|
The
following table details the components of the net periodic benefit cost for
postretirement benefits other than pensions:
|
Year
Ended December31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Service
cost
|
$
|
3,734
|
$
|
3,906
|
$
|
2,266
|
||||
|
Interest
cost
|
2,782
|
2,489
|
1,375
|
|||||||
|
Amortization
of net (gain) or loss
|
186
|
27
|
(24
|
)
|
||||||
|
Amortization
of prior service cost
|
2,219
|
2,463
|
1,396
|
|||||||
|
Net
periodic benefit cost
|
$
|
8,921
|
$
|
8,885
|
$
|
5,013
|
||||
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The
following details the amounts expected to be recognized as components of
net
periodic benefit cost in 2007:
|
Net
actuarial gain
|
$
|
(61
|
)
|
|
|
Prior
service cost
|
2,292
|
|||
|
$
|
2,231
|
The
discount rates used in determining the benefit obligations as of
December 31, 2006, 2005 and 2004 were 5.92%, 5.50% and 5.75%, respectively.
The discount rates used in determining net periodic postretirement benefit
cost
were 5.50%,
5.75% and 6.25% for the years ended December 31, 2006, 2005 and 2004,
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 9%
for
2007, decreasing to 5% in 2011 and thereafter.
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, 2006:
|
One
Percentage
Point
Increase
|
One
Percentage
Point
Decrease
|
||||||
|
Effect
on accumulated postretirement benefit obligation
|
$
|
692
|
$
|
(562
|
)
|
||
|
Effect
on total service and interest cost components
|
83
|
(65
|
)
|
||||
Employer
contributions for benefits paid for the years ended December 31, 2006 and
2005 were $49 and $60,
respectively. Employee contributions are not expected to be made and the
plan is
unfunded.
Estimated
future benefit payments for the fiscal years ending after December 31, 2006
are as follows:
|
Year
ending December 31:
|
||||
|
2007
|
$
|
135
|
||
|
2008
|
436
|
|||
|
2009
|
959
|
|||
|
2010
|
1,490
|
|||
|
2011
|
2,075
|
|||
|
2012-2016
|
19,557
|
|||
The
Company also adopted SFAS No. 158 for its black lung benefit obligation and
the
effect of adoption resulted in an increase in the liability (which is reflected
in workers’ compensation benefits in the consolidated balance sheet) of $512, an
increase in deferred tax assets of $127, and an increase in accumulated other
comprehensive loss of $385. The adoption of this pronouncement did not affect
the Company’s comprehensive income for the year ended December 31, 2006. At
December 31, 2006 and 2005, the Company’s unfunded accumulated black lung
benefit obligation was $1,034 and $468, respectively. The net periodic benefit
cost was $152 and $105 for the years ended December 31, 2006 and 2005,
respectively. The discount rate used in determining the benefit obligation
at
December 31, 2006 and 2005 was 5.6% and 4.0%, respectively. The discount
rate
used in determining net periodic benefit cost was 5.3% and 4.0% for the year
ended December 31, 2006 and 2005, respectively. The estimated future
cash payments by the Company for each of the next five years and thereafter
are: $120 in 2007, $107 in 2008, $112 in 2009, $119 in 2010, $131 in 2011,
and
$588 from 2012 through 2016.
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. 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.
|
(b)
|
Savings
Plan
|
The
Company sponsors a 401(k) Savings-Investment Plan to assist its eligible
employees in providing for retirement. The Company contributes 3% of
compensation, as defined, 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, 2006, 2005 and 2004, were $9,183, $6,418, and $5,086,
respectively.
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, 2006, 2005 and 2004, total
claims expense of $25,125,
$20,714 and $18,094, respectively, was incurred, which represents claims
processed and an estimate for claims incurred but not reported.
|
(d)
|
Multi-Employer
Pension Plan
|
Three
of the Company’s subsidiaries assumed collective bargaining agreements as part
of two acquisitions that require them to participate in the United Mine Workers
of America (UMWA) 1950 and 1974 pension plans. These plans are
multi-employer pension plans whereby the expense is based upon defined
contribution rates. There was no expense under these plans for the years
ended
December 31, 2006, 2005 and 2004.
Some
of the Company’s subsidiaries are required to make contributions to the 1993
UMWA Benefit Plan of fifty cents per signatory hour worked. The contributions
that the Company made to this plan for the years ended December 31, 2006,
2005 and 2004 were $28, $32
and
$31, respectively.
|
(e)
|
Share-Based
Compensation Awards
|
In
November 2004, ACM adopted the Alpha Coal Management LLC 2004 Long-Term
Incentive Plan (the “Alpha Coal Management Long-Term Incentive Plan”) to provide
equity-based incentive compensation to those key employees and others who
make
significant contributions to the strategic and long-term performance objectives
and growth of the Company. On November 10, 2004, ACM granted options to purchase
800,000 units of ACM to 22 members of the Company’s management team under the
Alpha Coal Management Long-Term Incentive Plan. These options vest over a
period
of five years (with accelerated vesting upon a change of control) and have
a
term of ten years. In connection with this grant of options, ACM entered
into a
letter agreement with ANR Holdings pursuant to which ANR Holdings agreed
to
issue to ACM additional membership interests representing sharing ratios
in the
aggregate amount equal to 1% of the outstanding membership interests upon
exercise of awards granted by ACM under the Alpha Coal Management Long-Term
Incentive Plan. In connection with the Internal Restructuring on February
11,
2005, this plan was amended and restated, the outstanding options to purchase
units of ACM were automatically converted into options to purchase shares
of
Alpha common stock and Alpha assumed the obligations of ACM pursuant to this
plan. After the Internal Restructuring, there were outstanding under the
plan
options to purchase an aggregate of 596,985 shares of common stock at an
exercise price of $12.73 per share. No additional options or awards will
be
granted under this
plan.
As
part of the Internal Restructuring, the officers and employees who were members
of ACM contributed all of their interest in ANR Holdings to Alpha in exchange
for 2,772,157 shares of Alpha common stock. Pursuant to the stockholder
agreement, an aggregate of 1,344,930 shares of common stock held by the
Company’s executives were
unvested on the grant date. These options were vested by December 31, 2006.
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
In
connection with the Internal Restructuring, Alpha Natural Resources, Inc.
adopted, and its stockholders approved, the Alpha Natural Resources, Inc.
Long-Term Incentive Plan (the “Long-Term Incentive Plan”). The principal purpose
of the Long-Term Incentive Plan is to attract, motivate, reward and retain
selected employees, consultants and directors through the granting of
stock-based compensation awards. The Long-Term Incentive Plan provides for
a
variety of awards, including non-qualified stock options, incentive stock
options (within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended), stock appreciation rights, non-vested
shares,
dividend equivalents, performance-based awards and other stock-based awards.
The
total number of shares of Alpha Natural Resources, Inc. common stock initially
available for issuance or delivery under the Long-Term Incentive Plan is
3,338,841 shares. The Company currently uses authorized and unissued shares
to
satisfy share award exercises.
On
February 11, 2005 the Company granted certain of its executive officers,
directors and key employee’s options to purchase an aggregate of 692,905 shares
of Alpha Natural Resources, Inc. common stock at the initial public offering
price of $19.00 per share. During the remainder of 2005, an additional 70,000
stock options were granted as well as 12,000 non-vested shares of stock.
All
options granted during 2005 pursuant to the Long-Term Incentive Plan vest
over a
period of five years and have a term of ten years. The non-vested shares
of
stock vest over a three-year period. In the year ended December 31, 2006,
all
awards granted pursuant to the Long-Term Incentive Plan consisted of non-vested
shares and performance shares.
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Stock
option
activity
for the year ended December 31, 2006 is summarized in the following
table:
|
Weighted-
|
Weighted-
|
|||||||||
|
Average
|
Average
|
|||||||||
|
Number
of
|
Exercise
|
Remaining
|
||||||||
|
Shares
|
Price
|
Contract
Life
|
||||||||
|
Outstanding
at December 31, 2005
|
1,253,593
|
$
|
16.71
|
|||||||
|
Exercised
|
(60,195
|
)
|
$
|
15.86
|
||||||
|
Forfeited/Canceled
|
(56,000
|
)
|
$
|
19.00
|
||||||
|
Outstanding
at December 31, 2006
|
1,137,398
|
$
|
16.64
|
8.03
|
||||||
|
Exercisable
at December 31, 2006
|
268,979
|
$
|
15.48
|
7.99
|
||||||
The
aggregate intrinsic value of options outstanding at December
31, 2006 was $2,741 and the aggregate intrinsic value of exercisable options
was
$336. Cash received from the exercise of stock options during the years ended
December 31, 2006 and 2005 was $954 and $199, respectively. As of December
31,
2006, $5,523 of unrecognized compensation cost related to stock options is
expected to be recognized as expense over a weighted-average period of
3.01 years.
The
weighted average grant date fair value of options granted during the year
2006
and 2005 was $15.48 and $16.71, respectively. The total intrinsic value of
options exercised during the year ended December 31, 2006 and 2005 was $479
and
$169.
Non-vested
share award activity for the year ended December 31, 2006 is summarized in
the
following table:
|
Number
of
|
Weighted
Average
Grant
Date
|
||||||
|
Shares
|
Fair
Value
|
||||||
|
Non-vested
shares outstanding at December 31, 2005
|
684,465
|
$
|
19.15
|
||||
|
Granted
|
524,277
|
21.21
|
|||||
|
Vested
|
(696,802
|
)
|
19.10
|
||||
|
Forfeited
|
(40,599
|
)
|
21.22
|
||||
|
Non-vested
shares outstanding at December 31, 2006
|
471,341
|
21.34
|
|||||
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The
fair value of non-vested
share awards is estimated based on the average of the high and low market
price
on the date of grant, and, for purposes of expense recognition, the total
number
of awards expected to vest is adjusted for estimated forfeitures. As of December
31, 2006, there was $7,292 of unamortized compensation cost related to
non-vested shares which is expected to be recognized as expense over a
weighted-average period of 2.08 years.
In
addition to the above, the Company granted 148,268 performance share awards
in
March 2006, of which 133,411 remain outstanding as of December 31, 2006.
Recipients of these awards can receive shares of Alpha common stock at the
end
of a three-year performance period which ends on December 31, 2008, based
on the
Company’s actual performance against pre-established operating income and return
on invested capital targets. In order to receive the shares, the recipient
must
also be employed by the Company on the vesting date. The performance share
awards represent the number of common shares to be awarded based on the
achievement of targeted performance, however the actual number of shares
to be
awarded based on performance may range from 0 percent to 200 percent of the
targeted amount. The grant date fair value of a performance share award is
based
on the average of the high and low market price of the Company common stock
on
the date of award and is being amortized over the performance period. The
Company reassesses at each reporting date whether achievement of the performance
conditions is probable, as well as estimated forfeitures, and adjusts the
accrual of compensation expense as appropriate. At December 31, 2006, the
Company has determined that achievement of the performance targets was
improbable and therefore, no shares are probable of vesting. Accordingly,
the
Company has ceased recording compensation expense and has reversed previously
recognized compensation expense for these shares.
|
(19)
|
Workers’
Compensation Benefits
|
The
Company’s operations generally are fully insured for workers’ compensation and
black lung claims. Insurance premium expense for the years ended
December 31, 2006, 2005 and 2004 was $18,698,
$14,108
and $16,192, 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 workers’ compensation claims is an estimate of the ultimate
losses to be incurred on such claims based on the Company’s experience and
published industry data. Adjustments to the probable ultimate liability are
made
annually based on an actuarial valuation and are included in operations as
they
are determined. The liability for black lung benefits is
an
estimate of such benefit as determined by an independent actuary at the present
value of the actuarially computed liability over the employee’s applicable term
of service. The obligations incurred prior to January 31, 2003 are
currently secured by surety bonds of El Paso Corporation, an unrelated
entity. Also see Note 25.
The
liability for self-insured workers compensation claims and black lung benefits
at December 31, 2006 and 2005 was $8,344 and $6,920, respectively,
including a current portion of $1,175 and $1,019, respectively. Workers’
compensation and black lung expense for the years ended December 31, 2006,
2005 and 2004 was $6,507, $6,940 and $7,697, respectively, including fees
paid
to the State of West Virginia to be self-insured. The Company is required
to
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.
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
(20)
|
Related
Party Transactions
|
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 Company’s former Executive Vice
Presidents. Total rent expense was $186, $263 and $144 for the years ended
December 31, 2006, 2005 and 2004, respectively.
In
conjunction with the acquisition of U.S. AMCI, ANR Holdings entered into an
agreement with entities affiliated with AMCI that requires the AMCI parties
to
pay reclamation and other obligations of one of the former U.S. AMCI
entities acquired by the Company (Solomons Mining Company). In April 2004,
the
Company entered into an arrangement with the AMCI Parties to purchase 350
tons of coal from a third-party at a price of $54.50 per ton at various
times from April 2004 through November 2005, of which $34.50 was paid to
the
producer of that coal, $12.00 per ton was payable to the AMCI Parties and
$8.00 per ton was retained by the Company to fund the remaining reclamation
obligation of Solomons Mining Company. By an agreement dated January 25,
2006, the AMCI Parties made a final settlement of all reclamation and other
obligations associated with Solomons Mining Company by a payment of $4,104
to
the Company. The payment repaid advances in the amount of $2,495 made by
the
Company in excess of the amount received under the coal purchase agreement
and
the estimated remaining reclamation obligation in the amount of $1,034. In
addition, the payment provided funds to pay an amount owed by Solomons Mining
Company to a third party.
In
connection with the acquisition of Coastal Coal Company, the Company acquired
an
overriding royalty interest in certain properties located in Virginia and
West
Virginia owned by El Paso CPG Company for $11,000 in cash. Effective
February 1, 2003, the Company sold the overriding royalty interest to
affiliates of Natural Resource Partners, L.P. (NRP) for $11,850 in cash.
Effective April 1, 2003, the Company also sold substantially all of its
fee-owned Virginia mineral properties to NRP for $53,625 in cash in a
sale/leaseback transaction. Based on the aggregate of $25,966, $21,689 and
$20,219 that the Company paid to NRP in lease, royalty and property tax
reimbursement payments for the years ended December 31, 2006, 2005 and
2004, respectively, NRP is the Company’s largest landlord. As of
December 31, 2006 and 2005, the Company had $897 and $1,522, respectively,
in accounts payable to NRP. In an unrelated transaction in December 2003,
a
former member of the ANR Holdings and Alpha Natural Resources, Inc. board
of
directors was appointed as a member of the board of directors of GP Natural
Resource Partners, LLC, the general partner of NRP, and First Reserve became
a
substantial equity owner of NRP. The Company believes the production and
minimum
royalty rates contained in leases with NRP are consistent with other current
market royalty rates.
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
One
of the Company’s former
Executive Vice Presidents is a 50% owner of Robindale Energy Services, Inc.
(and
its subsidiary) (“Robindale”). Robindale is engaged in the business of waste
coal sales and related businesses in Pennsylvania. From time to time, Robindale
has sold and purchased coal and related products to the operations of the
Company’s AMFIRE regional business unit in Pennsylvania. For the years ended
December 31, 2006, 2005 and 2004 the Company’s subsidiaries Alpha Coal
Sales and AMFIRE Mining Company, LLC made purchases of $359, $581 and $799,
respectively, from Robindale for trucking services and waste coal. For the
years
ended December 31, 2006 and 2005, the Company had sales of$206 and $463,
respectively, to Robindale. The Company has agreed that its former Executive
Vice President’s 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. former board members hold ownership
in AMCI International AG. For the years ended December 31, 2006, 2005 and
2004, total sales of $13,308, $72,121 and $46,315, respectively, have been
made
pursuant to these arrangements. The Company also had total sales of $51,693,
$49,165 and $14,872 for the years ended December 31, 2006, 2005 and 2004,
respectively, to AMCI Australia Pty Ltd., an entity owned by these former
board
members. Accounts receivable due from AMCI Australia Pty Ltd. were $5,097
at
December 31, 2006. In addition, American Metals and Coal International,
Inc., an entity owned by these board members, facilitated coal transactions
for
an international buyer of $13,865, $9,427 and $5,202 for the years ended
December 31, 2006, 2005 and 2004, respectively. The Company made coal
purchases totaling $1,030, $13,931 and $1,658 during the years ended
December 31, 2006, 2005 and 2004, respectively, from XCoal Energy and
Resources, an entity in which each of the former aforementioned board members
each own more than a 10% equity interest. The Company had outstanding payables
due to XCoal Energy and Resources of $11,335 as of December 31, 2005. The
Company had revenue of $1,119 from XCoal Energy and Reserve with no outstanding
receivable as of December 31, 2006.
During
2005 and early 2006 one or more of our directors was also a director of
Foundation Coal Holdings, Inc. (“Foundation”). First Reserve Fund IX, L.P.
and an entity affiliated with AMCI previously beneficially owned in excess
of 5%
of the outstanding shares of Foundation’s common stock. One of the Company’s
subsidiaries made coal purchases totaling $23,533, $34,790 and $4,799 in
the
ordinary course of business during the years ended December 31, 2006, 2005
and 2004, respectively, from subsidiaries of Foundation. The Company had
outstanding payables due to Foundation of $675 and $2,605 as of
December 31, 2006 and 2005, respectively.
|
(21)
|
Commitments
|
Operating
Leases
The
Company leases coal mining and other equipment under long-term operating
leases
with varying terms. In addition, the Company leases mineral interests and
surface rights from land owners under various terms and royalty
rates.
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
As of December 31, 2006, aggregate future minimum lease payments under
operating leases and minimum royalties under coal leases were as
follows:
|
Facility
|
Equipment
and
Other
|
Coal
Royalties
|
Total
|
||||||||||
|
Year
ending December 31:
|
|||||||||||||
|
2007
|
$
|
1,389
|
5,065
|
12,475
|
18,929
|
||||||||
|
2008
|
1,340
|
1,360
|
10,936
|
13,636
|
|||||||||
|
2009
|
1,252
|
-
|
13,707
|
14,959
|
|||||||||
|
2010
|
1,233
|
-
|
10,768
|
12,001
|
|||||||||
|
2011
|
1,157
|
-
|
12,361
|
13,518
|
|||||||||
|
Thereafter
|
8,652
|
-
|
34,791
|
43,443
|
|||||||||
|
Total
|
$
|
15,023
|
6,425
|
95,038
|
116,486
|
||||||||
The
above table includes amounts due under noncancelable leases with initial
or
remaining lease terms in excess of one year.
For
years
ended December 31, 2006, 2005 and 2004, net rent expense amounted to $8,029,
$6,972 and $6,290, respectively. Coal royalties expense amounted to $75,128,
$57,952 and $43,858 for the years ended December 31, 2006, 2005 and 2004,
respectively.
Other
Commitments
As
of December 31, 2006, the Company had commitments to
purchase 2,400 tons of coal at a cost of $118,797 during 2007.
As
part of a coal supply tonnage buyout agreement, at December 31, 2006, the
Company had commitments to pay the customer $680 each year from 2007 to 2009,
and $567 in 2010.
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
(22)
|
Mergers
and Acquisitions
|
|
|
2006
Acquisition
|
Progress
Energy
On
May 1, 2006, the Company completed the acquisition of certain coal mining
operations in eastern Kentucky from Progress Fuels Corp, a subsidiary of
Progress Energy for $28,795,
including an adjustment for working capital. The Progress acquisition consisted
of the purchase of the outstanding capital stock of Diamond May Coal Co.
and
Progress Land Corp. and the assets of Kentucky May Coal Co., Inc. The operations
acquired are adjacent to the Company’s Enterprise business unit and have been
integrated into Enterprise.
The
following table summarizes the estimated fair values, of the assets acquired
and
liabilities assumed at the date of acquisition:
|
Current
assets
|
$
|
5,261
|
||
|
Property,
plant, and equipment
|
46,983
|
|||
|
Deferred
tax asset
|
4,838
|
|||
|
Total
assets acquired
|
57,082
|
|||
|
Current
liabilities
|
(474
|
)
|
||
|
Asset
retirement obligation
|
(7,204
|
)
|
||
|
Other
noncurrent liabilities
|
(20,609
|
)
|
||
|
Total
liabilities assumed
|
(28,287
|
)
|
||
|
Net
assets acquired
|
$
|
28,795
|
Included
in
liabilities assumed is $20,000 allocated to a coal sales agreement which
was
below market, and is being amortized over the remaining life of the contract.
Gallatin
LLC
On
December 28, 2006, the Company paid $3,300 and is obligated to make an
additional contribution of $7,000 in 2007 for a 94% ownership interest in
Gallatin Materials LLC (Gallatin), a lime manufacturing venture near Cincinnati,
Ohio. Gallatin plans to construct two rotary pre-heater lime kilns to
produce lime to be sold to coal-burning utilities as a scrubbing agent for
removing sulfur dioxide from flue gas. The lime will also be sold to steel
producers for use as flux in electric arc and basic oxygen furnaces. The
minority owners were granted restricted member interest which vest based
on
performance criteria over a period of approximately three years from the
closing
date and which, if earned in their entirety would reduce the Company’s ownership
to 77.5%. The Company is committed to provide financing through a $3,800
loan
and a $2,600 letter of credit.
The
Company acquired intangible assets which include a limestone supply agreement,
land lease, an air permit and two lime sales contracts. The Company has made
a
preliminary estimate of fair value for the acquired intangibles assets which
are
subject to adjustments based upon the completion of an independent third-party
valuation.
At
December 31, 2006, long-term debt included $700 for a promissory
installment note that was issued immediately subsequent to the Gallatin
Acquisition (Note 13).
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
2005
Acquisition
Nicewonder
Coal Group
On
October 26, 2005, the Company completed the acquisition of certain
privately held coal reserves and operations of the Nicewonder Coal Group
in
southern West Virginia and southwestern Virginia (the “Nicewonder Acquisition”)
for an aggregate purchase price of $328,200, consisting of cash at closing
in
the amount of $35,162, a cash payment of $1,896 made to the sellers in April
2006, transaction costs of $4,701, $221,000 principal amount of promissory
installment notes of an indirect, wholly owned subsidiary, of which $181,045
was
paid on November 2, 2005 and $39,955 was paid on January 13, 2006, a
payment on February 6, 2006 in the amount of $12,256 for working capital in
excess of the original agreed upon amount, and 2,180,233 shares of Alpha
Natural Resources, Inc. common stock valued at $53,184 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, the Company also agreed to make
royalty payments to the former owners of the acquired companies in the amount
of
$0.10 per ton of coal mined and sold from White Flame Energy’s Surface Mine
No. 10. The Nicewonder Acquisition consisted of the purchase of the
outstanding capital stock of White Flame Energy, Inc., Twin Star Mining,
Inc.
and Nicewonder Contracting, Inc., the equity interests of Powers Shop, LLC
and
Buchanan Energy, LLC and substantially all of the assets of Mate Creek Energy
of
W. Va., Inc. and Virginia Energy Company, and the acquisition of Premium
Energy,
Inc. by merger (together referred to as the “Nicewonder Coal Group.”). The
operating results of the Nicewonder Coal Group have been included in the
Company’s consolidated results of operations from the date of
acquisition.
The
following table summarizes the estimated fair values, as determined by an
independent third-party valuation, of the assets acquired and liabilities
assumed at the date of acquisition:
|
Current
assets
|
$
|
22,937
|
||
|
Property,
plant, and equipment
|
311,315
|
|||
|
Intangibles
|
11,064
|
|||
|
Other
noncurrent assets
|
1,704
|
|||
|
Total
assets acquired
|
347,020
|
|||
|
Current
liabilities
|
(10,236
|
)
|
||
|
Asset
retirement obligation
|
(7,229
|
)
|
||
|
Other
noncurrent liabilities
|
(1,355
|
)
|
||
|
Total
liabilities assumed
|
(18,820
|
)
|
||
|
Net
assets acquired
|
$
|
328,200
|
The
intangible assets reflected above includes: sales contracts of $5,375, which
are
being amortized on average over five years; customer relationships of $4,762,
which are being amortized over five years; and 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.
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 - basic
|
63,359,431
|
63,047,913
|
|||||
|
Pro
Forma weighted average shares - diluted
|
63,895,431
|
63,394,263
|
|||||
2004
Acquisitions
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
Company’s 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.
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
(23)
|
Concentrations
and Major Customers
|
The
Company markets its coal principally to electric utilities in the United
States
and international and domestic steel producers. As of December 31, 2006 and
2005, trade accounts receivable from electric utilities totaled approximately
$55,816 and
$52,400, respectively. Credit is extended based on an evaluation of the
customer’s financial condition and collateral is generally not required. Credit
losses are provided for in the consolidated financial statements and
historically have been minimal. The Company is committed under long-term
contracts to supply coal that meets certain quality requirements at specified
prices. The prices for some multi-year contracts are adjusted based on economic
indices or the contract may include year-to-year specified price changes.
Quantities sold under some contracts may vary from year to year within certain
limits at the option of the customer. Sales to the Company’s largest customer
accounted for less than 10% of total sales for each of the years ended
December 31, 2006, 2005 and 2004.
|
(24)
|
Segment
Information
|
The
Company extracts, processes and markets steam and metallurgical coal from
surface and deep mines for sale to electric utilities, steel and coke producers,
and industrial customers. The Company operates only in the United States
with
mines in the Central Appalachian and Northern Appalachian regions. The Company
has one reportable segment: Coal Operations, which, as of February 1, 2007,
consisted of 38 active underground mines and 27 active surface mines located
in
Central Appalachia and Northern Appalachia. Coal Operations also includes
the
Company’s purchased coal sales function, which markets the Company’s Appalachian
coal to domestic and international customers. The All Other category includes
the Company’s equipment sales and repairs operations, and other ancillary
business activities, including terminal services, trucking services, coal
and
environmental analysis services, and leasing of mineral rights. In addition,
the
All Other category includes revenues from the operation of a road 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 and
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,
2006, and segment assets as of December 31, 2006 were as
follows:
|
Coal
Operations
|
All
Other
|
Corporate
and
Eliminations
|
Combined
|
||||||||||
|
Revenues
|
$
|
1,881,657
|
69,018
|
(40,013
|
)
|
1,910,662
|
|||||||
|
Depreciation,
depletion, and amortization
|
133,043
|
5,962
|
1,846
|
140,851
|
|||||||||
|
EBITDA
|
337,803
|
9,599
|
(67,967
|
)
|
279,
435
|
||||||||
|
Capital
expenditures
|
124,554
|
6,208
|
1,181
|
131,943
|
|||||||||
|
Total
assets
|
1,167,010
|
98,418
|
(119,635
|
)
|
1,145,793
|
||||||||
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Segment operating results and capital expenditures for the year ended
December 31, 2005, and segment assets as of December 31, 2005 were as
follows:
|
|
Coal
Operations
|
All
Other
|
Corporate
and
Eliminations
|
Combined
|
|||||||||
|
Revenues
|
$
|
1,609,262
|
$
|
42,335
|
$
|
(24,942
|
)
|
$
|
1,626,655
|
||||
|
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
|
||||||||
Segment
operating results and capital expenditures for the year ended December 31,
2004, and segment assets as of December 31, 2004 were as follows:
|
|
Coal
Operations
|
All
Other
|
Corporate
and
Eliminations
|
Combined
|
|||||||||
|
Revenues
|
$
|
1,231,366
|
$
|
28,571
|
$
|
(10,509
|
)
|
$
|
1,249,428
|
||||
|
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
|
||||||||
Reconciliation
of total segment EBITDA, as adjusted, to income from continuing operations
follows:
|
|
Year
Ended December 31,
|
|||||||||
|
|
2006
|
2005
|
2004
|
|||||||
|
Total
segment EBITDA, as adjusted for 2005 and 2004, from continuing
operations
|
$
|
279,435
|
$
|
145,292
|
$
|
125,090
|
||||
|
Interest
expense
|
(41,774
|
)
|
(29,937
|
)
|
(20,041
|
)
|
||||
|
Interest
income
|
839
|
1,064
|
531
|
|||||||
|
Income
tax (expense) benefit
|
30,519
|
(18,953
|
)
|
(5,150
|
)
|
|||||
|
Depreciation,
depletion and amortization
|
(140,851
|
)
|
(73,122
|
)
|
(55,261
|
)
|
||||
|
Minority
interest
|
—
|
(2,918
|
)
|
(22,781
|
)
|
|||||
|
Income
from continuing operations
|
$
|
128,168
|
$
|
21,426
|
$
|
22,388
|
||||
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: $668,830 or approximately
35% of total revenues for the year ended December 31, 2006; $737,097 or
approximately 45% of total revenues for the year ended December 31, 2005;
and, $597,902 or approximately 48% of total revenues for the year ended
December 31, 2004. Included in total export revenues were: sales totaling
$111,756 to customers located in Canada during the year ended December 31,
2006; sales totaling $108,037 to customers located in Japan during the year
ended December 31, 2005; and, sales totaling $137,395 to customers located
in Canada during the year ended December 31, 2004.
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
(25)
|
Contingencies
|
|
(a)
|
Guarantees
and Financial Instruments with Off-balance Sheet
Risk
|
In
the normal course of business, the Company is a party to certain guarantees
and
financial instruments with off-balance sheet risk, such as bank letters of
credit and performance or surety bonds. No liabilities related to these
arrangements are reflected in the Company’s consolidated balance sheets.
Management does not expect any material losses to result from these guarantees
or off-balance sheet financial instruments. The amount of bank letters of
credit
outstanding as of December 31, 2006 was $81,094. The amount of surety bonds
outstanding at December 31, 2006 was $148,399, including $138,013 related
to the Company’s reclamation obligations (Note 14). The Company has
provided guarantees for equipment financing obtained by certain of its contract
mining operators totaling approximately $1,589 as of December 31, 2006. The
estimated fair value of these guarantees is not significant.
|
(b)
|
Litigation
|
The
Company is involved in various legal proceedings from time to time in the
normal
course of business. In management’s opinion, the Company is not currently
involved in any legal proceeding which individually or in the aggregate could
have a material effect on the consolidated financial condition, results of
operations and/or cash flows of the Company.
|
(c)
|
Other
Contingencies
|
In
connection with the Company’s 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.
|
(26)
|
Discontinued
Operations
|
In
the third quarter of 2004, the Company recorded an impairment charge of $5,100
to reduce the carrying value of the assets of its Colorado mining subsidiary,
National King Coal LLC, and related trucking subsidiary, Gallup Transportation
and Transloading Company, LLC (collectively, “NKC”) to their estimated fair
values. On April 14, 2005, the Company sold the assets of NKC to an
unrelated third party for cash in the amount of $4,400, plus an amount in
cash
equal to the fair market value of NKC’s coal inventory, and the assumption by
the buyer of certain liabilities of NKC. The Company recorded a gain on the
sale
of NKC of $704 in the second quarter of 2005. The results of operations of
NKC
for the current and prior periods have been reported as discontinued operations.
National King Coal LLC was previously reported in the Coal Operations segment
and Gallup Transportation and Transloading Company, LLC was previously reported
in the All Other segment.
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 and
2004:
|
Year
Ended December 31,
|
|||||||
|
2005
|
2004
|
||||||
|
Total
revenues
|
$
|
4,523
|
$
|
17,016
|
|||
|
Total
costs and expenses (excluding impairment charge)
|
(5,607
|
)
|
(18,442
|
)
|
|||
|
Impairment
charge
|
—
|
(5,100
|
)
|
||||
|
Gain
on sale of discontinued operations
|
704
|
—
|
|||||
|
Loss
from operations
|
(380
|
)
|
(6,526
|
)
|
|||
|
Miscellaneous
income
|
2
|
12
|
|||||
|
Income
tax benefit from discontinued operations
|
(93
|
)
|
(1,190
|
)
|
|||
|
Minority
interest in loss from discontinued operations
|
(72
|
)
|
(2,951
|
)
|
|||
|
Loss
from discontinued operations
|
$
|
(213
|
)
|
$
|
(2,373
|
)
|
|
|
(27)
|
Supplemental
Cash Flow Disclosures
|
Cash
paid for interest (net of amounts capitalized) for the years ended
December 31, 2006, 2005 and 2004 was $40,392, $24,269 and $14,293,
respectively. Income taxes paid, net of refunds, by the Company for the years
ended December 31, 2006, 2005 and 2004 were $15,524, $19,960 and $4,047,
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, 2006
includes:
|
•
|
The
short-term financing of prepaid insurance premiums in the amount
of
$20,941
|
Significant
non-cash activity for the year ended December 31, 2005
includes:
|
•
|
Issuance
of 2,180,233 shares of Alpha Natural Resources, Inc. common stock
valued at $53,184 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
Note 2.
|
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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.
|
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
(28)
|
Minority
Interest
|
In
connection with the Internal Restructuring on February 11, 2005
(Note 2),
the minority interest holders contributed their interests in ANR Holdings
to
Alpha Natural Resources, Inc. in exchange for shares of Alpha Natural Resources,
Inc. common stock, thereby eliminating the minority interest.
|
(29)
|
Investments
|
Dominion
Terminal Associates
As
part of the Company’s acquisition of its predecessor in 2003, the Company
acquired a 32.5%
interest in Dominion Terminal Associates (DTA). DTA is a partnership with
three
other companies that operates a leased coal port terminal in Newport News,
Virginia (the Terminal). 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, 2006, 2005 and 2004, the Company made advances
to DTA equal to its share of allocated costs of $4,923,
$4,056 and $3,266, respectively, offset by outside revenues of $1,677, $1,869
and $1,763, respectively.
Excelven
Pty Ltd
In
September 2004,
the
Company, together with AMCI, entered into a subscription deed with Excelven
Pty
Ltd, pursuant to which each party agreed to acquire a 24.5% interest in Excelven
for a purchase price of $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. The Company
made
additional investments in Excelven totaling $261 and $1,235 during the years
ended December 31, 2006 and 2005, respectively. The investment is accounted
for under the equity method, and is included in other assets at
December 31, 2006 and 2005. The Company has recognized its share of
Excelven losses in 2006 of $174.
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
(30)
|
Income
Taxes
|
The
total income tax expense (benefit) provided on pretax income was allocated
as
follows:
|
|
Year
Ended December 31,
|
|||||||||
|
|
2006
|
2005
|
2004
|
|||||||
|
|
|
|
|
|||||||
|
Continuing
operations
|
$
|
(30,519
|
)
|
$
|
18,953
|
$
|
5,150
|
|||
|
Discontinued
operations
|
—
|
(93
|
)
|
(1,190
|
)
|
|||||
|
|
$
|
(30,519
|
)
|
$
|
18,860
|
$
|
3,960
|
|||
Significant
components of income tax expense (benefit) from continuing operations were
as
follows:
|
|
Year
Ended December 31,
|
|||||||||
|
|
2006
|
2005
|
2004
|
|||||||
|
|
|
|
|
|||||||
|
Current
tax expense:
|
|
|
|
|||||||
|
Federal
|
$
|
15,671
|
$
|
13,841
|
$
|
1,625
|
||||
|
State
|
2,530
|
1,364
|
—
|
|||||||
|
|
18,201
|
15,205
|
1,625
|
|||||||
|
Deferred
tax expense (benefit):
|
||||||||||
|
Federal
|
(40,461
|
)
|
3,740
|
2,918
|
||||||
|
State
|
(8,259
|
)
|
8
|
607
|
||||||
|
|
(48,720
|
)
|
3,748
|
3,525
|
||||||
|
Total
income tax expense (benefit):
|
||||||||||
|
Federal
|
(24,790
|
)
|
17,581
|
4,543
|
||||||
|
State
|
(5,729
|
)
|
1,372
|
607
|
||||||
|
|
$
|
(30,519
|
)
|
$
|
18,953
|
$
|
5,150
|
|||
A
reconciliation of the statutory federal income tax expense at 35% to income
before income taxes and minority interest, and the actual income tax expense
(benefit) is as follows:
|
|
Year
Ended December 31,
|
|||||||||
|
|
2006
|
2005
|
2004
|
|||||||
|
Federal
statutory income tax expense
|
$
|
34,177
|
$
|
15,154
|
$
|
17,612
|
||||
|
Increases
(reductions) in taxes due to:
|
||||||||||
|
Nondeductible
stock-based compensation
|
4,472
|
16,056
|
—
|
|||||||
|
Percentage
depletion allowance
|
(6,345
|
)
|
(4,625
|
)
|
(3,376
|
)
|
||||
|
Extraterritorial
income exclusion
|
(1,678
|
)
|
(2,381
|
)
|
(1,225
|
|||||
|
State
taxes, net of federal tax impact
|
3,859
|
2,016
|
395
|
|||||||
|
Change
in valuation allowance
|
(67,629
|
)
|
(6,077
|
)
|
559
|
|||||
|
Taxes
not provided for minority interest
|
—
|
(1,021
|
)
|
(8,189
|
)
|
|||||
|
Taxes
not provided for pass-through entity
|
—
|
(142
|
)
|
(779
|
)
|
|||||
|
Other,
net
|
2,625
|
(27
|
)
|
153
|
||||||
|
Actual
income tax expense (benefit)
|
$
|
(30,519
|
)
|
$
|
18,953
|
$
|
5,150
|
|||
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,
|
||||||
|
|
2006
|
2005
|
|||||
|
Deferred
tax assets:
|
|
|
|||||
|
Property,
plant and equipment
|
$
|
56,437
|
$
|
78,526
|
|||
|
Asset
retirement obligation
|
29,990
|
20,855
|
|||||
|
Goodwill
|
15,627
|
18,214
|
|||||
|
Postretirement
medical benefits
|
19,756
|
9,538
|
|||||
|
Workers’
compensation benefits
|
4,832
|
4,730
|
|||||
|
Deferred
gains on sales of property interests
|
1,898
|
2,614
|
|||||
|
Minimum
tax credit carryforwards
|
12,126
|
8,989
|
|||||
|
Other
|
15,885
|
4,074
|
|||||
|
Gross
deferred tax assets
|
156,551
|
147,540
|
|||||
|
Less
valuation allowance
|
(39,732
|
)
|
(93,525
|
)
|
|||
|
Total
net deferred tax assets
|
116,819
|
54,015
|
|||||
|
|
|||||||
|
Deferred
tax liabilities:
|
|||||||
|
Prepaid
insurance and other prepaid expenses
|
(15,258
|
)
|
(12,882
|
)
|
|||
|
Advance
mining royalties
|
(5,296
|
)
|
(5,174
|
)
|
|||
|
Virginia
tax credit
|
(5,701
|
)
|
(3,672
|
)
|
|||
|
Other
|
(3,268
|
)
|
(4,563
|
)
|
|||
|
Total
deferred tax liabilities
|
(29,523
|
)
|
(26,291
|
)
|
|||
|
Net
deferred tax asset
|
$
|
87,296
|
$
|
27,724
|
|||
The
breakdown of the net deferred tax asset as recorded in the accompanying
consolidated balance sheets is as follows:
|
|
December 31,
|
||||||
|
|
2006
|
2005
|
|||||
|
Current
liability
|
(7,601
|
)
|
(11,243
|
)
|
|||
|
Noncurrent
asset
|
94,897
|
38,967
|
|||||
|
Total
net deferred tax asset
|
$
|
87,296
|
$
|
27,724
|
|||
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Changes
in the valuation allowance during the year ended December 31, 2006 were as
follows:
|
Valuation
allowance at December 31, 2005
|
$
|
93,525
|
||
|
Increase
in valuation allowance not affecting income tax expense
|
13,836
|
|||
|
Reduction
of valuation allowance recorded as a reduction to income tax
expense
|
(67,629
|
)
|
||
|
Valuation
allowance at December 31, 2006
|
$
|
39,732
|
Since
its formation and through the third quarter of 2006, the Company did not
weigh
significantly its forecast of future taxable income (subjective evidence)
as it
had not yet established an adequate earnings history (defined by the Company
as
at least three years) to provide objective evidence of the ability to generate
future income. Accordingly, the Company had recorded a valuation allowance
against a substantial portion of its deferred tax asset. As of December 31,
2006, the Company has a three year history of cumulative earnings. As a result,
management believes it is able to place a higher degree of reliance on its
projections of future taxable income. Based on the results of a comprehensive
analysis completed in the fourth quarter of 2006, the Company has concluded
that
it was more likely than not that a portion of its deferred tax asset previously
reserved through a valuation allowance will be realized. As a result, the
Company recorded a tax benefit in the fourth quarter 2006 of $55,614.
The
Company’s remaining valuation allowance of $39,732 as of December 31, 2006
includes a full valuation allowance against the $12,126 minimum tax credit
carry-forward, which is available for an unlimited carry-forward period to
offset regular federal income tax in excess of the alternative minimum tax.
In
addition, the remaining valuation allowance is being maintained primarily
to
account for the expectation that the Company will be a perpetual AMT taxpayer.
The
increase in the valuation allowance not affecting income tax expense relates
to
items recorded directly on the consolidated balance sheet and other
comprehensive income and includes primarily the effects of the Progress
acquisition ($10,406), the adoption of SFAS No. 158 ($2,548) and the interest
rate swap ($1,020). The Company’s remaining valuation allowance of $39,732 as of
December 31, 2006 includes a full valuation allowance against the $12,126
minimum tax credit carry-forward, which is available for an unlimited
carry-forward period to offset regular federal income tax in excess of the
alternative minimum tax. In addition, the remaining valuation allowance is
being
maintained primarily to account for the expectation that the Company will
be a
perpetual AMT taxpayer.
The
Company monitors the valuation allowance each quarter and makes adjustments
to
the allowance as appropriate.
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
(31)
|
Quarterly
Financial Information
(Unaudited)
|
|
|
Year
Ended December 31, 2006
|
||||||||||||
|
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
|||||||||
|
|
|
|
|
|
|||||||||
|
Total
revenues
|
$
|
482,310
|
$
|
495,681
|
$
|
474,718
|
$
|
457,953
|
|||||
|
Income
from operations
|
46,639
|
41,006
|
29,440
|
20,976
|
|||||||||
|
Net
income
|
27,212
|
23,128
|
14,544
|
63,284
|
|||||||||
|
Earnings
per share, as adjusted — basic and diluted
|
$
|
0.43
|
$
|
0.36
|
$
|
0.23
|
$
|
0.98
|
|||||
Net
income for the quarter ended December 31, 2006 included a charge to coal
revenue
of $7,000 for a contract buyout of a multi-year legacy coal supply agreement
and
an income tax benefit of $55,614 for a reversal of a deferred tax asset
valuation allowance.
|
Year
Ended December31, 2005
|
|||||||||||||
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
||||||||||
|
Total
revenues
|
$
|
311,987
|
$
|
417,466
|
$
|
397,519
|
$
|
499,683
|
|||||
|
Income
(loss) from operations
|
(14,022
|
)
|
41,640
|
18,141
|
26,320
|
||||||||
|
Income
(loss) from continuing operations
|
(25,323
|
)
|
26,127
|
8,210
|
12,412
|
||||||||
|
Income
(loss) from discontinued operations
|
(480
|
)
|
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
net income for the year ended December 31, 2005 included stock-based
compensation expense, primarily relating to the Internal Restructuring and
the
Company’s initial public offering in February 2005 (Note 2) as follows: first
quarter — $36,407 second quarter — $3,381; third quarter —
$3,381; and, fourth quarter — $3,350 (See Note 28).
The
net loss for the first quarter of 2005 included an increase for minority
interest of $2,990. Effective with the Internal Restructuring in
February 2005, the minority interest no longer existed (See
Note 2).
The
results of operations from the Nicewonder Coal Group were included in the
Company’s consolidated results of operations from the date of the acquisition,
October 26, 2005 (Note 22).
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
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. The
Company’s Disclosure Committee has responsibility for ensuring that there is an
adequate and effective process for establishing, maintaining and evaluating
disclosure controls and procedures that are designed to ensure that information
required to be disclosed by the Company in its SEC reports is timely recorded,
processed, summarized and reported. In addition, the Company has established
a
Code of Business Ethics designed to provide a statement of the values and
ethical standards to which the Company requires its employees and directors
to
adhere. The Code of Business Ethics provides the framework for maintaining
the
highest possible standards of professional conduct. The Company also maintains
an ethics hotline for employees. There are inherent limitations to the
effectiveness of any system of disclosure controls and procedures, including
the
possibility of human error and the circumvention or overriding of the controls
and procedures. Accordingly, even effective disclosure controls and procedures
can only provide reasonable assurance of achieving their control
objectives.
Under
the
supervision and with the participation of our management, including our Chief
Executive Officer and our Chief Financial Officer, we evaluated the
effectiveness of our disclosure controls and procedures, as such term is
defined
under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934,
as
amended, as of the end of the period covered by this report. Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures were effective, as of the end
of the
period covered by this report, in ensuring that material information relating
to
Alpha Natural Resources, Inc., required to be disclosed in reports that it
files
or submits under the Securities Exchange Act of 1934, is recorded, processed,
summarized and reported within the requisite time periods and is accumulated
and
communicated to our management, including our Chief Executive Officer and
our
Chief Financial Officer, as appropriate to allow timely decisions regarding
disclosure.
Management’s
Report on Internal Control Over Financial Reporting
The
Company's management is responsible for establishing and maintaining
adequate internal control over financial reporting. Our internal control
over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles.
The
Company's internal
control over financial reporting includes policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect transactions and dispositions of assets;
(2) provide reasonable assurances that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures
are
being made only in accordance with authorizations of management and the
directors of Alpha; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition
of the Company's assets that could have a material effect on our financial
statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Management
assessed the effectiveness of the
Company's internal control over financial reporting as of December 31,
2006. In making this assessment, management used the criteria set forth by
the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control-Integrated Framework. Based on our assessment and those
criteria, management has concluded that we maintained effective internal
control
over financial reporting as of December 31, 2006.
The
Company's independent registered public accounting firm has audited and
issued their report on management’s assessment of our internal control over
financial reporting, and the report is set forth in the Report of Independent
Registered Public Accounting Firm in Part II, Item 8 of this Annual Report
on Form 10-K.
Changes
in internal controls over financial reporting
There
were no changes that occurred during the fourth quarter of the fiscal year
covered by this Annual Report on Form 10-K that have materially affected,
or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
ALPHA
NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
Item 9B.
|
Other
Information.
|
Amended
and Restated Bylaws
On
February 27, 2007, Alpha’s Board of Directors amended various provisions of the
Company’s Bylaws effective on that date.
The
Board of Directors amended Sections 2.08, 3.04 and 5.06 of the Bylaws to
adopt
procedures governing the setting of a record date for, and other procedures
relating to, the taking of stockholder action by written consent. Previously,
Section 2.08 of Alpha’s Bylaws provided for minimal procedures applicable to
action by written consent but did not require that a stockholder give prior
notice of the intent to solicit consents. Section 2.08 now provides for advance
notification of the intent to take action by written consent consistent with
the
requirement to provide advance notification of a stockholder’s intention to
propose action at a meeting of stockholders. Additionally, Section 5.06 of
Alpha’s Bylaws previously provided that the Board of Directors could fix,
subject to certain limitations, the record date to determine the
stockholders entitled to act by consent, or the date could be set, if not
previously set by the Board, as of the date on which the first written consent
is delivered to Alpha. As amended, the Bylaws establish the primary authority
of
the Board to set the record date. The amended Bylaw provisions also clarify
basic requirements relating to the notice to Alpha of a consent solicitation
and
set forth detailed processes the Company would follow in the event of a consent
solicitation.
The
Board
of Directors also amended Sections 5.01, 5.02 and 5.07 to explicitly state
the
Company’s authority to issue uncertificated shares of stock, which authority was
previously only implicit.
The
foregoing summary of the amended and restated Bylaws is qualified in its
entirety by reference to the full text of the amended and restated Bylaws
filed
as Exhibit 3.2 of this annual report.
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, Executive
Officers and Corporate
Governance
|
Incorporated
herein by reference from the Proxy Statement.
The
Board of Directors of Alpha Natural Resources, Inc. has adopted a code of
ethics
that applies to our principal executive officers, principal financial officer,
and principal accounting officer, as well as other employees. A copy of
this code of ethics has been posted on our Internet website at www.alphanr.com.
Any amendments to, or waivers from, a provision of our code of ethics that
applies to our principal executive officer, principal financial officer,
controller, or persons performing similar functions and that relates to any
element of the code of ethics enumerated in paragraph (b) of
Item 406 of Regulation S-K shall be disclosed by posting such
information on our website.
|
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, and Director
Independence
|
Incorporated
herein by reference from the Proxy Statement.
|
Item 14.
|
Principal
Accountant Fees and
Services
|
Incorporated
herein by reference from the Proxy Statement.
PART IV
|
Item 15.
|
Exhibits,
Financial Statement
Schedules
|
Pursuant
to the rules and regulations of the Securities and Exchange Commission,
the
Company has filed certain agreements as exhibits to this Annual Report
on Form
10-K. These agreements may contain representations and warranties by the
parties. These warranties have been made solely for the benefit of the
other
party or parties to such agreements and (i) may been qualified by disclosure
made to such other party or parties, (ii) were made only as of the date
of such
agreements or such other date(s) as may be specified in such agreements
and are
subject to more recent developments, which may not be fully reflected in
such
Company’s public disclosure, (iii) may reflect the allocation of risk among the
parties to such agreements and (iv) may apply materiality standards different
from what may be viewed as material to investors. Accordingly, these
representations and warranties may not describe the Company’s actual state of
affairs at the date hereof and should not be relied upon.
(a) Documents
filed as part of this annual report:
(1):
The following financial statements are filed as part of this annual report
under
Item 8:
Alpha
Natural Resources, Inc. and Subsidiaries
Reports
of Independent Registered Public Accounting Firm
Consolidated
Balance Sheets, December 31, 2006 and 2005
Consolidated
Statements of Income, years ended December 31, 2006, 2005 and
2004
Consolidated
Statements of Stockholders’ Equity and Partners’ Capital and Comprehensive
Income, years ended December 31, 2006, 2005 and 2004
Consolidated
Statements of Cash Flows, years ended December 31, 2006, 2005 and
2004
Notes
to Consolidated Financial Statements
(2) Financial
Statement Schedules. All schedules for which provision is made in the applicable
accounting regulations of the SEC are not required under the related
instructions, are inapplicable or not material, or the information called
for
thereby is otherwise included in the consolidated financial statements and
therefore has been omitted.
(3) Listing
of Exhibits. See Exhibit Index following the signature page of this annual
report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on
its behalf by the undersigned, thereunto duly authorized.
|
ALPHA
NATURAL RESOURCES, INC.
|
||||
|
By:
|
/s/ David C. Stuebe | |||
|
Name:
|
David
C. Stuebe
|
|||
|
Title:
|
Vice
President and Chief Financial Officer
|
|||
Date:
March 1, 2007
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
|
March
1, 2007
|
Chairman
of the Board of Directors and Chief Executive Officer (Principal
Executive
Officer)
|
||
|
Michael
J. Quillen
|
||||
|
/s/ David C. Stuebe
|
March
1, 2007
|
Vice
President and Chief Financial Officer (Principal Financial
Officer)
|
||
|
David
C. Stuebe
|
||||
|
/s/ Eddie W. Neely
|
March
1, 2007
|
Vice
President, Assistant Secretary and Controller (Principal Accounting
Officer)
|
||
|
Eddie
W. Neely
|
||||
|
/s/ John S. Brinzo
|
March
1, 2007
|
Director
|
||
|
John
S. Brinzo
|
||||
|
/s/ E. Linn Draper, Jr.
|
March
1, 2007
|
Director
|
||
|
E.
Linn Draper, Jr.
|
||||
|
/s/ John W. Fox, Jr.
|
March
1, 2007
|
Director
|
||
|
John
W. Fox, Jr.
|
||||
|
/s/ Glenn A. Eisenberg
|
March
1, 2007
|
Director
|
||
|
Glenn
A. Eisenberg
|
||||
|
/s/ Ted G. Wood
|
March
1, 2007
|
Director
|
||
|
Ted
G. Wood
|
10-K
EXHIBIT
INDEX
|
Exhibit
No.
|
|
Description
of Exhibit
|
|
|
2.1
|
|
Asset
Purchase Agreement by and between Pittston Coal Company and
Dickenson-Russell Coal Company, LLC, dated as of October 29, 2002, as
amended (Incorporated by reference to the Registration Statement
on
Form S-1 of Alpha Natural Resources, Inc. (File No. 333-121002)
filed on December 6, 2004.)
|
|
|
2.2
|
|
Asset
Purchase Agreement by and between Pittston Coal Company and Paramont
Coal
Company Virginia, LLC, dated as of October 29, 2002, as amended
(Incorporated by reference to the Registration Statement on Form S-1
of Alpha Natural Resources, Inc. (File No. 333-121002) filed on
December 6, 2004.)
|
|
|
2.3
|
|
Asset
Purchase Agreement by and between Pittston Coal Company and Alpha
Land and
Reserves, LLC, dated as of October 29, 2002, as amended (Incorporated
by reference to the Registration Statement on Form S-1 of Alpha
Natural Resources, Inc. (File No. 333-121002) filed on
December 6, 2004.)
|
|
|
|
|||
|
2.4
|
|
Asset
Purchase Agreement by and between Pittston Coal Company and Alpha
Coal
Sales Co., LLC, dated as of October 29, 2002, as amended
(Incorporated by reference to the Registration Statement on Form S-1
of Alpha Natural Resources, Inc. (File No. 333-121002) filed on
December 6, 2004.)
|
|
|
|
|||
|
2.5
|
|
Asset
Purchase Agreement by and between Pittston Coal Company and Alpha
Terminal
Company, LLC, dated as of October 29, 2002, as amended (Incorporated
by reference to the Registration Statement on Form S-1 of Alpha
Natural Resources, Inc. (File No. 333-121002) filed on
December 6, 2004.)
|
|
|
|
|||
|
2.6
|
|
Asset
Purchase Agreement by and between Pittston Coal Company and Maxxim
Rebuild
Co., LLC, dated as of October 29, 2002, as amended (Incorporated by
reference to the Registration Statement on Form S-1 of Alpha Natural
Resources, Inc. (File No. 333-121002) filed on December 6,
2004.)
|
|
|
|
|||
|
2.7
|
|
Purchase
and Sale Agreement by and among El Paso CGP Company and AMFIRE, LLC
dated as of November 14, 2002, as amended (Incorporated by reference
to the Registration Statement on Form S-1 of Alpha Natural Resources,
Inc. (File No. 333-121002) filed on December 6,
2004.)
|
|
|
|
|||
|
2.8
|
|
Contribution
Agreement among the FRC Parties, the AMCI Parties, ANR Holdings,
LLC and
the Additional Persons listed on the signature pages dated as of
March 11, 2003, as amended (Incorporated by reference to the
Registration Statement on Form S-1 of Alpha Natural Resources, Inc.
(File No. 333-121002) filed on December 6,
2004.)
|
|
|
|
|||
|
2.9
|
|
Purchase
and Sale Agreement made and entered into as of January 31, 2003 by
and among Alpha Land and Reserves, LLC and CSTL, LLC (Incorporated
by
reference to the Registration Statement on Form S-1 of Alpha Natural
Resources, Inc. (File No. 333-121002) filed on December 6,
2004.)
|
|
|
|
|||
|
2.10
|
|
Purchase
and Sale Agreement dated as of April 9, 2003 by and between Alpha
Land and Reserves, LLC and CSTL LLC (Incorporated by reference
to the
Registration Statement on Form S-1 of Alpha Natural Resources, Inc.
(File No. 333-121002) filed on December 6,
2004.)
|
|
|
|
|||
|
2.11
|
|
Purchase
and Sale Agreement dated as of April 9, 2003 by and between
Dickenson-Russell Coal Company, LLC and WBRD LLC (Incorporated
by
reference to the Registration Statement on Form S-1 of Alpha Natural
Resources, Inc. (File No. 333-121002) filed on December 6,
2004.)
|
|
|
|
|||
|
2.12
|
|
Letter
agreement dated April 9, 2003 among Alpha Natural Resources, LLC,
Dickenson-Russell Company, LLC, Alpha Land and Reserves, LLC, CSTL
LLC,
WBRD LLC, and Natural Resources Partners L.P. (Incorporated by
reference
to the Registration Statement on Form S-1 of Alpha Natural Resources,
Inc. (File No. 333-121002) filed on December 6,
2004.)
|
|
|
|
|||
|
2.13
|
|
Asset
Purchase Agreement by and among S&M Mining, S&M Mining, Inc. and
AMFIRE Mining Company, LLC dated October 29, 2003, as amended
(Incorporated by reference to the Registration Statement on Form S-1
of Alpha Natural Resources, Inc. (File No. 333-121002) filed on
December 6, 2004.)
|
|
|
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.)
|
|
|
|
Amended
and Restated Bylaws of Alpha Natural Resources, Inc.
|
||
|
|
|||
|
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.)
|
|
|
4.7
|
|
Fifth
Supplemental Indenture dated as of May 1, 2006 among Alpha Natural
Resources, LLC, Alpha Natural Resources Capital Corp. , the existing
Guarantors, Wells Fargo Bank, N.A., as Trustee, and Progress Land
Corporation (Incorporated by reference to Exhibit 4.1 to the Quarterly
Report on Form 10-Q of Alpha Natural Resources, Inc. (File No.
1-32423)
filed on August 18, 2006.)
|
|
|
|
Sixth
Supplemental Indenture dated as of January 10, 2007 among Alpha
Natural
Resources, LLC, Alpha Natural Resources Capital Corp., the existing
Guarantors, Wells Fargo Bank, N.A., as Trustee, Palladian Holdings,
LLC
and Palladian Lime, LLC
|
||
|
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
|
|
Waiver
and Consent dated as of August 14, 2006 to Credit Agreement among
Alpha NR
Holding, Inc., Alpha Natural Resources, LLC, the Lenders and Issuing
Banks
party thereto from time to time, and Citicorp North America, Inc.,
as
administrative agent and as collateral agent for the Lenders and
Issuing
Banks (Incorporated by reference to Exhibit 10.1 to the Current
Report on
Form 8-K of Alpha Natural Resources, Inc. (File No. 1-32423) filed
on
August 18, 2006.)
|
|
|
|
|||
|
10.4
|
|
Amendment
and Consent, dated as of December 22, 2006, to Credit Agreement,
among
Alpha NR Holding, Inc., Alpha Natural Resources, LLC, the Lenders
and
Issuing Banks party thereto from time to time, and Citicorp North
America,
Inc., as administrative agent and as collateral agent for the Lenders
and
Issuing Banks (Incorporated by reference to Exhibit 10.1 to the
Current
Report on Form 8-K of Alpha Natural Resources, Inc. (File No. 1-32423)
filed on December 29, 2006.)
|
|
|
|
|||
|
10.5‡
|
|
Third
Amended and Restated Employment Agreement between Alpha Natural
Resources
Services, LLC and Michael J. Quillen dated March 22, 2006
(Incorporated by reference to Exhibit 10.3 to the Annual Report
on Form
10-K of Alpha Natural Resources, Inc. (File No. 1-32423) filed
on March
28, 2006.)
|
|
|
|
|||
|
|
First
Amendment to Third Amended and Restated Employment Agreement between
Alpha
Natural Resources Services, LLC and Michael J. Quillen dated February
26,
2007.
|
||
|
|
|||
|
10.7‡
|
|
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.)
|
|
|
|
|||
|
10.8‡
|
|
Letter
Agreement dated September 1, 2006 among Alpha Natural Resources,
Inc. and
D. Scott Kroh setting forth terms of employment with Alpha Natural
Resources, Inc and its subsidiaries (Incorporated by reference
to Exhibit
10.1 to the Current Report on Form 8-K of Alpha Natural Resources,
Inc.
(File No. 1-32423) filed on September 1, 2006.)
|
|
|
|
|||
|
|
First
Amended and Restated Employment Agreement between Alpha Natural
Resources
Services, LLC and Kevin S. Crutchfield, dated February 26,
2007
|
||
|
|
|||
|
10.10
|
|
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.)
|
|
|
10.11
|
|
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.)
|
|
|
10.12
|
|
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.)
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10.13
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Letter
Agreement dated November 7, 2006, by the AMCI Parties named therein
and
Alpha Natural Resources, Inc., amending certain provisions of the
Stockholder Agreement (Incorporated by reference to Exhibit 10.2
to the
Quarterly Report on Form 10-Q of Alpha Natural Resources, Inc.
(File No.
1-32423) filed November 9, 2006.)
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Alpha
Natural Resources, Inc. Annual Incentive Bonus (AIB) Plan
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10.15‡
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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.)
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Alpha
Natural Resources, Inc. 2005 Long-Term Incentive Plan
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10.17‡
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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.)
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10.18‡
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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.)
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10.19‡
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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.)
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10.20‡
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Form
of Alpha Natural Resources, Inc. Performance Share Award Agreement
for
Alpha Natural Resources, Inc. 2005 Long-Term Incentive Plan (for
grants
prior to February 26, 2007)
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Form
of Alpha Natural Resources, Inc. Performance Share Award Agreement
for
Alpha Natural Resources, Inc. 2005 Long-Term Incentive Plan (for
grants on
or after February 26,2007)
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Exhibit
No.
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Description
of Exhibit
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10.22†
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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.)
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10.23
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Two
Partial Surrender Agreements and Fourth Amendment to Coal Mining
Lease,
each dated September 1, 2005, by and between ACIN LLC and Alpha Land
and Reserves, LLC, amending the ACIN Lease (Incorporated by reference
to
Exhibit 10.17 to the Annual Report on Form 10-K of Alpha Natural
Resources, Inc. (File No. 1-32423) filed on March 28,
2006.)
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10.24
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Partial
Surrender Agreement dated November 1, 2005, by and between ACIN LLC
and Alpha Land and Reserves, LLC, amending the ACIN Lease (Incorporated
by
reference to Exhibit 10.18 to the Annual Report on Form 10-K of
Alpha
Natural Resources, Inc. (File No. 1-32423) filed on March 28,
2006.)
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10.25
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Amendment
to Coal Mining Lease dated January 1, 2006, by and between ACIN
LLC and
Alpha Land and Reserves, LLC, amending the ACIN Lease (Incorporated
by
reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q
of Alpha
Natural Resources, Inc. (File No. 1-32423) filed on May 12,
2006.)
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10.26
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Agreement
dated February 17, 2006, between ACIN LLC and Alpha Land and Reserves,
LLC
and Virginia Electric and Power Company for mutual interests as
to
parties’ rights and obligations with regard to certain land (Incorporated
by reference to Exhibit 10.4 to the Quarterly Report on Form 10-Q
of Alpha
Natural Resources, Inc. (File No. 1-32423) filed on May 12,
2006.)
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10.27‡
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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
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10.28‡
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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.)
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10.29‡
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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.)
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10.30‡
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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
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10.31‡
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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.)
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10.32‡
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Plan
Document and Summary Plan Description of the Alpha Natural Resources,
Inc.
Key Employee Separation Plan (Incorporated by reference to Exhibit
10.24
to the Annual Report on Form 10-K of Alpha Natural Resources, Inc.
(File
No. 1-32423) filed on March 28, 2006.)
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10.33‡
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Director
Deferred Compensation Agreement of the Alpha Natural Resources,
Inc. 2005
Long-Term Incentive Plan (Incorporated by reference to Exhibit
10.1 to the
Current Report on Form 8-K of Alpha Natural Resources, Inc. (File
No.
333-124319-17) filed on August 3, 2006.)
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List
of Subsidiaries
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Consent
of KPMG LLP
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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
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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
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Certification
Pursuant to 18 U.S.C. §1350, As Adopted Pursuant to §906 of the
Sarbanes-Oxley Act of 2002
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Certification
Pursuant to 18 U.S.C. §1350, As Adopted Pursuant to §906 of the
Sarbanes-Oxley Act of 2002
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*
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Filed
herewith.
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†
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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.
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‡
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Management
contract or compensatory plan or
arrangement.
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-139-