10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark
One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2005
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No. 1-32423
ALPHA NATURAL RESOURCES, INC.
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of
incorporation or organization)
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02-0733940
(I.R.S. Employer
Identification Number) |
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406 West Main Street, Abingdon, Virginia
(Address of principal executive offices)
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24210
(Zip Code) |
Registrants telephone number, including area code:
(276) 619-4410
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange
Act Rule 12b-2). Yes o No þ
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes
o No þ
Number of shares of the Registrants Common Stock, $0.01 par value, outstanding as of
October 28, 2005 64,404,813.
Item 1. Financial Statements
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
(In thousands, except share and per share amounts)
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September 30, |
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December 31, |
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2005 |
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2004 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
111 |
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$ |
7,391 |
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Trade accounts receivable, net |
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151,932 |
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95,828 |
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Notes and other receivables |
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9,708 |
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9,936 |
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Inventories |
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102,856 |
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54,569 |
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Due from affiliate |
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323 |
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Deferred income taxes |
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401 |
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4,674 |
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Prepaid expenses and other current assets |
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15,087 |
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29,814 |
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Total current assets |
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280,095 |
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202,535 |
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Property, plant, and equipment, net of accumulated depreciation, depletion and amortization of $127,969 and
$83,848 as of September 30, 2005 and December 31, 2004, respectively |
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267,481 |
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217,964 |
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Goodwill |
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18,641 |
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18,641 |
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Other intangibles, net of accumulated amortization of $1,542 and $2,343 as of September 30, 2005 and December
31, 2004, respectively |
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560 |
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1,155 |
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Deferred income taxes |
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19,616 |
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Other assets |
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35,705 |
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36,826 |
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Total assets |
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$ |
622,098 |
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$ |
477,121 |
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Liabilities and Stockholders Equity and Partners Capital |
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Current liabilities: |
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Current portion of long-term debt |
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$ |
1,046 |
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$ |
1,693 |
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Note payable |
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2,815 |
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15,228 |
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Bank overdraft |
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15,507 |
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10,024 |
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Trade accounts payable |
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73,208 |
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51,050 |
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Accrued expenses and other current liabilities |
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61,919 |
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68,283 |
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Total current liabilities |
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154,495 |
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146,278 |
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Long-term debt, net of current portion |
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257,163 |
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184,784 |
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Workers compensation benefits |
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5,113 |
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4,678 |
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Postretirement medical benefits |
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22,226 |
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15,637 |
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Asset retirement obligation |
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34,284 |
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32,888 |
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Deferred gains on sale of property interests |
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5,166 |
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5,516 |
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Deferred income taxes |
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7,718 |
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Other liabilities |
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9,178 |
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4,911 |
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Total liabilities |
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487,625 |
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402,410 |
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Minority interest |
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28,778 |
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Stockholders equity and partners capital: |
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Alpha Natural Resources, Inc.: |
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Preferred stock par value $0.01, 10,000,000 shares authorized, none issued |
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Common stock par value $0.01, 100,000,000 shares authorized, 62,212,580 shares
issued and outstanding |
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622 |
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Additional paid-in capital |
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146,372 |
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Unearned stock-based compensation |
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(18,623 |
) |
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Retained earnings |
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6,102 |
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Total Alpha Natural Resources, Inc. stockholders equity |
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134,473 |
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Alpha NR Holding, Inc.: |
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Preferred stock par value $0.01, 1,000 shares authorized, none issued |
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Common stock par value $0.01, 1,000 shares authorized, 100 shares issued and
outstanding |
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Additional paid-in capital |
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22,153 |
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Retained earnings |
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18,828 |
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Total Alpha NR Holding, Inc. stockholders equity |
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40,981 |
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ANR Fund IX Holdings, L.P.: |
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Partners capital |
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4,952 |
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Total stockholders equity and partners capital |
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134,473 |
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45,933 |
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Total liabilities and stockholders equity and partners
capital |
|
$ |
622,098 |
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|
$ |
477,121 |
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See accompanying notes to condensed consolidated financial statements.
2
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income (Unaudited)
(In thousands, except per share amounts)
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Three months ended |
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Nine months ended |
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September 30, |
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September 30, |
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2005 |
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2004 |
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2005 |
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2004 |
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Revenues: |
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Coal revenues |
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$ |
345,179 |
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$ |
295,208 |
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$ |
982,383 |
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$ |
801,021 |
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Freight and handling revenues |
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46,659 |
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37,570 |
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126,650 |
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102,846 |
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Other revenues |
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5,851 |
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8,931 |
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|
18,447 |
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|
20,440 |
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|
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Total revenues |
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397,689 |
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|
341,709 |
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1,127,480 |
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924,307 |
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Costs and expenses: |
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Cost of coal sales (exclusive of items shown
separately below) |
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298,522 |
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|
250,311 |
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818,299 |
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|
668,887 |
|
Freight and handling costs |
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46,659 |
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|
37,570 |
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|
126,650 |
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|
102,846 |
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Cost of other revenues |
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|
5,943 |
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|
6,603 |
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|
16,327 |
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|
14,942 |
|
Depreciation, depletion and amortization |
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|
16,277 |
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|
14,193 |
|
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|
45,521 |
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|
38,883 |
|
Selling, general and administrative expenses
(exclusive of depreciation and amortization shown
separately above
and including stock-based compensation of $3,381 and
$43,169 for
the three months and nine months ended September 30, 2005,
respectively) |
|
|
12,147 |
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|
10,124 |
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|
74,924 |
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|
35,786 |
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Total costs and expenses |
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379,548 |
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318,801 |
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1,081,721 |
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|
861,344 |
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Income from operations |
|
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18,141 |
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|
22,908 |
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45,759 |
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62,963 |
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Other income (expense): |
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Interest expense |
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(6,636 |
) |
|
|
(5,666 |
) |
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|
(19,400 |
) |
|
|
(14,497 |
) |
Interest income |
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|
197 |
|
|
|
230 |
|
|
|
675 |
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|
|
331 |
|
Miscellaneous income, net |
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|
50 |
|
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|
154 |
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|
40 |
|
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|
517 |
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|
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Total other income (expense), net |
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|
(6,389 |
) |
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|
(5,282 |
) |
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(18,685 |
) |
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(13,649 |
) |
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Income from continuing operations before income taxes
and minority interest |
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11,752 |
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17,626 |
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27,074 |
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|
49,314 |
|
Income tax expense |
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|
3,542 |
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|
|
2,379 |
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|
15,141 |
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|
|
5,852 |
|
Minority interest |
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|
7,980 |
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|
2,918 |
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|
22,335 |
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Income from continuing operations |
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8,210 |
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|
7,267 |
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9,015 |
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21,127 |
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Discontinued operations (note 11): |
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Loss from discontinued operations before income taxes and
minority interest (including gain on disposal in April 2005
of $704) |
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(5,248 |
) |
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(379 |
) |
|
|
(6,120 |
) |
Income tax benefit |
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|
|
|
|
(1,024 |
) |
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|
(93 |
) |
|
|
(1,120 |
) |
Minority interest |
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|
(2,378 |
) |
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(72 |
) |
|
|
(2,773 |
) |
Loss from discontinued operations |
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(1,846 |
) |
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(214 |
) |
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(2,227 |
) |
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Net income |
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$ |
8,210 |
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$ |
5,421 |
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$ |
8,801 |
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$ |
18,900 |
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Net income per share, as adjusted (note 2): |
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Basic: |
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Income from continuing operations |
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$ |
0.13 |
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$ |
0.49 |
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$ |
0.17 |
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$ |
1.43 |
|
Loss from discontinued operations |
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|
|
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|
(0.12 |
) |
|
|
(0.01 |
) |
|
|
(0.15 |
) |
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Net income, as adjusted |
|
$ |
0.13 |
|
|
$ |
0.37 |
|
|
$ |
0.16 |
|
|
$ |
1.28 |
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Diluted: |
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Income from continuing operations |
|
$ |
0.13 |
|
|
$ |
0.49 |
|
|
$ |
0.17 |
|
|
$ |
1.43 |
|
Loss from discontinued operations |
|
|
|
|
|
|
(0.12 |
) |
|
|
(0.01 |
) |
|
|
(0.15 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, as adjusted |
|
$ |
0.13 |
|
|
$ |
0.37 |
|
|
$ |
0.16 |
|
|
$ |
1.28 |
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Pro forma net income per share (note 2): |
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Basic: |
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Income from continuing operations |
|
|
|
|
|
$ |
0.19 |
|
|
$ |
0.18 |
|
|
$ |
0.53 |
|
Loss from discontinued operations |
|
|
|
|
|
|
(0.05 |
) |
|
|
|
|
|
|
(0.06 |
) |
|
|
|
|
|
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|
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|
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Pro forma net income |
|
|
|
|
|
$ |
0.14 |
|
|
$ |
0.18 |
|
|
$ |
0.47 |
|
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Diluted: |
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Income from continuing operations |
|
|
|
|
|
$ |
0.19 |
|
|
$ |
0.18 |
|
|
$ |
0.52 |
|
Loss from discontinued operations |
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|
|
|
|
|
(0.05 |
) |
|
|
|
|
|
|
(0.06 |
) |
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Pro forma net income |
|
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|
|
|
$ |
0.14 |
|
|
$ |
0.18 |
|
|
$ |
0.46 |
|
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See accompanying notes to condensed consolidated financial statements.
3
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Stockholders Equity (Unaudited)
Nine months ended September 30, 2005
(In thousands, except per share amounts)
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Alpha Natural Resources, Inc. |
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Alpha NR Holding, Inc. |
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|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ANR Fund IX |
|
|
Stockholders |
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
Unearned |
|
|
|
|
|
|
Total |
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
Total |
|
|
Holdings, L.P. |
|
|
Equity and |
|
|
|
Common Stock |
|
|
Paid-in |
|
|
Stock-based |
|
|
Retained |
|
|
Stockholders |
|
|
Common |
|
|
Paid-in |
|
|
Retained |
|
|
Stockholders |
|
|
Partners |
|
|
Partners |
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Compensation |
|
|
Earnings |
|
|
Equity |
|
|
Stock |
|
|
Capital |
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,160 |
) |
|
|
(8,160 |
) |
|
|
(1,243 |
) |
|
|
(9,403 |
) |
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 |
|
|
|
35,016 |
|
|
|
|
|
|
|
|
|
|
|
35,141 |
|
|
|
|
|
|
|
(22,153 |
) |
|
|
(12,988 |
) |
|
|
(35,141 |
) |
|
|
|
|
|
|
|
|
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 |
) |
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alpha Natural Resources, Inc. |
|
|
Alpha NR Holding, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ANR Fund IX |
|
|
Stockholders |
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
Unearned |
|
|
|
|
|
|
Total |
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
Total |
|
|
Holdings, L.P. |
|
|
Equity and |
|
|
|
Common Stock |
|
|
Paid-in |
|
|
Stock-based |
|
|
Retained |
|
|
Stockholders |
|
|
Common |
|
|
Paid-in |
|
|
Retained |
|
|
Stockholders |
|
|
Partners |
|
|
Partners |
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Compensation |
|
|
Earnings |
|
|
Equity |
|
|
Stock |
|
|
Capital |
|
|
Earnings |
|
|
Equity |
|
|
Capital |
|
|
Capital |
|
Contribution by minority interest holders,
including certain members of
management,
of their membership interests in
ANR
Holdings, LLC in exchange for
shares of
Alpha Natural Resources, Inc.
common
stock and recognition of unearned
stock-based compensation |
|
|
14,289 |
|
|
|
143 |
|
|
|
85,424 |
|
|
|
(29,122 |
) |
|
|
|
|
|
|
56,445 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56,445 |
|
Issuance of Restructuring Notes |
|
|
|
|
|
|
|
|
|
|
(517,692 |
) |
|
|
|
|
|
|
|
|
|
|
(517,692 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(517,692 |
) |
Tax Distributions payable recorded upon
the completion of the Internal
Restructuring |
|
|
|
|
|
|
|
|
|
|
(10,500 |
) |
|
|
|
|
|
|
|
|
|
|
(10,500 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,500 |
) |
Change in net deferred income taxes recognized
upon the completion of the
Internal
Restructuring |
|
|
|
|
|
|
|
|
|
|
25,729 |
|
|
|
|
|
|
|
|
|
|
|
25,729 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,729 |
|
Proceeds from initial public offering of
common shares ($19 per share),
net of
offering costs of $48,296. |
|
|
33,925 |
|
|
|
339 |
|
|
|
595,940 |
|
|
|
|
|
|
|
|
|
|
|
596,279 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
596,279 |
|
Distribution of net proceeds received from
underwriters exercise of
over-allotment
option |
|
|
|
|
|
|
|
|
|
|
(71,135 |
) |
|
|
|
|
|
|
|
|
|
|
(71,135 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(71,135 |
) |
Amortization of unearned stock-based
compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,056 |
|
|
|
|
|
|
|
10,056 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,056 |
|
Cancellation of nonvested stock options |
|
|
|
|
|
|
|
|
|
|
(443 |
) |
|
|
443 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income subsequent to Internal Restructuring |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,102 |
|
|
|
6,102 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,102 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, September
30, 2005 |
|
|
62,213 |
|
|
$ |
622 |
|
|
$ |
146,372 |
|
|
$ |
(18,623 |
) |
|
$ |
6,102 |
|
|
$ |
134,473 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
134,473 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
5
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
Operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
8,801 |
|
|
$ |
18,900 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation, depletion and amortization |
|
|
45,805 |
|
|
|
39,352 |
|
Amortization and write-off of debt issuance costs |
|
|
1,325 |
|
|
|
4,039 |
|
Minority interest |
|
|
2,846 |
|
|
|
19,562 |
|
Accretion of asset retirement obligation |
|
|
2,463 |
|
|
|
2,902 |
|
Virginia tax credit |
|
|
(343 |
) |
|
|
(1,930 |
) |
Stock-based compensation non-cash |
|
|
35,694 |
|
|
|
|
|
Provision for bad debts |
|
|
44 |
|
|
|
298 |
|
Amortization of deferred gains on sales of property interests |
|
|
(595 |
) |
|
|
(690 |
) |
Amortization of deferred gain on railroad incentives |
|
|
(478 |
) |
|
|
|
|
Loss on settlement of asset retirement obligation |
|
|
490 |
|
|
|
636 |
|
Asset impairment charge |
|
|
|
|
|
|
5,100 |
|
Write-off of advance royalties |
|
|
|
|
|
|
1,099 |
|
Gains on sales of fixed assets, net |
|
|
(11 |
) |
|
|
(342 |
) |
Gain on sale of discontinued operations |
|
|
(704 |
) |
|
|
|
|
Deferred income taxes |
|
|
2,668 |
|
|
|
2,448 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Trade accounts receivable |
|
|
(56,073 |
) |
|
|
(27,568 |
) |
Notes and other receivables |
|
|
(1,087 |
) |
|
|
(183 |
) |
Inventories |
|
|
(48,294 |
) |
|
|
(19,841 |
) |
Prepaid expenses and other current assets |
|
|
13,438 |
|
|
|
9,478 |
|
Other assets |
|
|
(5,148 |
) |
|
|
(1,497 |
) |
Trade accounts payable |
|
|
20,868 |
|
|
|
18,534 |
|
Accrued expenses and other current liabilities |
|
|
(4,691 |
) |
|
|
26,341 |
|
Workers compensation benefits |
|
|
367 |
|
|
|
2,274 |
|
Postretirement medical benefits |
|
|
6,589 |
|
|
|
2,828 |
|
Asset retirement obligation |
|
|
(2,919 |
) |
|
|
(2,495 |
) |
Other liabilities |
|
|
569 |
|
|
|
2 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
21,624 |
|
|
|
99,247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(95,919 |
) |
|
|
(52,984 |
) |
Proceeds from disposal of property, plant and equipment |
|
|
5,282 |
|
|
|
595 |
|
Purchase of net assets of acquired companies |
|
|
(961 |
) |
|
|
(2,891 |
) |
Equity investments |
|
|
(1,234 |
) |
|
|
(3,250 |
) |
Payment of additional consideration on acquisition |
|
|
(5,000 |
) |
|
|
|
|
Issuance of note receivable to coal supplier |
|
|
|
|
|
|
(10,000 |
) |
Collections on note receivable from coal supplier |
|
|
4,442 |
|
|
|
675 |
|
Increase in due from affiliate |
|
|
|
|
|
|
620 |
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(93,390 |
) |
|
|
(67,235 |
) |
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
Repayments of notes payable |
|
|
(12,413 |
) |
|
|
(11,787 |
) |
Proceeds from issuance of long-term debt |
|
|
73,000 |
|
|
|
175,000 |
|
Repayments on long-term debt |
|
|
(1,323 |
) |
|
|
(64,920 |
) |
Increase in bank overdraft |
|
|
5,483 |
|
|
|
396 |
|
Proceeds from initial public offering, net of offering costs |
|
|
598,066 |
|
|
|
|
|
Repayment of restructuring notes payable |
|
|
(517,692 |
) |
|
|
|
|
Distributions to prior members of ANR Holdings, LLC subsequent to Internal Restructuring |
|
|
(72,335 |
) |
|
|
|
|
Distributions to prior members of ANR Holdings, LLC prior to Internal Restructuring |
|
|
(7,732 |
) |
|
|
(115,573 |
) |
Debt issuance costs |
|
|
(568 |
) |
|
|
(10,563 |
) |
|
|
|
|
|
|
|
Net cash
provided by (used in) financing activities |
|
|
64,486 |
|
|
|
(27,447 |
) |
|
|
|
|
|
|
|
Net increase
(decrease) in cash and cash equivalents |
|
|
(7,280 |
) |
|
|
4,565 |
|
Cash and cash equivalents at beginning of period |
|
|
7,391 |
|
|
|
11,246 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
111 |
|
|
$ |
15,811 |
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
6
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30,
2005
(In thousands, except percentages and share data)
(1) Business and Basis of Presentation
Organization and Business
Alpha Natural Resources, Inc. and its operating subsidiaries are engaged in the business of
extracting, processing and marketing coal from deep and surface mines, located in the Central and
Northern Appalachian regions of the United States, for sale to utility and steel companies in the
United States and in international markets.
On February 11, 2005, Alpha Natural Resources, Inc., a Delaware corporation (Alpha) succeeded
to the business of ANR Holdings, LLC, a Delaware limited liability company (ANR Holdings) in a
series of internal restructuring transactions which are referred to collectively as the Internal
Restructuring, and on February 18, 2005, Alpha completed the initial public offering of its common
stock. Prior to the Internal Restructuring, ANR Fund IX Holdings, L.P. and Alpha NR Holding, Inc.
(the FR Affiliates), entities under the common control of First Reserve GP IX, Inc., were the
owners of 54.7% of the membership interests in ANR Holdings, and the remaining membership interests
in ANR Holdings were held by affiliates of American Metals & Coal International, Inc. (AMCI), Alpha
Coal Management, LLC (ACM) and Madison Capital Funding, LLC. The financial statements for the nine
months ended September 30, 2005 are presented on a combined basis including the combined financial
results for the FR Affiliates and subsidiaries for the period from January 1, 2005 to February 11,
2005, and the consolidated results for Alpha and subsidiaries from February 12, 2005 to September
30, 2005. The financial statements for the three months ended September 30, 2005 are presented on
a consolidated basis. The financial statements for the period from January 1, 2004 to September
30, 2004 and for the period from July 1, 2004 to September 30, 2004 are presented for the FR
Affiliates and subsidiaries on a combined basis. The entities included in the accompanying
financial statements are collectively referred to as the Company.
Basis of Presentation
The accompanying interim condensed consolidated financial statements have been prepared in
accordance with U.S generally accepted accounting principles for interim financial reporting.
Accounting measurements at interim dates inherently rely on estimates more than year-end; however,
in the opinion of management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Results of operations for the nine months
ended September 30, 2005 are not necessarily indicative of the results to be expected for the year
ending December 31, 2005. These financial statements should be read in conjunction with the
audited financial statements and related notes as of and for the year ended December 31, 2004
included in the Companys Annual Report on Form 10-K filed with the Securities and Exchange
Commission.
Certain prior period amounts have been reclassified to conform to the current year
presentation with no effect on previously reported net income.
(2) 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 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 Company has
disclosed for informational purposes two sets of earnings per share data on
the face of the accompanying condensed consolidated statements of operations. |
7
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 2005
(In thousands, except percentages and share data)
Net Income (Loss) Per Share, as Adjusted
The first set of earnings per share data is labeled net income (loss) per
share, as adjusted. 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, 2004. For purposes of the computation of basic and
diluted net income (loss) per share, as adjusted, the pro forma adjustment
for income taxes only applies to the percentage interest owned by ANR Fund IX
Holding, L.P., the non-taxable FR Affiliate. No pro forma adjustment for
income taxes is required for the percentage interest owned by Alpha NR
Holding, Inc., the taxable FR Affiliate, because income taxes have already
been recorded in the historical results of operations. Furthermore, no pro
forma adjustment to reported net income (loss) is necessary subsequent to
February 11, 2005 because Alpha is subject to income taxes.
The denominator for purposes of computing basic net income (loss) per share,
as adjusted, 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, 2004. 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.
8
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 2005
(In thousands, except percentages and share data)
The computations of basic and diluted net income (loss) per share, as adjusted, are set forth
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported income from continuing operations |
|
$ |
8,210 |
|
|
$ |
7,267 |
|
|
$ |
9,015 |
|
|
$ |
21,127 |
|
Deduct: Income tax effect of ANR Fund IX Holdings, L.P. income
from continuing operations prior to Internal Restructuring |
|
|
|
|
|
|
(402 |
) |
|
|
(91 |
) |
|
|
(1,124 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, as adjusted |
|
|
8,210 |
|
|
|
6,865 |
|
|
|
8,924 |
|
|
|
20,003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported loss from discontinued operations |
|
|
|
|
|
|
(1,846 |
) |
|
|
(214 |
) |
|
|
(2,227 |
) |
Add: Income tax effect of ANR Fund IX Holdings, L.P. loss
from discontinued operations prior to Internal Restructuring |
|
|
|
|
|
|
120 |
|
|
|
2 |
|
|
|
139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, as adjusted |
|
|
|
|
|
|
(1,726 |
) |
|
|
(212 |
) |
|
|
(2,088 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, as adjusted |
|
$ |
8,210 |
|
|
$ |
5,139 |
|
|
$ |
8,712 |
|
|
$ |
17,915 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares denominator for basic |
|
|
61,259,314 |
|
|
|
13,998,911 |
|
|
|
53,184,066 |
|
|
|
13,998,911 |
|
Dilutive effect of stock options and restricted stock grants |
|
|
648,706 |
|
|
|
|
|
|
|
382,403 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted average shares for diluted |
|
|
61,908,020 |
|
|
|
13,998,911 |
|
|
|
53,566,469 |
|
|
|
13,998,911 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per basic share, as adjusted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, as adjusted |
|
$ |
0.13 |
|
|
$ |
0.49 |
|
|
$ |
0.17 |
|
|
$ |
1.43 |
|
Loss from discontinued operations, as adjusted |
|
|
|
|
|
|
(0.12 |
) |
|
|
(0.01 |
) |
|
|
(0.15 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per basic share, as adjusted |
|
$ |
0.13 |
|
|
$ |
0.37 |
|
|
$ |
0.16 |
|
|
$ |
1.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per diluted share, as adjusted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, as adjusted |
|
$ |
0.13 |
|
|
$ |
0.49 |
|
|
$ |
0.17 |
|
|
$ |
1.43 |
|
Loss from discontinued operations, as adjusted |
|
|
|
|
|
|
(0.12 |
) |
|
|
(0.01 |
) |
|
|
(0.15 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per diluted share, as adjusted |
|
$ |
0.13 |
|
|
$ |
0.37 |
|
|
$ |
0.16 |
|
|
$ |
1.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma Net Income (Loss) Per Share
The second set of earnings per share data is labeled pro forma net income (loss) per share. The
numerator for purposes of computing basic and diluted pro forma net income (loss) per share
includes the reported net income (loss) and pro forma adjustments to reflect the impact of:
|
(i) |
|
the additional income taxes on the portion of reported pre-tax income (loss)
attributable to the portion owned by ANR Fund IX Holdings, L.P. for the periods from
January 1, 2005 to February 11, 2005, and from January 1, 2004 to September 30, 2004; |
|
|
(ii) |
|
the add back of minority interest for the periods from January 1, 2005 to
February 11, 2005, and from January 1, 2004 to September 30, 2004 because the
ownership held by the minority interest owners of ANR Holdings were exchanged for shares
of Alpha National Resources, Inc. as part of the Internal Restructuring; |
|
|
(iii) |
|
the additional income taxes that would have been incurred by the Company on the
minority interest added back for the periods from January 1, 2005 to February 11, 2005,
and from January 1, 2004 to September 30, 2004; and |
|
|
(iv) |
|
the issuance of $175,000 principal amount of 10% senior notes due 2012 by our
subsidiaries Alpha Natural Resources, LLC and Alpha Natural Resources Capital Corp. and
the entry by Alpha Natural Resources, LLC into a $175,000 credit facility in May 2004,
which we refer to as the 2004 Financings, as if these transactions had occurred on
January 1, 2004. |
9
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 2005
(In thousands, except percentages and share data)
No pro forma adjustments to reported net income (loss) are necessary subsequent to February 11, 2005.
The denominator for purposes of computing basic pro forma net income (loss) per share reflects:
|
(i) |
|
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, 2004; |
|
|
(ii) |
|
the retroactive impact of 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, on a weighted-average outstanding share
basis as being outstanding as of January 1, 2004; |
|
|
(iii) |
|
the unvested shares granted to management that vest over the two-year period
from January 1, 2005 to December 31, 2006 have been included in the basic computation on
a weighted-average outstanding share basis which is based on the monthly vesting
beginning as of January 1, 2005; and |
|
|
(iv) |
|
the retroactive impact of the 33,925,000 new shares issued in connection with the
initial public offering on a weighted-average outstanding share basis as being
outstanding as of January 1, 2004 since 100 percent of the net proceeds from the initial
public offering was distributed to the previous owners of ANR Holdings. |
The unvested shares issued to management are considered options for purposes of computing
diluted pro forma net income (loss) per share. Therefore, for diluted purposes, all remaining
unvested shares granted to management would be added to the denominator as of January 1, 2004 using
the treasury stock method, if the effect is dilutive. In addition, the treasury stock method would
be 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 following pro forma earnings per share data for the quarter and nine months ended
September 30, 2005 and 2004 give effect to the 2004 Financings, the Internal Restructuring and our
initial public offering of common stock completed on February 18, 2005 as if these transactions had
occurred on January 1, 2004. This pro forma information is for information purposes only, and
should not be considered indicative of results that would have been achieved had the transactions
listed above actually been consummated on January 1, 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Pro forma revenues |
|
$ |
397,689 |
|
|
$ |
341,709 |
|
|
$ |
1,127,480 |
|
|
$ |
924,307 |
|
Pro forma net income |
|
|
8,210 |
|
|
|
8,613 |
|
|
|
10,888 |
|
|
|
28,430 |
|
10
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 2005
(In thousands, except percentages and share data)
The computation of basic and diluted pro forma earnings (loss) per share are set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
Reported income from continuing operations |
|
$ |
7,267 |
|
|
$ |
9,015 |
|
|
$ |
21,127 |
|
Deduct: Income tax effect of ANR Fund IX Holdings, L.P. income
from continuing operations prior to Internal Restructuring |
|
|
(402 |
) |
|
|
(91 |
) |
|
|
(1,124 |
) |
Deduct: Pro forma effects of the 2004 Financings, net of income taxes |
|
|
|
|
|
|
|
|
|
|
(1,614 |
) |
Add: Minority interest in income from continuing operations, net of
income tax effect |
|
|
4,948 |
|
|
|
2,231 |
|
|
|
13,848 |
|
|
|
|
|
|
|
|
|
|
|
Pro forma income from continuing operations |
|
|
11,813 |
|
|
|
11,155 |
|
|
|
32,237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported income loss from discontinued operations |
|
|
(1,846 |
) |
|
|
(214 |
) |
|
|
(2,227 |
) |
Add: Income tax effect of ANR Fund IX Holdings, L.P. loss from
from discontinued operations prior to Internal Restructuring |
|
|
120 |
|
|
|
2 |
|
|
|
139 |
|
Add: Minority interest in loss from discontinued operations, net of
income tax effect |
|
|
(1,474 |
) |
|
|
(55 |
) |
|
|
(1,719 |
) |
|
|
|
|
|
|
|
|
|
|
Pro forma loss from discontinued operations |
|
|
(3,200 |
) |
|
|
(267 |
) |
|
|
(3,807 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income |
|
$ |
8,613 |
|
|
$ |
10,888 |
|
|
$ |
28,430 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares denominator for basic |
|
|
60,867,650 |
|
|
|
61,092,832 |
|
|
|
60,867,650 |
|
Dilutive effect of stock options and restricted stock grants |
|
|
444,201 |
|
|
|
584,389 |
|
|
|
379,183 |
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted average shares for diluted |
|
|
61,311,851 |
|
|
|
61,677,221 |
|
|
|
61,246,833 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income per basic share: |
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma income from continuing operations |
|
$ |
0.19 |
|
|
$ |
0.18 |
|
|
$ |
0.53 |
|
Pro forma loss from discontinued operations |
|
|
(0.05 |
) |
|
|
|
|
|
|
(0.06 |
) |
|
|
|
|
|
|
|
|
|
|
Pro forma net income per basic share |
|
$ |
0.14 |
|
|
$ |
0.18 |
|
|
$ |
0.47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income per diluted share: |
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma income from continuing operations |
|
$ |
0.19 |
|
|
$ |
0.18 |
|
|
$ |
0.52 |
|
Pro forma income loss from discontinued operations |
|
|
(0.05 |
) |
|
|
|
|
|
|
(0.06 |
) |
|
|
|
|
|
|
|
|
|
|
Pro forma net income per diluted share |
|
$ |
0.14 |
|
|
$ |
0.18 |
|
|
$ |
0.46 |
|
|
|
|
|
|
|
|
|
|
|
Pro Forma Earnings Per Share Disclosure Provisions of SFAS No. 123
The Company accounts for stock-based compensation awards granted to employees in accordance
with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees,
and related interpretations. Compensation cost for equity-based awards is recognized in an amount
equal to the difference between the exercise price of the award and the fair value of the Companys
common stock on the date of grant.
The Company has implemented the disclosure-only provisions of SFAS No. 123 Accounting for
Stock-Based Compensation. The following table illustrates the effect on pro forma net income as
if the Company had applied the fair value recognition provisions of SFAS No. 123 to equity-based
employee compensation using the Black-Scholes option-pricing model for the three and nine months
ended September 30, 2005:
11
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 2005
(In thousands, except percentages and share data)
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, 2005 |
|
|
September 30, 2005 |
|
Net income (pro forma net income for the nine months ended September 30, 2005) |
|
$ |
8,210 |
|
|
$ |
10,888 |
|
Add: Stock-based compensation expense
included in pro forma net income, net of income taxes |
|
|
2,362 |
|
|
|
40,391 |
|
Deduct: Total stock-based compensation expense
determined under fair-value based method, net of income
taxes |
|
|
(2,572 |
) |
|
|
(40,945 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income, adjusted for effect of fair value of stock options |
|
$ |
8,000 |
|
|
$ |
10,334 |
|
|
|
|
|
|
|
|
Income per share: |
|
|
|
|
|
|
|
|
Basic and diluted pro forma (see above) |
|
$ |
0.13 |
|
|
$ |
0.18 |
|
Basic and diluted pro forma, adjusted |
|
$ |
0.13 |
|
|
$ |
0.17 |
|
The Company had not granted equity-based awards prior to November 2004. The fair value of
equity-based awards granted in November 2004 and in the first nine months of 2005 was estimated on
the date of the grant using the Black-Scholes option pricing model with the following weighted
average assumptions:
|
|
|
|
|
Expected life (years) |
|
|
4.0 |
|
Expected volatility |
|
|
38.0 |
% |
Risk-free interest rate |
|
|
3.38 |
% |
Expected annual dividend |
|
$ |
0.10 |
|
The effects on pro forma net income of expensing the estimated fair value of equity-based
awards are not necessarily representative of the effects on reported net income for future periods
due to such factors as the vesting periods of stock options and the potential issuance of
additional awards in future years.
(3) Inventories
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Raw coal |
|
$ |
5,473 |
|
|
$ |
3,888 |
|
Saleable coal |
|
|
87,982 |
|
|
|
42,899 |
|
Materials and supplies |
|
|
9,401 |
|
|
|
7,782 |
|
|
|
|
|
|
|
|
Total inventories |
|
$ |
102,856 |
|
|
$ |
54,569 |
|
|
|
|
|
|
|
|
12
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 2005
(In thousands, except percentages and share data)
(4) Long-Term Debt
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
10% Senior notes due 2012 |
|
$ |
175,000 |
|
|
$ |
175,000 |
|
Revolving credit facility |
|
|
81,000 |
|
|
|
8,000 |
|
Variable rate term notes |
|
|
586 |
|
|
|
1,466 |
|
Capital lease obligation |
|
|
1,623 |
|
|
|
1,995 |
|
Other |
|
|
|
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt |
|
|
258,209 |
|
|
|
186,477 |
|
|
|
|
|
|
|
|
|
|
Less current portion |
|
|
1,046 |
|
|
|
1,693 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, net of current
portion |
|
$ |
257,163 |
|
|
$ |
184,784 |
|
|
|
|
|
|
|
|
The $175,000 of 10% senior notes issued by our indirect subsidiary, Alpha Natural Resources,
LLC and its wholly-owned subsidiary, Alpha Natural Resources Capital Corp., are unsecured but are
guaranteed fully and unconditionally on a joint and several basis by all of our subsidiaries other
than the issuers of the notes.
Alpha Natural Resources, LLC has a revolving credit facility with a group of lending
institutions led by Citicorp North America, Inc., as administrative agent (Citicorp Credit
Facility). The Citicorp Credit Facility, as amended, provides for a revolving line of credit of up
to $125,000 and a funded letter of credit facility of up to $50,000. As of September 30, 2005,
Alpha Natural Resources, LLC had $81,000 principal amount of borrowings outstanding under its
$125,000 revolving line of credit and $2,966 in letters of credit outstanding, leaving $41,034
available for borrowing. The weighted average interest rate applicable to borrowings under the
revolver was 6.8% as of September 30, 2005. As of September 30, 2005, the funded letter of credit
facility was fully utilized at $50,000 at an annual fee of 3.1% of the outstanding amount. Each of
the Companys subsidiaries other than Alpha Natural Resources, LLC has guaranteed Alpha Natural
Resources, LLCs obligations under the revolving credit facility. The obligations of Alphas
subsidiaries under the Citicorp Credit Facility are collateralized by all of their assets. The
Citicorp Credit Facility contains various affirmative and negative covenants which, among others,
establish net worth, interest coverage and leverage ratio requirements. Alpha Natural Resources,
LLC must pay an annual commitment fee up to a maximum of 1/2 of 1% of the unused portion of the
commitment. Alphas subsidiaries were in compliance with their debt covenants under the Citicorp
Credit Facility as of September 30, 2005. See Note 14 for a description of the New Citicorp Credit
Facility, which was used to refinance borrowings under the Citicorp Credit Facility described
above.
13
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 2005
(In thousands, except percentages and share data)
(5) Asset Retirement Obligation
At September 30, 2005 and December 31, 2004, the Company has recorded asset retirement
obligation accruals for mine reclamation and closure costs totaling $40,975 and $39,579,
respectively. The portion of the costs expected to be incurred within a year in the amount of
$6,691 at September 30, 2005 and December 31, 2004 is included in accrued expenses and other
current liabilities. These regulatory obligations are secured by surety bonds in the amount of
$89,290 at September 30, 2005 and $91,394 at December 31, 2004. Changes in the reclamation
obligation were as follows:
|
|
|
|
|
Total asset retirement obligation at December 31, 2004 |
|
$ |
39,579 |
|
|
|
|
|
|
Accretion for the nine months ended September 30, 2005 |
|
|
2,463 |
|
Sites added during the nine months ended September 30, 2005 |
|
|
1,156 |
|
Expenditures for the nine months ended September 30, 2005 |
|
|
(2,919 |
) |
Loss on settlement of asset retirement obligation |
|
|
371 |
|
Revision to estimate |
|
|
325 |
|
|
|
|
|
Total asset retirement obligation at September 30, 2005 |
|
$ |
40,975 |
|
|
|
|
|
(6) Stock-Based Compensation Awards
The Company accounts for stock-based compensation awards granted to employees in accordance
with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees,
and related interpretations. Compensation cost for equity-based awards is recognized in an amount
equal to the difference between the exercise price of the award and the fair value of the Companys
equity on the date of grant. In accordance with APB Opinion No. 25, the Company recognized
compensation expense of $3,381 and $43,169 related to the three and nine months ended September
30, 2005, respectively, for equity-based awards that had an exercise or issuance price less than
the fair value of the Companys common shares on the grant or issue date.
At September 30, 2005 there were 1,269,194 stock options outstanding, with a weighted average
exercise price of $16.66 and a weighted average remaining contractual life of 9.3 years. None of
these options were exercisable as of September 30, 2005. The following table summarizes stock
option activity for the nine months ended September 30, 2005 and the options outstanding at
September 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
Exercise |
|
|
|
Options |
|
|
Price |
|
Outstanding at January 1, 2005 |
|
|
596,985 |
|
|
$ |
12.73 |
|
Granted at initial public offering |
|
|
692,905 |
|
|
$ |
19.00 |
|
Additional grants |
|
|
70,000 |
|
|
$ |
23.69 |
|
Exercised |
|
|
|
|
|
|
|
|
Forfeited |
|
|
(90,696 |
) |
|
$ |
14.11 |
|
|
|
|
|
|
|
|
Outstanding at September 30, 2005 |
|
|
1,269,194 |
|
|
$ |
16.66 |
|
|
|
|
|
|
|
|
14
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 2005
(In thousands, except percentages and share data)
(7) Postretirement Benefits Other Than Pensions
The following table details the components of the net periodic benefit cost for postretirement
benefits other than pensions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Service cost |
|
$ |
940 |
|
|
$ |
925 |
|
|
$ |
2,884 |
|
|
$ |
1,323 |
|
Interest cost |
|
|
601 |
|
|
|
525 |
|
|
|
1,856 |
|
|
|
837 |
|
Amortization of net (gain) or loss |
|
|
10 |
|
|
|
(6 |
) |
|
|
19 |
|
|
|
(18 |
) |
Amortization of prior service cost |
|
|
535 |
|
|
|
698 |
|
|
|
1,841 |
|
|
|
698 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
2,086 |
|
|
$ |
2,142 |
|
|
$ |
6,600 |
|
|
$ |
2,840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employer contributions for benefits paid for the nine months ended September 30, 2005 and 2004
were $11 and $29, respectively. Employee contributions are not expected to be made and the plan is
unfunded.
Two of the Companys subsidiaries are required to make contributions to the 1993 UMWA Benefit
Plan of fifty cents per signatory hour worked. The contributions that the Company made to this
plan for the quarters ended September 30, 2005 and 2004 were $9 and $8, respectively and $24 and
$24 for the nine months ended September 30, 2005 and 2004, respectively.
(8) Related Party Transactions
The Company had the following receivable balances from affiliated parties as of September 30,
2005 and December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
AMCI |
|
$ |
14,271 |
|
|
$ |
7,121 |
|
Robindale Energy & Subsidiary |
|
|
34 |
|
|
|
6 |
|
|
|
|
|
|
|
|
Total |
|
$ |
14,305 |
|
|
$ |
7,127 |
|
|
|
|
|
|
|
|
As of September 30, 2005, $13,206 of receivables from AMCI are included in trade accounts
receivable, net and $1,065 is included in notes and other receivables. As of December 31, 2004,
all receivables from AMCI were included in trade accounts receivable. The majority of the AMCI
receivables as of September 30, 2005 and December 31, 2004 relate to coal sales transactions in the
normal course of business.
The Company had the following balances payable to affiliated parties as of September 30, 2005 and
December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
AMCI |
|
$ |
2,400 |
|
|
$ |
262 |
|
First Reserve Fund IX, L.P. |
|
|
4,500 |
|
|
|
|
|
Robindale Energy & Subsidiary |
|
|
139 |
|
|
|
42 |
|
|
|
|
|
|
|
|
Total |
|
$ |
7,039 |
|
|
$ |
304 |
|
|
|
|
|
|
|
|
As of September 30, 2005, $2,400 of AMCI payables is included in accrued expenses and other
current liabilities, and $4,500 of payables to First Reserve Fund IX, L.P. is included in other
liabilities. These represent tax distributions payable, related to the Internal Restructuring on
February 11, 2005. Also as of September 30, 2005, $139 owed to Robindale Energy & Subsidiary
related to trucking and coal purchases and is included in trade accounts payable. As of December
31, 2004, $262, related to building rent, is included in accrued expenses and other current
liabilities and $42 payable to Robindale Energy & Subsidiary is included in trade accounts payable.
15
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 2005
(In thousands, except percentages and share data)
(9) Segment Information
The Company extracts, processes and markets steam and metallurgical coal from surface and deep
mines for sale to electric utilities, steel and coke producers, and industrial customers. The
Company operates only in the United States with mines in the Central Appalachian and Northern
Appalachian regions. The Company has one reportable segment: Coal Operations, which as of September
30, 2005, consisted of 45 underground mines and 22 surface mines located in Central Appalachia and
Northern Appalachia. Coal Operations also includes the Companys purchased coal sales function,
which markets the Companys Appalachian coal to domestic and international customers. The All Other
category includes the Companys equipment sales and repair operations, as well as other ancillary
business activities, including terminal services, coal and environmental analysis services, and
leasing of mineral rights. The Corporate and Eliminations category includes general corporate
overhead and the elimination of intercompany transactions. The revenue elimination amount
represents inter-segment revenues. The Company evaluates the performance of its segment based on
EBITDA, as adjusted, which the Company defines as net income (loss) plus interest expense, income
tax expense (benefit), depreciation, depletion and amortization, less interest income, and adjusted
for minority interest. EBITDA, as adjusted, from continuing operations is defined as income from
continuing operations plus interest expense, income tax expense (benefit), depreciation, depletion
and amortization, less interest income, and adjusted for minority interest.
Operating segment results for continuing operations for the three months ended September 30,
2005 and segment assets as of September 30, 2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate |
|
|
|
|
Coal |
|
All |
|
and |
|
|
|
|
Operations |
|
Other |
|
Eliminations |
|
Consolidated |
Revenues |
|
$ |
394,331 |
|
|
$ |
9,084 |
|
|
$ |
(5,726 |
) |
|
$ |
397,689 |
|
Depreciation, depletion, and amortization |
|
|
15,543 |
|
|
|
361 |
|
|
|
373 |
|
|
|
16,277 |
|
EBITDA, as adjusted |
|
|
46,144 |
|
|
|
468 |
|
|
|
(12,144 |
) |
|
|
34,468 |
|
Capital expenditures |
|
|
29,312 |
|
|
|
|
|
|
|
86 |
|
|
|
29,398 |
|
Total assets |
|
|
536,792 |
|
|
|
72,019 |
|
|
|
13,287 |
|
|
|
622,098 |
|
Operating segment results for continuing operations for the nine months ended September 30,
2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate |
|
|
|
|
Coal |
|
All |
|
and |
|
|
|
|
Operations |
|
Other |
|
Eliminations |
|
Consolidated |
Revenues |
|
$ |
1,116,447 |
|
|
$ |
29,313 |
|
|
$ |
(18,280 |
) |
|
$ |
1,127,480 |
|
Depreciation, depletion, and amortization |
|
|
43,037 |
|
|
|
1,149 |
|
|
|
1,335 |
|
|
|
45,521 |
|
EBITDA, as adjusted |
|
|
162,519 |
|
|
|
2,809 |
|
|
|
(74,008 |
) |
|
|
91,320 |
|
Capital expenditures |
|
|
94,770 |
|
|
|
322 |
|
|
|
517 |
|
|
|
95,609 |
|
Operating segment results for continuing operations for the three months ended September 30,
2004 and segment assets as of September 30, 2004 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate |
|
|
|
|
Coal |
|
All |
|
and |
|
|
|
|
Operations |
|
Other |
|
Eliminations |
|
Consolidated |
Revenues |
|
$ |
337,950 |
|
|
$ |
6,771 |
|
|
$ |
(3,012 |
) |
|
$ |
341,709 |
|
Depreciation, depletion, and amortization |
|
|
13,447 |
|
|
|
246 |
|
|
|
500 |
|
|
|
14,193 |
|
EBITDA, as adjusted |
|
|
47,039 |
|
|
|
351 |
|
|
|
(10,135 |
) |
|
|
37,255 |
|
Capital expenditures |
|
|
18,918 |
|
|
|
105 |
|
|
|
116 |
|
|
|
19,139 |
|
Total assets |
|
|
390,341 |
|
|
|
76,337 |
|
|
|
(8,855 |
) |
|
|
457,823 |
|
Operating segment results for continuing operations for the nine months ended September 30,
2004 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate |
|
|
|
|
|
|
Coal |
|
|
All |
|
|
and |
|
|
|
|
|
|
Operations |
|
|
Other |
|
|
Eliminations |
|
|
Consolidated |
|
Revenues |
|
$ |
912,810 |
|
|
$ |
20,111 |
|
|
$ |
(8,614 |
) |
|
$ |
924,307 |
|
Depreciation, depletion, and amortization |
|
|
36,652 |
|
|
|
740 |
|
|
|
1,491 |
|
|
|
38,883 |
|
EBITDA, as adjusted |
|
|
135,943 |
|
|
|
2,191 |
|
|
|
(35,771 |
) |
|
|
102,363 |
|
Capital expenditures |
|
|
51,787 |
|
|
|
248 |
|
|
|
449 |
|
|
|
52,484 |
|
16
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 2005
(In thousands, except percentages and share data)
Reconciliation of total segment EBITDA, as adjusted, to income from continuing operations
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Total segment EBITDA, as adjusted, from
continuing operations |
|
$ |
34,468 |
|
|
$ |
37,255 |
|
|
$ |
91,320 |
|
|
$ |
102,363 |
|
Interest expense |
|
|
(6,636 |
) |
|
|
(5,666 |
) |
|
|
(19,400 |
) |
|
|
(14,497 |
) |
Interest income |
|
|
197 |
|
|
|
230 |
|
|
|
675 |
|
|
|
331 |
|
Income tax expense from continuing operations |
|
|
(3,542 |
) |
|
|
(2,379 |
) |
|
|
(15,141 |
) |
|
|
(5,852 |
) |
Depreciation, depletion and amortization from
continuing operations |
|
|
(16,277 |
) |
|
|
(14,193 |
) |
|
|
(45,521 |
) |
|
|
(38,883 |
) |
Minority interest in income from continuing
operations |
|
|
|
|
|
|
(7,980 |
) |
|
|
(2,918 |
) |
|
|
(22,335 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
8,210 |
|
|
$ |
7,267 |
|
|
$ |
9,015 |
|
|
$ |
21,127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company markets produced, processed and purchased coal to customers in the United States
and in international markets. Export revenues totaled $156,243 and $501,014 or approximately 39%
and 44% of total revenues for the three and nine months ended September 30, 2005, respectively.
Export revenues were $171,971 and $447,513 or approximately 50% and 48%, respectively, of total
revenues for the three and nine months ended September 30, 2004.
(10) Contingencies
(a) Guarantees and Financial Instruments with Off-balance Sheet Risk
In the normal course of business, the Company is a party to certain guarantees and financial
instruments with off-balance sheet risk, such as bank letters of credit and performance or surety
bonds. No liabilities related to these arrangements are reflected in the Companys combined balance
sheets. Management does not expect any material losses to result from these guarantees or
off-balance sheet financial instruments. The amount of bank letters of credit outstanding as of
September 30, 2005 is $52,966. The amount of surety bonds currently outstanding related to the
Companys reclamation obligations is presented in note 5 to the condensed consolidated financial
statements. The Company has provided guarantees for equipment financing obtained by certain of its
contract mining operators totaling approximately $1,150. The estimated fair value of these
guarantees is not significant.
(b) Litigation
The Company is involved in various legal proceedings from time to time in the normal course of
business. In managements opinion, the Company is not currently involved in any legal proceeding
which individually or in the aggregate could have a material effect on the financial condition,
results of operations and/or cash flows of the Company.
(c) Hurricane Katrina
In August 2005, as a result of Hurricane Katrina, a portion of the Companys coal inventory
located at a loading facility in New Orleans was lost or destroyed. During the three months ended
September 30, 2005 the Company wrote down its inventory based on an estimate of the lost tonnage
and recorded a receivable for the probable related insurance recovery, which resulted in a net
pre-tax charge of $688. The Company expects to make a final determination of its losses resulting
from Katrina by the end of 2005. It is possible that additional
losses will be recorded; however,
the Company does not believe that such additional losses, if any, will be material.
17
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 2005
(In thousands, except percentages and share data)
(11) Discontinued Operations
On April 14, 2005, the Company sold the assets of its Colorado mining subsidiary, National
King Coal LLC, and related trucking subsidiary, Gallup Transportation and Transloading Company, LLC
(collectively, NKC), to an unrelated third party for cash in the amount of $4,400, plus an amount
in cash equal to the fair market value of NKCs coal inventory, and the assumption by the buyer of
certain liabilities of NKC. The Company recorded a gain on the sale of NKC of $704 in the second
quarter of 2005. The results of operations of NKC for the current and prior periods have been
reported in discontinued operations. National King Coal LLC was previously reported in the Coal
Operations segment and Gallup Transportation and Transloading Company, LLC was previously reported
in the All Other segment (note 9).
The following statement of operations data reflects the activity for the discontinued
operation for the three months and nine months ended September 30, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Total revenues |
|
$ |
|
|
|
$ |
5,255 |
|
|
$ |
4,523 |
|
|
$ |
12,756 |
|
Total costs and expenses |
|
|
|
|
|
|
10,510 |
|
|
|
5,607 |
|
|
|
18,887 |
|
Gain on sale of discontinued operations |
|
|
|
|
|
|
|
|
|
|
704 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
|
|
|
|
(5,255 |
) |
|
|
(380 |
) |
|
|
(6,131 |
) |
Miscellaneous income |
|
|
|
|
|
|
7 |
|
|
|
1 |
|
|
|
11 |
|
Income tax benefit from discontinued
operations |
|
|
|
|
|
|
(1,024 |
) |
|
|
(93 |
) |
|
|
(1,120 |
) |
Minority interest in loss from
discontinued operations |
|
|
|
|
|
|
(2,378 |
) |
|
|
(72 |
) |
|
|
(2,773 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations |
|
$ |
|
|
|
$ |
(1,846 |
) |
|
$ |
(214 |
) |
|
$ |
(2,227 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(12) Income Taxes
Since the condensed consolidated statements of operations for the nine months ended September
30, 2005 include activity both prior to and after the Internal Restructuring and initial public
offering, the total income tax provision is the sum of the provisions for the pre- and
post-restructuring periods.
Prior to February 12, 2005, the minority interest owners and ANR Fund IX Holdings, L.P. owned
interests in ANR Holdings, a limited liability company and pass-through entity for income tax
purposes. As a pass-through entity, ANR Holdings provides information returns reflecting the
allocated income (loss) to the minority interest owners and ANR Fund IX Holdings, L.P based upon
their respective ownership percentage and certain special allocations as provided by the limited
liability company agreement and the Internal Revenue Code. The income tax consequences of the
income (loss) allocated to these owners for the period from January 1, 2005 to February 11, 2005
and from January 1, 2004 to September 30, 2004 is not reflected in the financial statements. For
these periods, only the income tax expense associated with Alpha NR Holding, Inc., a taxable
entity, is included. The primary source of the income tax impact is derived from the allocated
income (loss) from ANR Holdings, Alpha Natural Resources, LLC and its operating subsidiaries, all
of which are pass-through entities for tax purposes. Subsequent to the Internal Restructuring and
initial public offering, all of the income of ANR Holdings is taxed to Alpha Natural Resources,
Inc.
A tax provision of $3,542 was recorded for the three months ended September 30, 2005 on
pre-tax income from continuing operations of $11,752, which equates to an effective tax rate of
30.1%.
A tax provision of $15,141 was recorded for the nine months ended September 30, 2005 on
pre-tax income from continuing operations of $27,074, which equates to an effective tax rate of
55.9%. This rate is higher than the federal statutory rate of 35% due primarily to the portion of
the stock-based compensation charge associated with the issuance of common stock to management in
18
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 2005
(In thousands, except percentages and share data)
connection with the Internal Restructuring and initial public offering that is not deductible for
tax purposes. The increase in expected income tax expense related to the stock-based compensation
charge is offset in part by the tax benefits associated with percentage depletion, the
extraterritorial income exclusion, and taxes not being provided for on the minority interest and
pass-through entity owners respective share of earnings for the period prior to the restructuring.
As $33,029 of the stock-based compensation charge was identified as a significant unusual item in
the first quarter of 2005, the tax effect of the $33,029 expense (no tax benefit) was recorded in
the first quarter of 2005 and excluded from the estimated annual effective tax rate of
approximately 27%. The Companys effective tax rate for the interim periods is applied to pre-tax
income exclusive of the $33,029 stock-based compensation charge.
Significant components of income tax expense from continuing operations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Current tax expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
2,149 |
|
|
$ |
944 |
|
|
$ |
10,833 |
|
|
$ |
2,573 |
|
State |
|
|
314 |
|
|
|
18 |
|
|
|
1,629 |
|
|
|
65 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,463 |
|
|
|
962 |
|
|
|
12,462 |
|
|
|
2,638 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
868 |
|
|
|
1,113 |
|
|
|
2,155 |
|
|
|
2,437 |
|
State |
|
|
211 |
|
|
|
304 |
|
|
|
524 |
|
|
|
777 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,079 |
|
|
|
1,417 |
|
|
|
2,679 |
|
|
|
3,214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
3,017 |
|
|
|
2,057 |
|
|
|
12,988 |
|
|
|
5,010 |
|
State |
|
|
525 |
|
|
|
322 |
|
|
|
2,153 |
|
|
|
842 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,542 |
|
|
$ |
2,379 |
|
|
$ |
15,141 |
|
|
$ |
5,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the statutory federal income tax expense at 35% to income from continuing
operations before income taxes and minority interest, and the actual income tax expense is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Federal statutory income tax expense |
|
$ |
4,114 |
|
|
$ |
6,169 |
|
|
$ |
9,476 |
|
|
$ |
17,260 |
|
Increases (reductions) in taxes due to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage depletion allowance |
|
|
(1,137 |
) |
|
|
(800 |
) |
|
|
(7,700 |
) |
|
|
(3,005 |
) |
Extraterritorial income exclusion |
|
|
(541 |
) |
|
|
|
|
|
|
(1,246 |
) |
|
|
|
|
Deduction for domestic production activities |
|
|
(68 |
) |
|
|
|
|
|
|
(347 |
) |
|
|
|
|
State taxes, net of federal tax impact |
|
|
342 |
|
|
|
209 |
|
|
|
1,398 |
|
|
|
547 |
|
Stock-based compensation |
|
|
1,031 |
|
|
|
|
|
|
|
14,385 |
|
|
|
|
|
Change in valuation allowance |
|
|
(260 |
) |
|
|
(54 |
) |
|
|
137 |
|
|
|
(203 |
) |
Taxes not provided for minority interest |
|
|
|
|
|
|
(2,572 |
) |
|
|
(1,001 |
) |
|
|
(7,743 |
) |
Taxes not provided for pass-through entity |
|
|
|
|
|
|
(259 |
) |
|
|
(133 |
) |
|
|
(781 |
) |
Other, net |
|
|
61 |
|
|
|
(314 |
) |
|
|
172 |
|
|
|
(223 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual income tax expense |
|
$ |
3,542 |
|
|
$ |
2,379 |
|
|
$ |
15,141 |
|
|
$ |
5,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 2005
(In thousands, except percentages and share data)
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 condensed consolidated financial statements include the following amounts:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Investment in limited liability company subsidiary |
|
$ |
123,696 |
|
|
$ |
|
|
Net operating loss carryforwards |
|
|
2,212 |
|
|
|
5,598 |
|
Alternative minimum tax credit carryforward |
|
|
5,489 |
|
|
|
1,249 |
|
Charitable contribution carryforwards |
|
|
93 |
|
|
|
207 |
|
|
|
|
|
|
|
|
Gross deferred tax assets |
|
|
131,490 |
|
|
|
7,054 |
|
Less valuation allowance |
|
|
(108,584 |
) |
|
|
(1,374 |
) |
|
|
|
|
|
|
|
Total net deferred tax assets |
|
|
22,906 |
|
|
|
5,680 |
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Investment in limited liability company subsidiary |
|
|
|
|
|
|
(6,869 |
) |
Virginia tax credit |
|
|
(2,889 |
) |
|
|
(1,855 |
) |
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
(2,889 |
) |
|
|
(8,724 |
) |
|
|
|
|
|
|
|
Net deferred tax asset (liability) |
|
$ |
20,017 |
|
|
$ |
(3,044 |
) |
|
|
|
|
|
|
|
Changes in the net deferred tax asset (liability) balance during the nine months ended
September 30, 2005 are as follows:
|
|
|
|
|
ANR Fund IX Holdings, L.P. and Alpha NR Holding, Inc. and Subsidiaries: |
|
|
|
|
Deferred tax liability balance at December 31, 2004 |
|
$ |
(3,044 |
) |
Deferred tax benefit recorded in period from January 1, 2005 to February 11, 2005
for continuing and discontinued operations |
|
|
192 |
|
|
|
|
|
|
|
|
|
|
Deferred tax liability balance at February 11, 2005 |
|
$ |
(2,852 |
) |
|
|
|
|
|
|
|
|
|
Alpha Natural Resources, Inc.: |
|
|
|
|
Deferred tax liability balance on February 12, 2005 |
|
$ |
(2,852 |
) |
|
|
|
|
|
Estimated deferred tax asset generated from the Internal Restructuring |
|
|
132,637 |
|
Valuation allowance established at the time of the Internal Restructuring |
|
|
(106,908 |
) |
|
|
|
|
Net deferred taxes recorded as part of Internal Restructuring, with offsetting
increase to additional paid-in capital |
|
|
25,729 |
|
Deferred tax expense recorded in period from February 12, 2005 to September 30, 2005
for continuing and discontinued operations |
|
|
(2,860 |
) |
|
|
|
|
|
|
|
|
|
Net deferred tax asset at September 30, 2005 |
|
$ |
20,017 |
|
|
|
|
|
The Internal Restructuring resulted in an increase in the basis of assets for income tax
purposes, currently estimated at $346,000, which resulted in a gross deferred tax asset of
$132,637. This amount was offset by an increase to the valuation allowance of $106,908 as of the
date of the Internal Restructuring. The resulting net increase in deferred income taxes of $25,729
was recorded as an increase to additional paid-in capital, as the underlying change in the tax
basis of assets of the Company was caused by the Internal Restructuring transactions between the
Company and its stockholders.
Since the Company has not been in business long enough to develop a strong earnings history
(objective evidence as required by generally accepted accounting principles), and due to the
likelihood that the alternative minimum tax will exceed the regular tax in the future, the Company
has recorded a valuation allowance of $108,584 as of September 30, 2005. The Company monitors the
valuation allowance each quarter and makes adjustments to the allowance through the tax provision
as appropriate based primarily upon continued development of an earnings history and projected
future earnings based on future sales commitments, which impacts the utilization of deferred tax
assets.
20
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 2005
(In thousands, except percentages and share data)
The breakdown of the net deferred tax asset (liability), net of valuation allowance, recorded
in the accompanying condensed consolidated balance sheets is as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Current asset |
|
$ |
401 |
|
|
$ |
4,674 |
|
Current liability |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current asset |
|
|
401 |
|
|
|
4,674 |
|
|
|
|
|
|
|
|
Noncurrent asset |
|
|
22,505 |
|
|
|
1,006 |
|
Noncurrent liability |
|
|
(2,889 |
) |
|
|
(8,724 |
) |
|
|
|
|
|
|
|
Net noncurrent asset (liability) |
|
|
19,616 |
|
|
|
(7,718 |
) |
|
|
|
|
|
|
|
Total net deferred tax asset (liability) |
|
$ |
20,017 |
|
|
$ |
(3,044 |
) |
|
|
|
|
|
|
|
(13) New Accounting Pronouncements
The FASB issued FIN 47, Accounting for Conditional Asset Retirement Obligations in March of
2005. FIN 47 clarifies that an entity must record a liability for a conditional asset retirement
obligation if the fair value of the obligation can be reasonably estimated. This interpretation
also clarifies the circumstances under which an entity would have sufficient information to
reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective no later
than the end of fiscal years ending after December 15, 2005. The Company expects to adopt this
interpretation on December 31, 2005. The Company does not expect the adoption of this
interpretation to have a material impact on its financial condition, results of operations or cash
flows.
In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment, which requires
companies to expense the fair value of equity awards over the required service period. This
Statement is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123(R)
supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, which uses the intrinsic
value method to value stock-based compensation. On April 14, 2005, the SEC adopted a new rule that
amends the effective date of SFAS No. 123(R) to allow SEC registrants to implement SFAS No. 123(R)
as of the beginning of the first annual reporting period that begins after June 15, 2005. The
Company will adopt SFAS No. 123(R) effective January 1, 2006.
(14) Subsequent Events
Acquisition
On October 26, 2005, the Company completed the acquisition of certain privately held coal
reserves and operations in southern West Virginia and southwestern Virginia (the Nicewonder
Acquisition) for $35,200 in cash, $221,000 in promissory notes, of which $181,100 was paid on
November 2, 2005 and $39,900 is due on January 15, 2006, and 2,180,233 shares of the Companys
common stock valued at approximately $58,949. The purchase price is
subject to certain post-closing working capital and other adjustments. 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 will be included in the Companys
consolidated results of operations from the date of acquisition.
Debt Refinancing
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
21
ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 2005
(In thousands, except percentages and share data)
existing Citicorp Credit Facility (see Note 4) and to pay certain expenses
related to the Nicewonder Acquisition and debt refinancing. As of November 2, 2005, there were
$250,000 in borrowings under the term loan facility and $40,000 in borrowings under the revolving
credit facility. In addition, there were $65,487 in letters of credit outstanding, $50,000 of
which resulted from conversion of funded letters of credit that were outstanding under the existing
Citicorp Credit Facility, and $169,513 was available for borrowing.
Borrowings under the New Citicorp Credit Facility bear interest at variable rates based upon,
at the Companys option, either the prime rate or a London Interbank Offered Rate, in each case
plus a spread that is generally dependent on a leverage ratio. The Company will be required to pay
a commitment fee on the unused portion of the revolving credit facility, as well as customary
letter of credit fees. The commitment fee is initially 0.50% per annum but may be reduced in the
future subject to the attainment of certain leverage ratios. As of
November 2, 2005, the weighted
average interest rates applicable to borrowings under the term loan facility and revolving credit
facility were 5.70% and 6.15%, respectively.
Under the term loan facility, quarterly principal payments of $625 are required, commencing on
March 31, 2006 and ending on September 30, 2012. The remaining unpaid principal, which is
projected to be $233,125, is due and payable on October 26, 2012. Any outstanding principal
amounts outstanding under the revolving credit facility are due and payable on October 26, 2010.
All obligations under the New Citicorp Credit Facility are unconditionally guaranteed by Alpha
NR Holding, Inc. and each of its existing and future direct and indirect domestic subsidiaries
(other than the borrower, Alpha Natural Resources, LLC), and are secured by substantially all of
the assets of Alpha NR Holding, Inc. and its subsidiaries. The New Citicorp Credit Facility
contains various affirmative and negative covenants which, among other things, require the Company
to maintain certain leverage and interest coverage ratios, and restrict certain payments and
transactions, including dividends, payments for the repurchase of capital stock and mergers or
consolidations.
22
Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
You should read the following discussion and analysis in conjunction with our financial statements
and related notes included elsewhere in this report. The combined historical financial information
discussed below for all periods prior to the completion of our Internal Restructuring on February
11, 2005, is for ANR Fund IX Holdings, L.P. and Alpha NR Holding, Inc. and subsidiaries, which
prior to the completion of our Internal Restructuring were the owners of a majority of the
membership interests of ANR Holdings, and for all periods after our Internal Restructuring is for
Alpha Natural Resources, Inc., the owner of 100% of the membership interests of ANR Holdings after
our Internal Restructuring.
Cautionary Note Regarding Forward Looking Statements
This report includes statements of our expectations, intentions, plans and beliefs that
constitute forward-looking statements within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934 and are intended to come within the
safe harbor protection provided by those sections. These statements, which involve risks and
uncertainties, relate to analyses and other information that are based on forecasts of future
results and estimates of amounts not yet determinable and may also relate to our future prospects,
developments and business strategies. We have used the words anticipate, believe, could,
estimate, expect, intend, may, plan, predict, project, should and similar terms and
phrases, including references to assumptions, in this report to identify forward-looking
statements. These forward-looking statements are made based on expectations and beliefs concerning
future events affecting us and are subject to uncertainties and factors relating to our operations
and business environment, all of which are difficult to predict and many of which are beyond our
control, that could cause our actual results to differ materially from those matters expressed in
or implied by these forward-looking statements.
The following factors are among those that may cause actual results to differ materially from
our forward-looking statements:
|
|
|
market demand for coal, electricity and steel; |
|
|
|
|
future economic or capital market conditions; |
|
|
|
|
weather conditions or catastrophic weather-related damage; |
|
|
|
|
our production capabilities; |
|
|
|
|
the consummation of financing, acquisition or disposition transactions and the effect thereof on our business; |
|
|
|
|
our ability to successfully integrate the operations we acquired in the Nicewonder
Acquisition with our existing operations, and to successfully operate the highway
construction business we acquired in the Nicewonder Acquisition; |
|
|
|
|
our plans and objectives for future operations and expansion or consolidation; |
|
|
|
|
our relationships with, and other conditions affecting, our customers; |
|
|
|
|
timing of reductions in customer coal inventories; |
|
|
|
|
long-term coal supply arrangements; |
|
|
|
|
inherent risks of coal mining beyond our control; |
|
|
|
|
environmental laws, including those directly affecting our coal mining and production,
and those affecting our customers coal usage; |
|
|
|
|
competition in coal markets; |
|
|
|
|
railroad and other transportation performance and costs; |
|
|
|
|
availability of mining and processing equipment and parts; |
23
|
|
|
our assumptions concerning economically recoverable coal reserve estimates; |
|
|
|
|
availability of skilled employees and other employee workforce factors; |
|
|
|
|
regulatory and court decisions; |
|
|
|
|
future legislation and changes in regulations, governmental policies or taxes; |
|
|
|
|
changes in postretirement benefit obligations; |
|
|
|
|
our liquidity, results of operations and financial condition; and |
|
|
|
|
other factors, including the other factors discussed in Overview Coal Pricing Trends
and Uncertainties and Outlook below, the Risks Related to our Company section of
Managements Discussion and Analysis of Financial Condition and Results of Operations, set
forth in our annual report on Form 10-K for the year ended December 31, 2004 and the Risk
Factors section of our registration statement on Form S-1 (file
number 333-129030). |
When considering these forward-looking statements, you should keep in mind the cautionary
statements in this report and the documents incorporated by reference. We do not undertake any
responsibility to release publicly any revisions to these forward-looking statements to take into
account events or circumstances that occur after the date of this report. Additionally, we do not
undertake any responsibility to update you on the occurrence of any unanticipated events which may
cause actual results to differ from those expressed or implied by the forward-looking statements
contained in this report.
Overview
We produce, process and sell steam and metallurgical coal from eight regional business units,
which, as of October 27, 2005, are supported by 44 active underground mines, 25 active surface
mines and 11 preparation plants located throughout Virginia, West Virginia, Kentucky, and
Pennsylvania. 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. For the three months and nine months
ended September 30, 2005, sales of steam coal were 4.6 million and 11.7 million tons, respectively,
which accounted for approximately 68% and 62%, respectively, of our coal sales volume during these
periods. For the three months and nine months ended September 30, 2005, sales of metallurgical
coal, which generally sells at a premium over steam coal, were 2.1 million and 7.2 million tons,
respectively, which accounted for approximately 32% and 38%, respectively, of our coal sales volume
during these periods. Our primary focus in producing, processing and selling coal is on maximizing
coal margins. Our sales of steam coal during the first nine months of 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 the period were made primarily to steel companies in the Northeastern
and Midwestern regions of the United States and in several countries in Europe, Asia and South
America. Approximately 44% of our sales revenue in the first nine months of 2005 was derived from
sales made outside the United States, primarily in Japan, Canada, Brazil, Korea and several
European countries.
In addition, we generate other revenues from equipment and parts sales, equipment repair
income, rentals, royalties, commissions, coal handling, terminal and processing fees, and coal and
environmental analysis fees. We also record revenue for freight and handling charges incurred in
delivering coal to our customers, which we treat as being reimbursed by our customers. However,
these freight and handling revenues are offset by equivalent freight and handling costs and do not
contribute to our profitability.
Our business is seasonal, with operating results varying from quarter to quarter. We generally
experience lower sales and hence build coal inventory during the winter months primarily due to the
freezing of lakes that we use to transport coal to some of our customers.
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 and coal handling and
processing operations. We report the revenues and costs from rentals, commissions and coal handling
and processing operations in our other revenues and cost of other revenues, respectively.
24
NKC Disposition. On April 14, 2005, we sold the assets of our Colorado mining subsidiary
National King Coal, LLC and related trucking subsidiary Gallup Transportation and Transloading
Company, LLC (collectively, NKC) to an unrelated third party for cash in the amount of $4.4
million, plus an amount in cash equal to the fair market value of NKCs coal inventory, and the
assumption by the buyer of certain liabilities of NKC. We recorded a gain on this sale of $0.7
million and are reporting NKC as discontinued operations for all periods presented herein. The
components of the operating results included in discontinued operations are shown in footnote 11 to
our unaudited financial statements included elsewhere in this report.
Nicewonder Acquisition and 2005 Financing. On October 26, 2005, we completed the previously
announced acquisition of the Combined Entities of the Nicewonder Coal Group (the Nicewonder
Acquisition), which is expected to add approximately 4.3 million tons of annual production. The
assets acquired include approximately 26.7 million tons of proven and probable reserves as of July
31, 2005, three surface mines and related equipment, as well as a road construction and coal
recovery business. We paid an aggregate purchase price of $315.1 million, including cash in the
amount of $35.2 million, $221.0 million principal amount of promissory installment notes, the first
installment of which in the amount of $181.1 million was paid by us on November 2, 2005 and the
second installment of which in the amount $39.9 million is due on January 15, 2006, and the
issuance of 2,180,233 shares of our common stock with a value determined under applicable
accounting standards of approximately $58.9 million. The final cash purchase price is subject to
certain working capital and other adjustments.
In conjunction with the closing of the Nicewonder Acquisition, we entered into a new credit
facility with certain lenders (the 2005 Financing) in the amount of $525.0 million, consisting of
a $250.0 million seven-year term loan and a $275.0 million revolving credit facility with a
five-year term. We used the proceeds of the term loan and borrowings under our new revolving credit
facility to finance the Nicewonder Acquisition (including payment of the first installment on the
promissory notes) and to repay in full our then-existing credit facility. Also in connection with
the Nicewonder Acquisition, we amended our committed bonding facility with Travelers Casualty and
Surety Company of America to increase the maximum amount of surety bonds that can be issued
thereunder from $125.0 million to $150.0 million.
Coal Pricing Trends and Uncertainties. During the three months and nine months ended September
30, 2005, when compared to the corresponding periods in 2004, prices for our coal increased due to
a combination of conditions in the United States and internationally, including an improving U.S.
economy and robust economic growth in Asia, relatively low customer stockpiles, limited
availability of high-quality coal from competing producers in Central Appalachia, capacity
constraints of U.S. nuclear-powered electricity generators, high current and forward prices for
natural gas and oil, and increased international demand for U.S. coal. This strong coal pricing
environment has contributed to our growth in revenues during the three months and nine months ended
September 30, 2005. While our outlook on coal pricing remains positive as noted below under
Outlook, future coal prices are subject to factors beyond our control and we cannot predict
whether and for how long this strong coal pricing environment will continue. As of November 1,
2005, including the operations we acquired in the Nicewonder Acquisition, approximately 18%, 55%
and 79% of our planned 2006, 2007 and 2008 production, respectively, was uncommitted and was not
yet priced. For the tons for which we have firm commitments in 2006, the average price for steam
coal is $46.72 per ton and the average price for metallurgical coal is $74.02 per ton.
During the first nine months of 2005 when compared to the first nine months of 2004, we
experienced increased costs for purchased coal which have risen with coal prices generally, and
increased operating costs for steel manufactured equipment and supplies, employee wages and
salaries and contract mining and trucking. In addition, we have elected to take over the
operations of three under-performing contract mines and we have incurred extra costs to improve
their operational and safety standards. We also experienced disruptions in railroad service during
the first nine months of 2005, which caused delays in delivering products to customers and
increased our internal coal handling costs. We expect continued disruptions in rail service for
the remainder of this year. Conditions affecting railroad service are subject to factors beyond our
control and we cannot predict whether and for how long these railroad-related costs will continue
to increase in the future.
We continued to experience a tight market for supplies of mining and processing equipment and
parts during this quarter, due to increased demand by coal producers attempting to increase
production in response to the strong market demand for coal. Although we are attempting to obtain
adequate supplies of mining and processing equipment and parts to meet our production forecasts,
continued limited availability of equipment and parts could prevent us from meeting those
forecasts. The supply of mining and processing equipment and parts is subject to factors beyond
our control and we cannot predict whether and for how long this supply market will remain limited.
25
We are also experiencing a tight market for skilled mining employees and certified
supervisors, due to increased demand by coal producers attempting to increase production in
response to the strong market demand for coal and demographic changes as existing miners in
Appalachia retire at a faster rate than new miners are added to the Appalachian mining workforce.
Although we have initiated training programs to create new skilled miners and raise the skill
levels of existing miners, continued limited availability of skilled miners could prevent us from
being able to meet our production and sales forecasts and may result in increases in our costs.
The supply of skilled mining employees and certified supervisors is subject to factors beyond our
control and we cannot predict whether and for how long this employee market will remain limited.
The Nicewonder Acquisition was completed on October 26, 2005 and our ability to integrate
those operations into our own is important to our future success. If we are unable to realize the
anticipated benefits of the Nicewonder Acquisition due to our inability to successfully integrate
these operations into our existing operations, or to successfully operate the highway construction
business we acquired in the Nicewonder Acquisition, it could have a material adverse effect on our
business and financial and operating results and require our senior management to dedicate
significant additional time to resolving integration issues.
As previously announced, due to Hurricane Katrina, we recorded a net pre-tax charge of $0.7
million in the third quarter for loss of tonnage at a coal loading facility in New Orleans,
representing the estimated total loss less the portion of the loss expected to be recovered through
insurance claims. We expect to make a final determination of that loss in the fourth quarter.
For additional information regarding some of the risks and uncertainties that affect our
business, see the Risks Related to our Company section of Managements Discussion and Analysis
of Financial Condition and Results of Operations, set forth in our annual report on Form 10-K for
the year ended December 31, 2004 and the Risk Factors section of our registration statement on
Form S-1 (file number 333-129030).
Reconciliation of Non-GAAP Measures
The following unaudited table reconciles EBITDA and EBITDA, as adjusted, to net income the
mostly directly comparable GAAP measure.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30. |
|
|
September 30. |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
(in thousands) |
|
Net income |
|
$ |
8,210 |
|
|
$ |
5,421 |
|
|
$ |
8,801 |
|
|
$ |
18,900 |
|
Interest expense |
|
|
6,636 |
|
|
|
5,666 |
|
|
|
19,400 |
|
|
|
14,497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
(197 |
) |
|
|
(230 |
) |
|
|
(675 |
) |
|
|
(331 |
) |
Income tax expense |
|
|
3,542 |
|
|
|
1,355 |
|
|
|
15,048 |
|
|
|
4,732 |
|
Depreciation, depletion and amortization |
|
|
16,277 |
|
|
|
14,312 |
|
|
|
45,804 |
|
|
|
39,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA (1) |
|
|
34,468 |
|
|
|
26,524 |
|
|
|
88,378 |
|
|
|
77,150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interest |
|
|
|
|
|
|
5,602 |
|
|
|
2,846 |
|
|
|
19,562 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA, as adjusted (1) |
|
$ |
34,468 |
|
|
$ |
32,126 |
|
|
$ |
91,224 |
|
|
$ |
96,712 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
EBITDA is defined as net income plus interest expense, income tax expense (benefit),
depreciation, depletion, and amortization, less interest income. EBITDA, as adjusted,
includes EBITDA plus minority interest. EBITDA and EBITDA, as adjusted, are used by management to
measure operating performance, and management also believes they are useful indicators of our
ability to meet debt service and capital expenditure requirements. Because EBITDA and EBITDA, as
adjusted, are not calculated identically by all companies, our calculation may not be comparable to
similarly titled measures of other companies. In addition, the amounts presented for EBITDA and
EBITDA, as adjusted, differ from the amounts calculated under the definition of EBITDA used in our
debt covenants. The definition of EBITDA used in our debt covenants is further adjusted for certain
cash and non-cash charges and is used to determine compliance with financial covenants and our
ability to engage in certain activities such as incurring debt and making certain payments.
Adjusted EBITDA as it is used and defined in our debt covenants is described and reconciled to net
income (loss) in Analysis of Material Debt Covenants below. |
26
Results of Operations
Three months Ended September 30, 2005 Compared to the Three months Ended September 30, 2004
Summary
The discussions that follow exclude, where applicable, the discontinued operating results of
NKC for all periods.
For the quarter ended September 30, 2005, we recorded revenues of $397.7 million compared to
$341.7 million for the quarter ended September 30, 2004, an increase of $56.0 million. Net income
increased from $5.4 million in the third quarter of 2004 to $8.2 million for the third quarter of
2005. Included in our current period results were a stock-based compensation charge in the amount
of $3.4 million ($2.4 million after-tax). EBITDA, as adjusted and as reconciled to our net income
in the table above, was $34.5 million in the third quarter of 2005, including the non-cash portion
of the stock-based compensation charge in the amount of $3.4 million, and was $2.3 million more
than the same period in 2004. Our earnings per diluted share were $0.13 for the third quarter of
2005. Our pro forma net income and earnings per share are calculated in footnote 2 of our financial
statements included in this report. The stock-based compensation charge discussed above had a
negative $0.04 effect on our earnings per diluted share in this years third quarter.
We sold 6.7 million tons of coal during the current quarter, 0.2 million more than the
comparable period in 2004. Coal margin (or coal margin per ton) which we define as coal revenues
(or coal revenues per ton) less cost of coal sales (or cost of coal sales per ton) excluding
depreciation, amortization and depletion (DD&A) and selling, general and administrative expenses
(SG&A), divided by coal revenues (or coal revenues per ton), decreased from 15.2% in 2004 to 13.5%
in 2005 mainly due to an increase in our cost of coal sales. Coal margin per ton was $6.95 in the
third quarter of 2005, a $0.03 increase from the comparable period in 2004.
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months Ended |
|
|
Increase |
|
|
|
September 30, |
|
|
(Decrease) |
|
|
|
2005 |
|
|
2004 |
|
|
$ or Tons |
|
|
% |
|
|
|
|
|
|
|
(in thousands, except per ton data) |
|
|
|
|
|
Coal revenues |
|
$ |
345,179 |
|
|
$ |
295,208 |
|
|
$ |
49,971 |
|
|
|
17 |
% |
Freight and handling revenues |
|
|
46,659 |
|
|
|
37,570 |
|
|
|
9,089 |
|
|
|
24 |
% |
Other revenues |
|
|
5,851 |
|
|
|
8,931 |
|
|
|
(3,080 |
) |
|
|
(34 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
397,689 |
|
|
$ |
341,709 |
|
|
$ |
55,980 |
|
|
|
16 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tons Sold: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steam |
|
|
4,589 |
|
|
|
3,995 |
|
|
|
594 |
|
|
|
15 |
% |
Metallurgical |
|
|
2,125 |
|
|
|
2,488 |
|
|
|
(363 |
) |
|
|
(15 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
6,714 |
|
|
|
6,483 |
|
|
|
231 |
|
|
|
4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coal sales realization per ton: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steam |
|
$ |
41.66 |
|
|
$ |
33.73 |
|
|
$ |
7.93 |
|
|
|
24 |
% |
Metallurgical |
|
|
72.49 |
|
|
|
64.49 |
|
|
|
8.00 |
|
|
|
12 |
% |
Total |
|
|
51.41 |
|
|
|
45.53 |
|
|
|
5.88 |
|
|
|
13 |
% |
Coal Revenues. Coal revenues increased by $50.0 million during the quarter ended September 30,
2005 over the comparable period of 2004, or 17%, mainly driven by a 13% increase in coal sales
realization per ton from $45.53 per ton in the third quarter of 2004 to $51.41 per ton in the third
quarter of 2005. Our metallurgical coal (met coal) realization per ton increased from $64.49 per
ton in the third quarter of 2004 to $72.49 per ton in the third quarter of 2005, or 12%, and steam
coal realization per ton increased from $33.73 per ton to $41.66 per ton for the reasons discussed
in the section titled Coal Pricing Trends and Uncertainties above. Met coal sales accounted for
32% of our coal sales volume in the three months ended September 30, 2005 compared to 38 % in the
year ago period. As previously stated, due to Hurricane Katrina approximately 0.3 million tons of
met coal shipments scheduled for the current quarter were delayed and account for most of the
decrease in the percentage of met coal sales volume. Total tons sold during the third quarter
of 2005 were 6.7 million, including 2.1 million tons of met coal and 4.6 million of steam coal.
Sales volume for the comparable period last year were 6.5 million tons, of which 2.5 million tons
were met coal and 4.0 million tons were steam coal.
27
Freight and Handling Revenues. Freight and handling revenues increased by $9.1 million for the
three months ended September 30, 2005 over the year ago period mainly due to higher freight rates
partially offset by lower overseas export volumes. However, these revenues are offset by equivalent
costs and do not contribute to our profitability.
Other Revenues. Other revenues decreased by $3.1 million during the third quarter this year from
the third quarter last year. This decrease was mainly due to used equipment sales by our Maxxim
Rebuild unit in the third quarter of 2005 being approximately $1.4 million lower than in the third
quarter of 2004, contract reclamation revenue in the third quarter of 2005 being $1.2 million lower
than in the third quarter of 2005 and net sales commission revenues in the third quarter of 2005
being approximately $0.8 million lower than in the third quarter of 2004.
Costs and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Increase |
|
|
|
September 30. |
|
|
(Decrease) |
|
|
|
2005 |
|
|
2004 |
|
|
$ |
|
|
% |
|
|
|
|
|
|
|
(in thousands, except per ton data) |
|
|
|
|
|
Cost of coal sales (exclusive of items shown separately below) |
|
$ |
298,522 |
|
|
$ |
250,311 |
|
|
$ |
48,211 |
|
|
|
19 |
% |
Freight and handling costs |
|
|
46,659 |
|
|
|
37,570 |
|
|
|
9,089 |
|
|
|
24 |
% |
Cost of other revenues |
|
|
5,943 |
|
|
|
6,603 |
|
|
|
(660 |
) |
|
|
(10 |
%) |
Depreciation, depletion and amortization |
|
|
16,277 |
|
|
|
14,193 |
|
|
|
2,084 |
|
|
|
15 |
% |
Selling, general and administrative expenses (exclusive of
depreciation and amortization shown separately above and including
stock-based compensation
expense in the amount of $3,381 for the three months ended September 30,
2005) |
|
|
12,147 |
|
|
|
10,124 |
|
|
|
2,023 |
|
|
|
20 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
$ |
379,548 |
|
|
$ |
318,801 |
|
|
$ |
60,747 |
|
|
|
19 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of coal sales per ton: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company mines |
|
$ |
38.07 |
|
|
$ |
31.93 |
|
|
$ |
6.14 |
|
|
|
19 |
% |
Contract mines (including purchased and processed) |
|
|
51.34 |
|
|
|
43.42 |
|
|
|
7.92 |
|
|
|
18 |
% |
Total produced and processed |
|
|
40.77 |
|
|
|
34.52 |
|
|
|
6.25 |
|
|
|
18 |
% |
Purchased and sold without processing |
|
|
56.14 |
|
|
|
48.90 |
|
|
|
7.24 |
|
|
|
15 |
% |
Cost of coal sales per ton |
|
|
44.46 |
|
|
|
38.61 |
|
|
|
5.85 |
|
|
|
15 |
% |
Cost of Coal Sales: Our cost of coal sales increased by $48.2 million, or $5.85 per ton, from
$250.3 million, or $38.61 per ton, in the third quarter of 2004 to $298.5 million, or $44.46 per
ton, in the third quarter of 2005. Our cost of sales per ton of our produced and processed coal was
$40.77 per ton in the three months ended September 30, 2005 as compared to $34.52 per ton in the
comparable period in 2004. This increase is attributable to increased costs for labor and mine
supplies, higher trucking costs, and increased variable sales-related costs, such as royalties and
severance taxes. Also, our cost for contract miner services and coal purchased and processed at our
facilities increased 18% in the current quarter as compared to the third quarter of 2004 due mainly
to a shortfall in contract mine production that was supplemented with higher-cost purchased coal.
In 2005, we have elected to take over production for three of these under-performing contract mines
and we have incurred extra costs to improve their operational and safety standards. The cost of
sales per ton of our purchased coal was $56.14 per ton in the third quarter 2005, and $48.90 per
ton for the corresponding period of 2004. This $7.24 per ton increase in costs is due to the
general increase in coal prices since last year and the change in the mix of coal qualities
purchased. Of these purchased tons, approximately 57% was blended with our produced and processed
tons prior to resale.
Freight and Handling Costs. Freight and handling costs increased by $9.1 million for the three
months ended September 30, 2005 over the year ago period mainly due to higher freight rates
partially offset by lower overseas export volumes. We paid these freight and handling costs which
we treat as being reimbursed by our customers.
Cost of Other Revenues. Our cost of other revenues decreased by 10% or $0.7 million in the third
quarter of 2005 when compared to the similar period in 2004 due to lower equipment purchases for
resale at our subsidiary, Maxxim Rebuild Company, mostly offset by higher coal processing and
handling costs.
Depreciation, Depletion and Amortization. DD&A increased $2.1 million, or 15%, to $16.3 million for
the three months ended September 30, 2005, as compared to the same period in 2004 due mainly to
capital additions. DD&A per ton of produced and
28
processed coal sold increased from $3.06 per ton
for the three months ended September 30, 2004 to $3.19 per ton in the same period of 2005.
Selling, General and Administrative Expenses. Our SG&A expenses increased by $2.0 million
during the third quarter of 2005 over the corresponding quarter last year. Excluding our
stock-based compensation charge of $3.4 million incurred in the third quarter of 2005, our SG&A
expenses decreased in the three months ended September 30, 2005 by $1.4 million from the third
quarter of last year. The decrease in this quarters expense is mainly due to a reduction in
incentive bonus awards. Excluding our stock-based compensation charge, our SG&A expenses are $1.30
per ton sold, down from $1.56 per ton sold in last years third quarter.
Interest Expense. Interest expense increased from $5.7 million to $6.6 million during the third
quarter of 2005 compared to the same period in 2004 due to an increase in our borrowings under our
credit facility and higher base interest rates in the current quarter.
Income Tax Expense: Our provision for income taxes related to continuing operations increased by
$1.1 million from $2.4 million in the prior years third quarter to $3.5 million in this years
third quarter. The effective tax rate of 30.1% for the third quarter of 2005 is higher than the
13.5% effective tax rate for the third quarter of 2004 primarily due to a portion of pre-tax income
related to the minority interest and pass-through entity owners not being tax affected in the 2004
period. Subsequent to the Internal Restructuring and IPO in 2005, all of the income of ANR Holdings
is taxed to Alpha Natural Resources, Inc.
We increased our estimated 2005 annual effective tax rate applied to year-to-date earnings,
exclusive of $33.0 million of the stock-based compensation charge, by approximately one percent
over the rate used in the year-to-date June period. The increase in the annual tax rate caused the
third quarter tax provision to be 30.1% of pre-tax income, compared with 25.8% for the second
quarter.
Nine months Ended September 30, 2005 Compared to the Nine months Ended September 30, 2004
Summary
For
the nine months ended September 30, 2005, our total revenues were $1.127 billion compared
to $924.3 million for the nine months ended September 30, 2004, an increase of $203.2 million. Net
income decreased from $18.9 million in the 2004 period to $8.8 million for the 2005 period.
Included in net income for the nine months ended September 30, 2005, was a stock-based compensation
charge in the amount of $43.2 million ($40.5 million after-tax) and gains associated with the
settlement of a funded reclamation settlement and the sale of NKC totaling $2.5 million ( $1.8
million after-tax). EBITDA, as adjusted and as reconciled to our net income or loss in the table
above, was $91.2 million in the first nine months of 2005, including the non-cash portion of the
stock-based compensation charge in the amount of $35.7 million and was $5.5 million less than the
same period in 2004. Our pro forma earnings per diluted share were $0.18 for the first nine months
2005, a $0.28 per share decrease over pro forma earnings per share for the 2004 period (see
footnote 2 in our financial statements included herein). The combination of the stock-based
compensation charge and the gains discussed above had a negative $0.63 effect on our pro forma
earnings per share for the first nine months of 2005.
We sold 18.9 million tons of coal during the first nine months of 2005, 0.1 million less than
the comparable period in 2004. Coal margin increased from 16.5% in 2004 to 16.7% in 2005. Coal
margin per ton was $8.67 in the nine months ended September 30, 2005, an increase of 25% over the
nine months ended September 30, 2004 as increases in realization per ton outpaced increases in cost
of coal sales per ton.
29
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months Ended |
|
|
Increase |
|
|
|
September 30, |
|
|
(Decrease) |
|
|
|
2005 |
|
|
2004 |
|
|
$ or Tons |
|
|
% |
|
|
|
|
|
|
|
(in thousands, except per ton data) |
|
|
|
|
|
Coal revenues |
|
$ |
982,383 |
|
|
$ |
801,021 |
|
|
$ |
181,362 |
|
|
|
23 |
% |
Freight and handling revenues |
|
|
126,650 |
|
|
|
102,846 |
|
|
|
23,804 |
|
|
|
23 |
% |
Other revenues |
|
|
18,447 |
|
|
|
20,440 |
|
|
|
(1,993 |
) |
|
|
(10 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
1,127,480 |
|
|
$ |
924,307 |
|
|
$ |
203,173 |
|
|
|
22 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tons Sold: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steam |
|
|
11,700 |
|
|
|
11,801 |
|
|
|
(101 |
) |
|
|
(1 |
%) |
Metallurgical |
|
|
7,237 |
|
|
|
7,261 |
|
|
|
(24 |
) |
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
18,937 |
|
|
|
19,062 |
|
|
|
(125 |
) |
|
|
(1 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coal sales realization per ton: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steam |
|
$ |
40.05 |
|
|
$ |
31.93 |
|
|
$ |
8.12 |
|
|
|
25 |
% |
Metallurgical |
|
|
70.99 |
|
|
|
58.43 |
|
|
|
12.56 |
|
|
|
21 |
% |
Total |
|
|
51.88 |
|
|
|
42.02 |
|
|
|
9.86 |
|
|
|
23 |
% |
Coal Revenues. Coal revenues increased by $181.4 million during the nine months ended September
30, 2005 over the comparable period of 2004, or 23% mainly driven by a 23% increase in coal sales
realization per ton from $42.02 per ton in the first nine months of 2004 to $51.88 per ton in the
comparable 2005 period. Our met coal realization per ton increased from $58.43 per ton in the nine
months ended September 30, 2004, to $70.99 per ton in the 2005 nine month period, or 21%, and
steam coal realization per ton increased from $31.93 to $40.05 or 25%. Met coal sales accounted for
38% of our coal sales volume in the nine months ended September 30, 2005 and September 30, 2004.
Total tons sold during the first nine months of 2005 were 18.9 million, including 7.2 million tons
of met coal and 11.7 million of steam coal. Sales for the comparable periods last year were 19.1
million tons of which 7.3 million tons were met coal and 11.8 million tons were steam coal.
Freight and Handling Revenues. Freight and handling revenues increased by $23.8 million during the
nine months ended September 30, 2005 over the year ago period mainly due to higher freight rates
partially offset by lower overseas export volumes. However, these revenues are offset by equivalent
costs and do not contribute to our profitability.
Other Revenues. Other revenues decreased by $2.0 million during the first nine months of this year
from the corresponding period last year mainly due to a $2.4 million decrease in net sales
commissions and lower used equipment sales by Maxxim Rebuild in the approximate amount of $1.2
million. Also, the nine months ended September 30, 2004 included revenue from contract reclamation
in the amount of $1.2 million and no income in the current period. These decreases were partially
offset by higher coal processing and handling fees.
Costs and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
Increase |
|
|
|
September 30. |
|
|
(Decrease) |
|
|
|
2005 |
|
|
2004 |
|
|
$ |
|
|
% |
|
|
|
|
|
|
|
(in thousands, except per ton data) |
|
|
|
|
|
Cost of coal sales (exclusive of items shown separately below) |
|
$ |
818,299 |
|
|
$ |
668,887 |
|
|
$ |
149,412 |
|
|
|
22 |
% |
Freight and handling costs |
|
|
126,650 |
|
|
|
102,846 |
|
|
|
23,804 |
|
|
|
23 |
% |
Cost of other revenues |
|
|
16,327 |
|
|
|
14,942 |
|
|
|
1,385 |
|
|
|
9 |
% |
Depreciation, depletion and amortization |
|
|
45,521 |
|
|
|
38,883 |
|
|
|
6,638 |
|
|
|
17 |
% |
Selling, general and administrative expenses (exclusive of
depreciation and amortization shown separately above and including
stock-based compensation
expense in the amount of $43,169 for the nine months ended September
30, 2005) |
|
|
74,924 |
|
|
|
35,786 |
|
|
|
39,138 |
|
|
|
109 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
$ |
1,081,721 |
|
|
$ |
861,344 |
|
|
$ |
220,377 |
|
|
|
26 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
Increase |
|
|
|
September 30. |
|
|
(Decrease) |
|
|
|
2005 |
|
|
2004 |
|
|
$ |
|
|
% |
|
|
|
|
|
|
|
(in thousands, except per ton data) |
|
|
|
|
|
Cost of coal sales per ton: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company mines |
|
$ |
36.49 |
|
|
$ |
29.95 |
|
|
$ |
6.54 |
|
|
|
22 |
% |
Contract mines (including purchased and processed) |
|
|
50.54 |
|
|
|
39.97 |
|
|
|
10.57 |
|
|
|
26 |
% |
Total produced and processed |
|
|
39.46 |
|
|
|
32.22 |
|
|
|
7.24 |
|
|
|
22 |
% |
Purchased and sold without processing |
|
|
57.30 |
|
|
|
43.71 |
|
|
|
13.59 |
|
|
|
31 |
% |
Cost of coal sales per ton |
|
|
43.21 |
|
|
|
35.09 |
|
|
|
8.12 |
|
|
|
23 |
% |
Cost of Coal Sales: Our cost of coal sales increased by $149.4 million, or $8.12 per ton, from
$668.9 million, or $35.09 per ton, in the nine months ended September 30, 2004 to $818.3 million,
or $43.21 per ton, in the 2005 comparable period. Our cost of sales per ton of our produced and
processed coal was $39.46 per ton in the nine months ended September 30, 2005 as compared to $32.22
per ton in the comparable period in 2004. This increase is attributable to increased costs for
steel-related mine supplies, higher trucking costs, and increased variable sales-related costs,
such as royalties and severance taxes. Also, our cost for contract miner services and coal
purchased and processed at our facilities increased 26% in the current period as compared to the
prior year period. In 2005, we have elected to take over production for three of these
under-performing contract mines and we have incurred extra costs improve their operational and
safety standards. The cost of sales per ton of our purchased coal was $57.30 per ton in the first
nine months of 2005, and $43.71 per ton for the corresponding period of 2004. This $13.59 per ton
increase in costs is due to the general increase in coal prices since last year and the change in
the mix of coal qualities purchased. Of these purchased tons approximately 62% was blended with our
produced and processed tons prior to resale.
Freight and Handling Costs. Freight and handling costs increased by $23.8 million during the nine
months ended September 30, 2005 over the year ago period due higher freight rates. We paid these
freight and handling costs which we treat as being reimbursed by our customers.
Cost of Other Revenues. Our cost of other revenues increased by 9% or $1.4 million in the first
nine months of 2005 when compared to the similar period in 2004 due to higher coal processing and
handling costs ($2.8 million) from increased volumes partially offset by lower expenses at Maxxim
Rebuild related to lower sales levels ($1.4 million).
Depreciation, Depletion and Amortization. DD&A increased $6.6 million or 17%, to $45.5 million for
the nine months ended September 30, 2005 as compared to the same period in 2004 due mainly to
capital additions. DD&A per ton of produced and processed coal sold increased from $2.72 per ton
for the nine months ended September 30, 2004 to $3.05 per ton in the same period of 2005.
Selling, General and Administrative Expenses. Our SG&A expenses increased by $39.1 million
during the first nine months of 2005 over the corresponding period last year. Excluding our
stock-based compensation charge of $43.2 million incurred in the first nine months of 2005, our
SG&A expenses decreased in the nine months ended September 30, 2005 by $4.0 million from the
comparable period last year. Included in the first nine months of 2004 expenses were incentive
bonuses in the total amount of $4.4 million and a $3.1 million payment related to partial
termination of a coal supply agreement. Included in this years first nine months are higher
professional fees related to a strategic sourcing initiative, our Sarbanes-Oxley compliance project
and other expenses related to being a public company. Excluding our stock-based compensation
charge, our SG&A was $1.68 and $1.88 per ton sold in 2005 and 2004, respectively.
Interest Expense. Interest expense increased from $14.5 million to $19.4 million during the nine
months ended September 30, 2005 compared to the same period in 2004. This increase is mainly
attributable to our 10% senior notes issued in May 2004.
Interest Income. Interest income increased by $0.3 million in the nine months ended September 30,
2005 over the nine months ended September 30, 2004. This increase was attributable to our $10.0
million loan to a coal supplier which we made in June 2004.
Income Tax Expense: Our provision for income taxes related to continuing operations increased by
$9.3 million from $5.9 million in the prior years first nine months to $15.1 million in this
years first nine months. Since the condensed consolidated statements of operations for the nine
months ended September 30, 2005 include activity both prior to and after the Internal Restructuring
and IPO, the total income tax provision is the sum of the provisions for the pre- and
post-restructuring periods.
Prior to February 12, 2005, the minority interest owners and ANR Fund IX Holdings, L.P. owned
interests in ANR Holdings, a limited liability company and pass-through entity for income tax
purposes. As a pass-through entity, ANR Holdings provides information
31
returns reflecting the allocated income (loss) to the minority interest owners and ANR Fund IX
Holdings, L.P based upon their respective ownership percentage and certain special allocations as
provided by the limited liability company agreement and the Internal Revenue Code. The income tax
consequences of the income (loss) allocated to these owners for the period from January 1, 2005 to
February 11, 2005 and from January 1, 2004 to September 30, 2004 is not reflected in the financial
statements. For these periods, only the income tax expense associated with Alpha NR Holding, Inc.,
a taxable entity, is included. The primary source of the income tax impact is derived from the
allocated income (loss) from ANR Holdings, Alpha Natural Resources, LLC and its operating
subsidiaries, all of which are pass-through entities for tax purposes. Subsequent to the Internal
Restructuring and IPO, all of the income of ANR Holdings is taxed to Alpha Natural Resources, Inc.
The effective tax rate of 55.9% for the first nine months of 2005 is greater than the federal
statutory rate of 35% due primarily to the majority of the stock-based compensation charge
associated with the issuance of common stock to management in connection with the Internal
Restructuring and IPO not being deductible for tax purposes. The increase in expected income tax
expense related to the stock-based compensation charge is offset in part by the tax benefits
associated with percentage depletion, the extraterritorial income exclusion, and taxes not being
provided for on the minority interest and pass-through entity owners respective share of income
for the period prior to the restructuring. As $33.0 million of the stock-based compensation charge
was identified as a significant unusual item in the first quarter 2005, the tax effect of the $33.0
million expense (no tax benefit) was accounted for in that period and excluded from the estimated
annual effective tax rate of approximately 27%. The estimated effective tax rate for Alpha Natural
Resources, Inc. is applied to pre-tax income exclusive of this significant unusual expense and
infrequently occurring item. Because the majority of the 2005 stock-based compensation was
recorded in the first quarter, the first nine months of 2005 effective tax rate of 55.9%, including
the negative impact of the $33.0 million stock-based compensation charge, will not be indicative of
the effective tax rate for the remainder of 2005. We estimate that, exclusive of the stock-based
compensation charge (both the $33.0 million significant unusual portion and the recurring portion
for the full year of 2005), our 2005 effective tax rate would be approximately 23.5%, which is
lower than the federal statutory rate of 35% due to the benefits of percentage depletion and a
combination of the Extraterritorial Income Exclusion and deduction for domestic production
activities enacted as part of the American Jobs Creation Act of 2004, partially offset by state
income taxes and valuation allowances. Actual pre-tax income for the year and continued quarterly
review of valuation allowances could have an impact on the fourth quarter and annual effective tax
rate.
Our effective tax rate of 55.9% for the first nine months of 2005 is significantly higher than the
rate of 11.9% in the first nine months of 2004 primarily due to the significant stock-based
compensation charge for 2005 that did not exist in 2004. In addition, the portion of pre-tax
income related to the minority interest and pass-through entity owners not tax affected is greater
in the first nine months of 2004, thereby reducing the effective rate more in that period of 2004
compared to the same period in 2005.
Liquidity and Capital Resources
Our primary liquidity and capital resource requirements are to finance the cost of our coal
production and purchases, to make capital expenditures, pay income taxes, and to service our debt
and reclamation obligations. Our primary sources of liquidity are cash flow from sales of our
produced and purchased coal, other income and borrowings under our senior credit facility.
At September 30, 2005, our available liquidity was $41.1 million, including cash of $0.1
million and $41.0 million available under our then-existing credit facility. Our total indebtedness
was $261.0 million at September 30, 2005, an increase of $59.3 million from the year ended December
31, 2004. As previously discussed, on October 26, 2005, we closed our 2005 Financing. Giving effect
to this new credit facility, the closing of the Nicewonder Acquisition and the repayment of the
first installment of the promissory installment notes issued to the sellers in connection with the
Nicewonder Acquisition, in each case as if these transactions had occurred on September 30, 2005,
our estimated availability would have been approximately $153.2 million and our total outstanding
indebtedness would have been approximately $527.2 million.
Our cash capital spending for the nine months ended September 30, 2005 is $95.9 million, and
we currently project cash capital spending for the full year of 2005 of $110 million to $120
million. These expenditures have been and are forecasted to be used to develop new mines and
replace or add equipment. We believe that cash generated from our operations and borrowings under
our credit facility will be sufficient to meet our working capital requirements, anticipated
capital expenditures and debt service requirements for at least the next twelve months.
Cash Flows
Net cash provided by operations in the first nine months of 2005 was $21.6 million, a decrease
of $77.6 million from the $99.2 million of net cash provided by operations during the first nine
months of 2004. A decrease in our net income and an increase in our
32
non-cash charges (mainly due to our stock-based compensation) provided more cash in the nine months
ended September 30, 2005 than the comparable period in 2004 in the amount of $6.6 million. However,
the $6.6 million was more than offset by an increase in the cash required to support our operating
assets and liabilities in the amount of $84.3 million. The additional cash required for operating
assets and liabilities in the first nine months of 2005 as compared to the first nine months of
2004 was principally caused by the following three factors:
§ Our trade accounts receivable used $28.5 million more cash in the first nine months of
2005 than in the comparable period last year, due to the 22% increase in our total revenues in
the nine months ended September 30, 2005 compared to the prior year period. Our days sales
outstanding as of September 30, 2005 were 34.8 days an
increase of 1.9 days from June 30, 2005.
This increase was due to shipments to customers whose regular terms of sale require them to pay
us within 60 days.
§ The cash required to carry inventories increased by $28.5 million in the current nine
month period over the corresponding period last year mainly due to an increase in tons in
inventory and an increase in the associated cost per ton.
§ Accounts payable and other current accrued liabilities provided cash in the nine months
ended September 30, 2005 in the amount of $16.2 million while these liabilities provided cash in
the amount of $44.9 million in the year ago period, an additional $28.7 million use of cash in
the current period.
Net cash used in investing activities consumed $26.2 million more cash in the first nine
months of 2005 over the year ago period mainly due to increased capital expenditures for new mines
and equipment.
Net cash provided by financing activities increased by $91.9 million to $64.5 million in the
nine months ended September 30, 2005 over the nine months ended September 30, 2004. During the nine
month period ending September 30, 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 $27.4 million during the year ago period. In the nine months ended
September 30, 2005, we completed our previously discussed Internal Restructuring and IPO. The
proceeds from the IPO were used to repay shareholders notes issued as part of the Internal
Restructuring. Our long-term debt increased approximately $72.0 million during 2005 and has been
used to fund our cash needs for working capital and to purchase capital equipment.
Credit Facility and Long-term Debt
As of September 30, 2005, our total long-term indebtedness, including capital lease
obligations, consisted of the following (in thousands):
|
|
|
|
|
|
|
September 30, |
|
|
|
2005 |
|
10% Senior notes due 2012 |
|
$ |
175,000 |
|
Revolving credit facility |
|
|
81,000 |
|
Variable rate term notes |
|
|
586 |
|
Capital lease obligation |
|
|
1,623 |
|
|
|
|
|
Total long-term debt |
|
|
258,209 |
|
Less current portion |
|
|
(1,046 |
) |
|
|
|
|
Long-term debt, net of current portion |
|
$ |
257,163 |
|
|
|
|
|
Our
credit facility in effect prior to the 2005 Financing, which we
refer to in this report as our prior credit facility, imposed, and our new 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, similar to our prior
credit facility, the new credit facility provides that we must meet or exceed certain interest
coverage ratios and must not exceed certain leverage ratios.
Borrowings under our new credit facility will be subject to mandatory prepayment (1) with 100%
of the net cash proceeds received from asset sales or other
dispositions of property by Alpha NR
Holding,
Inc. and its subsidiaries (including insurance and other condemnation
33
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 acquisitions of, or combinations with, coal mining companies. When we believe that
these opportunities are consistent with our growth plans and our acquisition criteria, we will make
bids or proposals and/or enter into letters of intent and other similar agreements, which may be
binding or nonbinding, that are customarily subject to a variety of conditions and usually permit
us to terminate the discussions and any related agreement if, among other things, we are not
satisfied with the results of our due diligence investigation. Any acquisition opportunities we
pursue could materially affect our liquidity and capital resources and may require us to incur
indebtedness, seek equity capital or both. There can be no assurance that additional financing will
be available on terms acceptable to us, or at all.
Analysis of Material Debt Covenants
We were in compliance with all covenants under our prior credit facility and the indenture
governing our senior notes as of September 30, 2005.
The financial covenants in our prior credit facility required, among other things, that:
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Alpha Natural Resources, LLC, our indirect wholly-owned subsidiary, must maintain a
leverage ratio, defined as the ratio of total debt to Adjusted EBITDA (as defined in the
prior credit agreement), of less than 3.75 at December 31, 2004, 3.50 at March 31 and
September 30, 2005, 3.25 at September 30 and December 31, 2005, 3.15 at March 31, September
30, September 30 and December 31, 2006 and 3.00 at March 31, 2007 (and thereafter),
respectively, with Adjusted EBITDA being computed using the most recent four quarters; and |
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|
Alpha Natural Resources, LLC must maintain an interest coverage ratio, defined as the
ratio of Adjusted EBITDA (as defined in the prior credit agreement), to cash interest expense
(defined as the sum of cash interest expense plus cash letter of credit fees and
commissions), of greater than 2.50 at September 30, 2004 and at each quarter end thereafter. |
Based upon Adjusted EBITDA (as defined in the prior credit agreement), Alpha Natural
Resources, LLCs leverage ratio and interest coverage ratio for the twelve months ended September
30, 2005 were 1.66 (maximum of 3.50) and 8.80 (minimum of 2.50), respectively. Alpha Natural
Resources, LLC maintained the leverage and interest coverage ratios
specified in, and was in
compliance with, the prior credit facility as of September 30, 2005. Prior to the 2005 Financing,
Adjusted EBITDA, as defined in the prior credit agreement, was used to determine compliance with
many of the covenants under the prior credit facility. The breach of covenants in the prior credit
facility that are tied to ratios based on Adjusted EBITDA could have resulted in a default under
the prior credit facility and the lenders could have elected to declare all amounts borrowed due
and payable.
The
new credit facility requires Alpha NR Holding, Inc. to maintain an interest coverage ratio,
defined as the ratio of Adjusted EBITDA (as defined in the new credit
agreement) to cash interest expense, of 2.50 or greater at December
31, 2005 and at each quarter end thereafter. The new
credit facility also requires Alpha NR Holding, Inc. to maintain a leverage ratio, defined as the
ratio of consolidated adjusted debt (consolidated debt less unrestricted cash and cash equivalents)
to Adjusted EBITDA, 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. As in the prior facility, Adjusted EBITDA will
be used to determine compliance with many of the covenants under the new credit facility. A breach
of the covenants in the new credit facility that are tied to ratios based on Adjusted EBITDA could
result in a default under the new credit facility and the lenders could elect to declare all
amounts borrowed due and payable. Any acceleration under our new credit facility would also result
in a default under our indenture.
Because the covenants in our prior credit facility related to Alpha Natural Resources, LLC,
EBITDA as presented in the table below reflects adjustments for minority interest necessary to
reconcile our net income to Alpha Natural Resources, LLCs EBITDA. Adjusted EBITDA is defined as
EBITDA further adjusted to exclude non-recurring items, non-cash items and other adjustments
permitted in calculating covenant compliance under our credit facility, as shown in the table
below. We believe that the inclusion of supplementary adjustments to EBITDA applied in presenting
Adjusted EBITDA is appropriate to provide additional information to investors to demonstrate
compliance with our financial covenants.
34
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Three Months |
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Three Months |
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Three Months |
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Three Months |
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Twelve Months |
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Ended |
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Ended |
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Ended |
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Ended |
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Ended |
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December 31, |
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March 31, |
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June 30, |
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September 30, |
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September 30, |
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2004 |
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2005 |
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2005 |
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2005 |
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2005 |
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(In thousands) |
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Net income (loss) |
|
$ |
1,115 |
|
|
$ |
(25,801 |
) |
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$ |
26,393 |
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|
$ |
8,210 |
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$ |
9,917 |
|
Interest expense, net |
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5,344 |
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|
5,830 |
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|
6,456 |
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|
6,439 |
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24,069 |
|
Income tax expense (benefit) |
|
|
(772 |
) |
|
|
2,324 |
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9,182 |
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|
3,542 |
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14,276 |
|
Depreciation, depletion and amortization
expenses |
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16,660 |
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14,480 |
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15,048 |
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16,277 |
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|
62,465 |
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EBITDA |
|
|
22,347 |
|
|
|
(3,167 |
) |
|
|
57,079 |
|
|
|
34,468 |
|
|
|
110,727 |
|
Minority interest(1) |
|
|
268 |
|
|
|
2,846 |
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|
|
|
|
|
3,114 |
|
Stock-based compensation charge(2) |
|
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|
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|
36,407 |
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|
3,381 |
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|
3,381 |
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43,169 |
|
Asset impairment charge and write-offs (2) |
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|
683 |
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|
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|
683 |
|
Alpha Natural Resources, Inc. (inc) exp (2) |
|
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|
|
209 |
|
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|
(505 |
) |
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|
|
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|
(296 |
) |
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|
Adjusted EBITDA |
|
$ |
22,615 |
|
|
$ |
36,295 |
|
|
$ |
60.638 |
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$ |
37,849 |
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$ |
157,397 |
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Leverage ratio(3) |
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1.66 |
|
Interest coverage ratio(4) |
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8.80 |
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(1) |
|
Because our prior credit facility and our senior notes are issued by our subsidiaries, we
are required to adjust our EBITDA for our minority interest which does not exist at the
subsidiary level. |
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(2) |
|
Adjusted EBITDA as defined in our prior credit facility is adjusted to add back for the
non-cash portion of the stock-based compensation charge related to our Internal Restructuring
and initial public offering, for the asset impairment charge related to our NKC operations,
for other asset write-offs and amounts of income or expense related to the parent of Alpha
Natural Resources, LLC. Income or expenses related solely to Alpha Natural Resources, Inc. are
excluded from the calculation of Adjusted EBITDA under our prior credit agreement. |
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(3) |
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Leverage ratio is defined in our prior credit facility as total debt divided by Adjusted
EBITDA. |
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(4) |
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Interest coverage ratio is defined in our prior credit facility as Adjusted EBITDA divided by
cash interest expense. |
Outlook
While our business is subject the general risks of the coal industry and specific individual risks,
we believe that the outlook for coal markets remains positive worldwide, assuming continued growth
in the U.S., China, Pacific Rim, Europe and other industrialized economies that are increasing coal
demand for electricity generation and steelmaking. Published indices show improved year-over-year
coal prices in most U.S. and global coal markets, and worldwide coal supply/demand fundamentals
remain tight due to high market demand, transportation constraints and production difficulties in
most countries. Metallurgical coal is generally selling at a significant premium to steam coal, and
we expect that pricing relationship to continue based on the same assumptions made above.
For 2005, we are targeting annual production of 20 million to 22 million tons and total sales
volume of 25 million to 26 million tons. Approximately 82%, 45% and 21% of our planned production
in 2006, 2007 and 2008, respectively, including production from the operations we acquired in the
Nicewonder Acquisition, has been priced as of November 1, 2005. Recent domestic contract
negotiations have yielded commitments for about 1.5 million tons of met coal in the $80-$90 per ton
FOB mine range for 2006. In addition, our sales force recently acquired several new customers in
both the foreign and domestic markets.
The availability of skilled miners and supervisors and the cost to attract and retained those
people is an issue we are addressing. While this issue has not materially impacted our business or
our ability to attain the financial targets we have set, we have initiated training programs to
attract new people into the mining industry and raise the skill levels of our current workers.
Three of our organic expansion projects started production this year and one more is on target to
begin producing coal in the fourth quarter of this year. These four mines are expected to produce
an aggregate of 2.5 million tons of coal annually and will help to replace higher cost mines and
purchased coal.
We anticipate continued challenges with railroad service throughout the remainder of this year. We
are working with our customers and the railroads in an effort to address these issues in a timely
manner.
35
Based on current market conditions in the steam and metallurgical coal markets, we anticipate
increasing the proportion of our metallurgical coal sales that are committed under long-term
contracts as compared to prior years and continuing to market portions of our high quality steam
coal production as metallurgical coal. We plan to focus on organic growth by continuing to develop
our existing reserves. In addition, we also plan to evaluate attractively priced acquisitions that
create potential synergies with our existing operations.
Critical Accounting Estimates and Assumptions
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States requires management to make estimates and assumptions that affect reported
amounts. These estimates and assumptions are based on information available as of the date of the
financial statements. Accounting measurements at interim dates inherently involve greater reliance
on estimates than at year-end. The results of operations for the quarter and year-to-date periods
ended September 30, 2005 are not necessarily indicative of results that can be expected for the
full year. Please refer to the section entitled Critical Accounting Estimates and Assumptions of
Managements Discussion and Analysis of Financial Condition and Results of Operations in our
annual report on Form 10-K for the year ended December 31, 2004 for a discussion of our critical
accounting estimates and assumptions.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
In addition to risks inherent in operations, we are exposed to market risks. The following
discussion provides additional detail regarding our exposure to the risks of changing coal prices,
interest rates and customer credit.
We are exposed to market price risk in the normal course of selling coal. As of November 1,
2005, approximately 18% and 55% of our estimated 2006 and 2007 planned production, respectively,
including the operations we acquired in the Nicewonder Acquisition, was uncommitted. As compared to
prior years, we have increased the proportion of our planned future production in 2006 and 2007 for
which we have contracts to sell coal, which has the effect of lessening our market price risk.
All of our borrowings under the revolving credit facility are at a variable rate, so we are
exposed to rising interest rates in the United States. A one percentage point increase in interest
rates would result in an annualized increase to interest expense of approximately $0.8 million
based on our variable rate borrowings as of September 30, 2005.
Our concentration of credit risk is substantially with electric utilities, producers of steel
and foreign customers. Our policy is to independently evaluate a customers creditworthiness prior
to entering into transactions and to periodically monitor the credit extended.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures. Under the supervision and with the
participation of our management, including our Chief Executive Officer and our Chief Financial
Officer, we evaluated the effectiveness of our disclosure controls and procedures, as such term is
defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended.
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.
Changes in internal control over financial reporting. Beginning with the year ending December
31, 2006, Section 404 of the Sarbanes-Oxley Act of 2002 will require us to include managements
report on our internal control over financial reporting in our Annual Report on Form 10-K. The
internal control report must contain (1) a statement of managements responsibility for
establishing and maintaining adequate internal control over our financial reporting, (2) a
statement identifying the framework used by management to conduct the required evaluation of the
effectiveness of our internal control over financial reporting, (3) managements assessment of the
effectiveness of our internal control over financial reporting as of the end of our most recent
fiscal year, including a statement as to whether or not our internal control over financial
reporting is effective, and (4) a statement that our registered independent public accounting firm
has issued an attestation report on managements assessment of our internal control over financial
reporting.
In order to achieve compliance with Section 404 within the prescribed period, management has
commenced a Section 404 compliance project under which management has engaged outside consultants
and adopted a detailed project work plan to assess the adequacy of our internal control over
financial reporting, remediate any control weaknesses that may be identified, validate through
36
testing that controls are functioning as documented and implement a continuous reporting and
improvement process for internal control over financial reporting. In connection with our Section
404 compliance project, during the third quarter of fiscal 2005 we continued the process of
implementing measures designed to improve our internal control over financial reporting in the
following areas: documentation of controls and procedures; segregation of duties; timely
reconciliation of accounts; methods of reconciling fixed asset accounts; the structure of our
general ledger; security systems and testing of our disaster recovery plan for our information
technology systems; and the level of experience in public company accounting and periodic reporting
matters among our financial and accounting staff. We expect to continue to make changes in our
internal control over financial reporting from time to time during the period prior to December 31,
2006 in connection with our Section 404 compliance project. Except as described above, during the
third quarter of fiscal year 2005, there have been no changes in our internal control over
financial reporting that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
Limitations of the effectiveness of internal control. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of
the internal control system are met. Because of the inherent limitations of any internal control
system, no evaluation of controls can provide absolute assurance that all control issues, if any,
within a company have been detected. Notwithstanding these limitations, our disclosure controls and
procedures are designed to provide reasonable assurance of achieving their objectives. Our Chief
Executive Officer and Chief Financial Officer have concluded that our disclosure controls and
procedures are, in fact, effective at the reasonable assurance level as of the end of the period
covered by this report.
37
PART II
Item 5. Other Information
On November 3, 2005, the Company hosted a conference call to discuss our financial results for the
quarter ended September 30, 2005. During the call, the Company provided information regarding our
coal reserves, including reserves that we acquired from the Nicewonder Coal Group on October 26,
2005. The Company characterized 99% and 60% of the coal reserves acquired from the Nicewonder Coal
Group and our total reserves including the acquired Nicewonder reserves, respectively, as
compliance coal, when instead these reserve percentages should have been characterized as having a
sulfur content of less than 1%.
On
November 10, 2005, the compensation committee of Alphas board
of directors (the Committee)
approved a retention compensation package (the Retention
Package) in which certain Company
officers and key employees designated from time to time by Alphas Chief Executive Officer will
be entitled to participate, including Kevin S. Crutchfield, Executive Vice President, D. Scott
Kroh, Executive Vice President, David C. Stuebe, Vice President and Chief Financial Officer and
Michael D. Brown, Vice President. The Retention Package will entitle participants to receive
cash payments equal to a specified percentage of the participants annual base salary in the
first pay period of each of 2007, 2008 and 2009 if they are employed by ANR or its subsidiaries
on the applicable payment date. The amount of the payments under the Retention Package will be
equal to 20% of the participants 2006 annual base salary for Retention Package payments made
in the first payroll period of 2007; 30% of the participants 2007 annual base salary for
Retention Package payments made in the first payroll period of 2008;
and 50% of the participants
2008 annual base salary for Retention Package payments made in the first payroll period of 2009.
Retention Package payments are not earned proportionally through the calendar year and will not
be prorated if a participants employment terminates for any reason prior to the scheduled
payment date. On November 10, 2005, the Committee also approved an increase in the annual base
salary for Mr. Brown from his current annual base salary of $288,750
to $325,000, to be effective
January 1, 2006.
Item 6. Exhibits
|
|
|
Exhibit No |
|
Description of Exhibit |
2.1
|
|
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). |
|
|
|
2.2
|
|
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). |
|
|
|
2.3
|
|
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). |
|
|
|
2.4
|
|
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). |
|
|
|
2.5
|
|
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). |
|
|
|
31(a)*
|
|
Certification Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant
to § 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
31(b)*
|
|
Certification Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant
to § 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32(a)*
|
|
Certification Pursuant to 18 U.S.C. § 1350, As Adopted Pursuant to § 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32(b)*
|
|
Certification Pursuant to 18 U.S.C. § 1350, As Adopted Pursuant to § 906 of the Sarbanes-Oxley Act of 2002 |
38
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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ALPHA NATURAL RESOURCES, INC. |
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By: /s/ David C. Stuebe |
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Name: David C. Stuebe |
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Title: Vice President and Chief Financial Officer |
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Date: November 14, 2005
10-Q EXHIBIT INDEX
|
|
|
Exhibit No |
|
Description of Exhibit |
2.1
|
|
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). |
|
|
|
2.2
|
|
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). |
|
|
|
2.3
|
|
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). |
|
|
|
2.4
|
|
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). |
|
|
|
2.5
|
|
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). |
|
|
|
31(a)*
|
|
Certification Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant
to § 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
31(b)*
|
|
Certification Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant
to § 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32(a)*
|
|
Certification Pursuant to 18 U.S.C. § 1350, As Adopted Pursuant to § 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32(b)*
|
|
Certification Pursuant to 18 U.S.C. § 1350, As Adopted Pursuant to § 906 of the Sarbanes-Oxley Act of 2002 |