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EXCEL - IDEA: XBRL DOCUMENT - Alpha Natural Resources, Inc.Financial_Report.xls
EX-10.3 - CONSULTING AGREEMENT, DATED SEPTEMBER 1, 2014 - Alpha Natural Resources, Inc.anr-2014930x10qexhibit103.htm
EX-32.B - CERTIFICATION PURSUANT TO 18 U.S.C. 1350 - Alpha Natural Resources, Inc.anr-2014930x10qexhibit32b.htm
EX-95 - MINE SAFETY DISCLOSURE EXHIBIT - Alpha Natural Resources, Inc.anr-2014930x10qexhibit95.htm
EX-32.A - CERTIFICATION PURSUANT TO 18 U.S.C. 1350 - Alpha Natural Resources, Inc.anr-2014930x10qexhibit32a.htm
EX-31.A - CERTIFICATION PURSUANT TO RULE 13A-14(A) UNDER THE SECURITIES EXCHANGE ACT - Alpha Natural Resources, Inc.anr-2014930x10qexhibit31a.htm
EX-10.1 - GENERAL RELEASE AND NON-DISPARAGEMENT, DATED JULY 18, 2014 - Alpha Natural Resources, Inc.anr-2014930x10qexhibit101.htm
EX-10.2 - GENERAL RELEASE, DATED SEPTEMBER 1, 2014 - Alpha Natural Resources, Inc.anr-2014930x10qexhibit102.htm
EX-12.1 - COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES - Alpha Natural Resources, Inc.anr-201493010qexhibit121.htm
EX-31.B - CERTIFICATION PURSUANT TO RULE 13A-14(A) UNDER THE SECURITIES EXCHANGE ACT - Alpha Natural Resources, Inc.anr-2014930x10qexhibit31b.htm
EX-12.2 - COMPUTATION OF OTHER RATIOS - Alpha Natural Resources, Inc.anr-2014930x10qexhibit122.htm

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
 
 (Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014

OR
¨
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. 001-32331

ALPHA NATURAL RESOURCES, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
42-1638663
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)
 
 
 
One Alpha Place, P.O. Box 16429, Bristol, Virginia
 
24209
(Address of principal executive offices)
 
(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. x Yes   ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec.232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes   ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
x Large accelerated filer
o Accelerated filer
o Non-accelerated filer
o Smaller reporting company
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes   x   No

Number of shares of the registrant’s Common Stock, $0.01 par value, outstanding as of October 31, 2014 - 221,571,545



TABLE OF CONTENTS
 







Item 1.
Financial Statements

ALPHA NATURAL RESOURCES INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
(Amounts in thousands, except share and per share data)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
Coal revenues
$
920,833

 
$
1,028,847

 
$
2,792,906

 
$
3,292,412

Freight and handling revenues
111,816

 
135,931

 
362,356

 
448,316

Other revenues
17,943

 
26,316

 
61,201

 
119,080

Total revenues
1,050,592

 
1,191,094

 
3,216,463

 
3,859,808

Costs and expenses:
 
 
 
 
 
 
 
Cost of coal sales (exclusive of items shown separately below)
864,998

 
988,995

 
2,589,530

 
3,082,330

Freight and handling costs
111,816

 
135,931

 
362,356

 
448,316

Other expenses
17,988

 
120,698

 
39,873

 
155,479

Depreciation, depletion and amortization
170,895

 
196,292

 
562,262

 
650,021

Amortization of acquired intangibles, net
9,166

 
2,748

 
27,909

 
908

Selling, general and administrative expenses (exclusive of depreciation, depletion and amortization shown separately above)
34,798

 
38,899

 
119,752

 
120,664

Asset impairment and restructuring
11,544

 
2,017

 
23,633

 
24,358

Goodwill impairment

 
253,102

 
308,651

 
253,102

Total costs and expenses
1,221,205

 
1,738,682

 
4,033,966

 
4,735,178

Loss from operations
(170,613
)
 
(547,588
)
 
(817,503
)
 
(875,370
)
Other income (expense):
 
 
 
 
 
 
 
Interest expense
(75,688
)
 
(62,233
)
 
(211,662
)
 
(182,587
)
Interest income
574

 
1,008

 
1,730

 
3,133

Gain on sale of marketable equity securities
16,435

 

 
16,435

 

Gain (loss) on early extinguishment of debt

 
158

 
(2,022
)
 
(33,039
)
Gain on exchange of equity method investment

 

 
250,331

 

Miscellaneous income, net
379

 
7,277

 
2,493

 
24,131

Total other income (expense), net
(58,300
)
 
(53,790
)
 
57,305

 
(188,362
)
Loss before income taxes
(228,913
)
 
(601,378
)
 
(760,198
)
 
(1,063,732
)
Income tax benefit
43,938

 
143,137

 
6,898

 
309,022

Net loss
$
(184,975
)
 
$
(458,241
)
 
$
(753,300
)
 
$
(754,710
)
Basic loss per common share
$
(0.84
)
 
$
(2.07
)
 
$
(3.40
)
 
$
(3.42
)
Diluted loss per common share
$
(0.84
)
 
$
(2.07
)
 
$
(3.40
)
 
$
(3.42
)
Weighted average shares - basic
221,491,811

 
220,960,449

 
221,342,088

 
220,850,020

Weighted average shares - diluted
221,491,811

 
220,960,449

 
221,342,088

 
220,850,020


See accompanying Notes to Condensed Consolidated Financial Statements.


1


ALPHA NATURAL RESOURCES INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
(Amounts in thousands)

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2014
 
2013
 
2014
 
2013
Net loss
$
(184,975
)
 
$
(458,241
)
 
$
(753,300
)
 
$
(754,710
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Amortization of and adjustments to employee benefit costs, net of income tax of ($1,033) and ($76,795), and $2,125 and ($81,081) for the three and nine months ended September 30, 2014 and 2013, respectively
(31,122
)
 
100,753

 
(35,838
)
 
109,931

Settlement of cash flow hedges, net of income tax of $265 and $788, and $1,304 and $2,575 for the three and nine months ended September 30, 2014 and 2013, respectively
(404
)
 
(946
)
 
(1,981
)
 
(3,998
)
Change in fair value of marketable securities, net of income tax of $21,505 and ($173), and ($14,202) and $27 for the three and nine months ended September 30, 2014 and 2013, respectively
(32,663
)
 
300

 
21,572

 
(41
)
Total other comprehensive income (loss), net of tax
(64,189
)
 
100,107

 
(16,247
)
 
105,892

Total comprehensive loss
$
(249,164
)
 
$
(358,134
)
 
$
(769,547
)
 
$
(648,818
)

See accompanying Notes to Condensed Consolidated Financial Statements.

2


ALPHA NATURAL RESOURCES INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Amounts in thousands, except share and per share data)
 
September 30,
2014
 
December 31,
2013
 
(Unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
809,411

 
$
619,644

Trade accounts receivable, net
317,684

 
287,655

Inventories, net
305,285

 
304,863

Short-term marketable securities
374,528

 
337,069

Prepaid expenses and other current assets
264,425

 
439,193

Total current assets
2,071,333

 
1,988,424

Property, equipment and mine development costs, net
1,528,163

 
1,798,648

Owned and leased mineral rights and land (net of accumulated depletion of $1,310,602 and $1,167,912, respectively)
6,984,875

 
7,157,506

Goodwill, net

 
308,651

Other acquired intangibles (net of accumulated amortization of $362,887 and $422,737, respectively)
112,696

 
158,465

Other non-current assets
495,758

 
387,564

Total assets
$
11,192,825

 
$
11,799,258

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
176,945

 
$
29,169

Trade accounts payable
245,311

 
234,951

Accrued expenses and other current liabilities
703,309

 
978,695

Total current liabilities
1,125,565

 
1,242,815

Long-term debt
3,714,976

 
3,398,434

Pension and postretirement medical benefit obligations
1,024,896

 
990,124

Asset retirement obligations
723,479

 
728,575

Deferred income taxes
828,070

 
901,552

Other non-current liabilities
455,296

 
465,892

Total liabilities
7,872,282

 
7,727,392

 
 
 
 
Commitments and Contingencies (Note 18)
 
 
 
Stockholders’ Equity
 
 
 
Preferred stock - par value $0.01, 10.0 million shares authorized, none issued

 

Common stock - par value $0.01, 400.0 million shares authorized, 233.7 million issued and 221.6 million outstanding at September 30, 2014 and 232.8 million issued and 221.0 million outstanding at December 31, 2013
2,337

 
2,328

Additional paid-in capital
8,204,829

 
8,185,222

Accumulated other comprehensive income (loss)
(73,395
)
 
(57,148
)
Treasury stock, at cost: 12.1 million and 11.8 million shares at September 30, 2014 and December 31, 2013, respectively
(273,129
)
 
(271,737
)
Accumulated deficit
(4,540,099
)
 
(3,786,799
)
Total stockholders’ equity
3,320,543

 
4,071,866

Total liabilities and stockholders’ equity
$
11,192,825

 
$
11,799,258


See accompanying Notes to Condensed Consolidated Financial Statements.

3


ALPHA NATURAL RESOURCES INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(Amounts in thousands)
 
Nine Months Ended
September 30,
 
2014
 
2013
Operating activities:
 
 
 
Net loss
$
(753,300
)
 
$
(754,710
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
Depreciation, depletion, accretion and amortization
647,298

 
733,282

Amortization of acquired intangibles, net
27,909

 
908

Mark-to-market adjustments for derivatives
4,641

 
1,312

Stock-based compensation
21,170

 
18,360

Goodwill impairment
308,651

 
253,102

Asset impairment and restructuring
23,633

 
24,358

Employee benefit plans, net
43,879

 
43,352

Loss on early extinguishment of debt
2,022

 
33,039

Gain on exchange of equity-method investment
(250,331
)
 

Gain on sale of marketable equity security
(16,435
)
 

Deferred income taxes
(4,785
)
 
(306,488
)
Other, net
13,005

 
(16,020
)
Changes in operating assets and liabilities:
 
 
 
Trade accounts receivable, net
(30,029
)
 
118,216

Inventories, net
(422
)
 
61,116

Prepaid expenses and other current assets
80,882

 
30,728

Other non-current assets
8,255

 
7,052

Trade accounts payable
11,204

 
(28,332
)
Accrued expenses and other current liabilities
(304,212
)
 
152,816

Pension and postretirement medical benefit obligations
(31,752
)
 
(36,647
)
Asset retirement obligations
(43,225
)
 
(31,519
)
Other non-current liabilities
(11,206
)
 
(125,346
)
Net cash provided by (used in) operating activities
(253,148
)
 
178,579

Investing activities:
 
 
 
Capital expenditures
(128,174
)
 
(163,129
)
Purchases of marketable securities
(507,804
)
 
(738,800
)
Sales of marketable securities
548,758

 
680,452

Proceeds from exchange of equity-method investment, net
96,732

 

Other, net
13,516

 
7,075

Net cash provided by (used in) investing activities
23,028

 
(214,402
)
Financing activities:
 
 
 
Principal repayments of long-term debt
(35,993
)
 
(951,894
)
Principal repayments of capital lease obligations
(13,028
)
 
(12,151
)
Proceeds from borrowings on long-term debt
500,000

 
964,369

Debt issuance and modification costs
(28,185
)
 
(24,317
)
Common stock repurchases
(1,392
)
 
(1,352
)
Other
(1,515
)
 
(1,453
)
Net cash provided by (used in) financing activities
419,887

 
(26,798
)
Net increase (decrease) in cash and cash equivalents
189,767

 
(62,621
)
Cash and cash equivalents at beginning of period
619,644

 
730,723

Cash and cash equivalents at end of period
$
809,411

 
$
668,102


See accompanying Notes to Condensed Consolidated Financial Statements.

4


ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

(1)
Business and Basis of Presentation

Business

Alpha Natural Resources, Inc. and its consolidated subsidiaries (the “Company” and “Alpha”) are primarily engaged in the business of extracting, processing and marketing steam and metallurgical coal from surface and deep mines, and mainly sell to electric utilities, steel and coke producers, and industrial customers. The Company, through its subsidiaries, is also involved in marketing coal produced by others to supplement its own production and, through blending, provides its customers with coal qualities beyond those available from its own production.

Basis of Presentation

The accompanying interim Condensed Consolidated Financial Statements of the Company are unaudited and prepared in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC”) for Form 10-Q. Such rules and regulations allow the omission of certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America as long as the financial statements are not misleading. In the opinion of management, these interim Condensed Consolidated Financial Statements reflect all normal and recurring adjustments necessary for a fair presentation of the results for the periods presented. Results of operations for the three and nine months ended September 30, 2014 are not necessarily indicative of the results to be expected for the year ending December 31, 2014 or any other period. These interim Condensed Consolidated Financial Statements should be read in conjunction with the consolidated financial statements of the Company included in its Annual Report on Form 10-K for the year ended December 31, 2013.

The Company’s Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of the Company’s Condensed Consolidated Financial Statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include inventories; mineral reserves; allowance for non-recoupable advanced mining royalties; asset impairments; reclamation obligations; pensions, postemployment, postretirement medical and other employee benefit obligations; useful lives for depreciation, reserves for workers’ compensation and black lung claims; current and deferred income taxes; reserves for contingencies and litigation and fair value of financial instruments. Estimates are based on facts and circumstances believed to be reasonable at the time; however, actual results could differ from those estimates.

New Accounting Pronouncements

On April 10, 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU 2014-08”), which changes the criteria for reporting discontinued operations and requires additional disclosures about discontinued operations. The standard requires that an entity report as a discontinued operation only a disposal that represents a strategic shift in operations that has a major effect on its operations and financial results. ASU 2014-08 is effective prospectively for new disposals that occur within annual periods beginning on or after December 15, 2014. Early adoption is permitted and the Company adopted ASU 2014-08 during the three months ended June 30, 2014. Adoption of the standard did not have a material impact on the Company's results of operations.
On May 28, 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for the Company on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

On June 19, 2014, the FASB issued ASU 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (“ASU 2014-12”). The standard requires a reporting entity to treat a performance target that affects vesting and that could be achieved after the requisite service

5

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

period as a performance condition. ASU 2014-12 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted and the Company adopted ASU 2014-12 during the three months ended September 30, 2014. Adoption of the standard did not have a material impact on the Company's results of operations.

Reclassifications

Certain reclassifications have been made to the Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2013 to conform to the current year presentation.

(2)    Asset Impairment and Restructuring

The Company recorded severance expenses of $11,544 and $13,942 during the three and nine months ended September 30, 2014, respectively. The Company recorded impairment expenses of $8,797 and $926 related to certain other non-current assets within the Company’s All Other category during the three months ended March 31, 2014 and June 30, 2014, respectively. Additionally, the Company recorded other expenses of ($32) during the nine months ended September 30, 2014.

The Company recorded severance expenses of ($266) and $12,781 and professional fees and other expenses of $393 and $9,687 for the three and nine months ended September 30, 2013, respectively. Additionally, during the three months ended September 30, 2013, the Company tested certain of its long-lived asset groups for impairment due primarily to a longer than expected recovery in the metallurgical coal markets and lower production and shipment levels compared with previous estimates and recorded asset impairment charges totaling $1,890 related to mineral reserves in an asset group in its All Other category.

(3)    Goodwill, Net

During the second quarter of 2014, the Company performed an interim goodwill impairment test due primarily to continued weakness in the global metallurgical coal markets which indicated that the fair value of a reporting unit within its eastern coal operations may have been below its carrying value.

The Company performed its interim goodwill impairment test using a two-step approach. Step one compared the fair value of a reporting unit to its carrying value. The valuation methodology utilized to estimate the fair value of the reporting unit was based on both a market and income approach and is within the range of fair values yielded under each approach. The income approach is based on a discounted cash flow methodology in which expected future net cash flows are discounted to present value, using an appropriate after-tax weighted average cost of capital. The market approach is based on a guideline company and similar transaction method. Under the guideline company method, certain operating metrics from a selected group of publicly traded guideline companies that have similar operations to the Company’s reporting unit are used to estimate the fair value of the reporting unit. Under the similar transaction method, recent merger and acquisition transactions for companies that have similar operations to the Company’s reporting unit are used to estimate the fair value of the Company’s reporting unit.
 
In step two of the goodwill impairment test, the Company compared the carrying value of goodwill to its implied fair value. In estimating the implied fair value of goodwill at a reporting unit, the Company assigned the fair value of the reporting unit to all of the assets and liabilities associated with the reporting unit as if the reporting unit had been acquired in a business combination.

As a result of applying the approach discussed above at its interim impairment testing date of June 1, 2014, the Company recorded an impairment charge to write down goodwill to its implied fair value as follows:

6

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

 
Balance December 31, 2013
 
 Impairments
 
Balance September 30, 2014
Goodwill:
 
 
 
 
 
Eastern operations
$
3,024,308

 
$

 
$
3,024,308

 
 
 
 
 
 
Accumulated impairment losses:
 
 
 
 
 
Eastern operations
$
(2,715,657
)
 
$
(308,651
)
 
$
(3,024,308
)
 
 
 
 
 
 
Goodwill, net:
 
 
 
 
 
Eastern operations
$
308,651

 
$
(308,651
)
 
$



7

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

(4)    Accumulated Other Comprehensive Income (Loss)

The following table summarizes the changes to accumulated other comprehensive income (loss) during the nine months ended September 30, 2014 and 2013:

Balance December 31, 2013
 
Other comprehensive
income (loss) before reclassifications
 
Amounts reclassified
from accumulated other comprehensive income (loss)
 
Balance
September 30, 2014
Employee benefit costs
$
(59,102
)
 
$
(34,168
)
 
$
(1,670
)
 
$
(94,940
)
Cash flow hedges
1,941

 

 
(1,981
)
 
(40
)
Available-for-sale marketable securities
13

 
31,483

 
(9,911
)
 
21,585


$
(57,148
)
 
$
(2,685
)
 
$
(13,562
)
 
$
(73,395
)

 
Balance December 31, 2012
 
Other comprehensive
income (loss) before reclassifications
 
Amounts reclassified
from accumulated other comprehensive income (loss)
 
Balance
September 30, 2013
Employee benefit costs
$
(171,394
)
 
$
108,985

 
$
946

 
$
(61,463
)
Cash flow hedges
4,755

 
(972
)
 
(3,026
)
 
757

Available-for-sale marketable securities
41

 
(103
)
 
62

 

 
$
(166,598
)
 
$
107,910

 
$
(2,018
)
 
$
(60,706
)

The following tables summarize the amounts reclassified from accumulated other comprehensive income (loss) and the statement of operations line items affected by the reclassifications during the three and nine months ended September 30, 2014 and 2013:


8

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

Details about accumulated other comprehensive income (loss) components
Amounts reclassified from accumulated other comprehensive income (loss)
 
Affected line item in the Condensed Consolidated Statements of Operations
Three Months Ended September 30, 2014
 
Three Months Ended September 30, 2013
 
 
 
Employee benefit costs:
 
 
 
 
 
     Amortization of actuarial loss
$
47

 
$
777

 
(1) 
     Amortization of prior service credit
(947
)
 
(955
)
 
(1) 
Total before income tax
(900
)
 
(178
)
 
 
Tax benefit
343

 
73

 
Income tax benefit
Total, net of tax
$
(557
)
 
$
(105
)
 
 
 
 
 
 
 
 
Cash flow hedges:


 
 
 

     Commodity swaps-coal
$
(1,012
)
 
$
(1,514
)
 
Coal revenues
     Commodity swaps-diesel fuel
343

 
(220
)
 
Cost of coal sales
Total before income tax
(669
)
 
(1,734
)
 

Tax benefit
265

 
788

 
Income tax benefit
Total, net of tax
$
(404
)
 
$
(946
)
 



 
 
 

Available-for-sale marketable securities:


 
 
 

     Unrealized gains and losses
$
(16,435
)
 
$
123

 
Interest income
Tax benefit (expense)
6,525

 
(45
)
 
Income tax benefit
Total, net of tax
$
(9,910
)
 
$
78

 



9

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

Details about accumulated other comprehensive income (loss) components
Amounts reclassified from accumulated other comprehensive income (loss)
 
Affected line item in the Condensed Consolidated Statements of Operations
Nine Months Ended September 30, 2014
 
Nine Months Ended September 30, 2013
 
 
 
Employee benefit costs:
 
 
 
 
 
     Amortization of actuarial loss
$
139

 
$
4,363

 
(1) 
     Amortization of prior service credit
(2,841
)
 
(2,864
)
 
(1) 
     Other

 
58

 
(1) 
Total before income tax
(2,702
)
 
1,557

 
 
Tax benefit (expense)
1,032

 
(611
)
 
Income tax benefit
Total, net of tax
$
(1,670
)
 
$
946

 
 
 
 
 
 
 
 
Cash flow hedges:
 
 
 
 
 
     Commodity swaps-coal
$
(3,252
)
 
$
(3,304
)
 
Coal revenues
     Commodity swaps-diesel fuel
(33
)
 
82

 
Cost of coal sales
     Commodity swaps-natural gas

 
(1,866
)
 
Other revenues
     Commodity options-natural gas

 
113

 
Other revenues
Total before income tax
(3,285
)
 
(4,975
)
 
 
Tax benefit
1,304

 
1,949

 
Income tax benefit
Total, net of tax
$
(1,981
)
 
$
(3,026
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale marketable securities:
 
 
 
 
 
     Unrealized gains and losses
$
(16,436
)
 
$
103

 
Interest income
Tax benefit (expense)
6,525

 
(41
)
 
Income tax benefit
Total, net of tax
$
(9,911
)
 
$
62

 
 

(1) These accumulated other comprehensive income (loss) components are included in the computation of net periodic benefit costs for pension, other postretirement benefit plans and black lung. See Note 16.

(5)    Earnings Per Share

The number of shares used to calculate basic earnings per common share is based on the weighted average number of the Company’s outstanding common shares during the respective periods. The number of shares used to calculate diluted earnings per common share is based on the number of common shares used to calculate basic earnings per share plus the dilutive effect of stock options and other stock-based instruments held by the Company’s employees and directors during each period, the Company’s outstanding 4.875% convertible senior notes due 2020 (the “4.875% Convertible Notes”), 3.75% convertible senior notes due 2017 (the “3.75% Convertible Notes”), 2.375% convertible senior notes due 2015 (the “2.375% Convertible Notes”), and 3.25% convertible senior notes due 2015 issued by Alpha Appalachia Holdings, Inc. (the “3.25% Convertible Notes”). The 4.875% Convertible Notes, 3.75% Convertible Notes, 2.375% Convertible Notes and 3.25% Convertible Notes become dilutive for earnings per common share calculations in certain circumstances and in specified periods. The shares that would be issued to settle the conversion or conversion spread are included in the diluted earnings per common share calculation when the conversion option is in the money or the notes are otherwise convertible. In periods of net loss, the number of shares used to calculate diluted earnings per share is the same as basic earnings per share.

(6)    Inventories, net

Inventories, net consisted of the following:

10

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

 
September 30,
2014
 
December 31,
2013
Raw coal
$
53,093

 
$
39,830

Saleable coal
168,176

 
171,240

Materials, supplies and other, net
84,016

 
93,793

Total inventories, net
$
305,285

 
$
304,863


(7)    Marketable Securities

In 2010, the Company entered into a 50/50 joint venture (the “Alpha Shale JV”) with Rice Drilling C LLC, a wholly owned subsidiary of Rice Drilling B LLC, in order to develop a portion of Alpha’s Marcellus Shale natural gas holdings in southwest Pennsylvania. On December 6, 2013, the Company, Rice Drilling C LLC and Rice Energy Inc. (“Rice Energy”) entered into a transaction agreement (the “Transaction Agreement”). Pursuant to the Transaction Agreement, the Company agreed to transfer its 50% interest in the Alpha Shale JV to Rice Energy in exchange for total consideration of $300,000, consisting of $100,000 of cash and $200,000 of shares of Rice Energy common stock, based upon Rice Energy’s initial public offering (the “Offering”). On January 29, 2014, Rice Energy completed the Offering, and on the same date, issued the Company 9,523,810 shares of common stock and paid $100,000 in cash. The exchange of interest in Alpha Shale resulted in a gain of $250,331 in the first quarter of 2014. On August 19, 2014, the Company sold approximately 3.1 million shares of Rice Energy common stock in exchange for $81,846 of cash and recorded a gain of $16,435. The remaining approximately 6.4 million shares of Rice Energy are subject to customary lockup provisions that will expire on November 11, 2014. The Rice Energy common stock is accounted for as an available for sale marketable security and reported within other non-current assets on the Condensed Consolidated Balance Sheet as of September 30, 2014.

Short-term marketable securities consisted of the following:
 
September 30, 2014
 
 
 
Unrealized
 
 
 
Cost
 
Gain
 
Loss
 
Fair value
Short-term marketable securities:
 
 
 
 
 
 
 
U.S. treasury and agency securities(a)
$
59,515

 
$
5

 
$
(3
)
 
$
59,517

Corporate debt securities(a)
315,111

 
3

 
(103
)
 
315,011

Total short-term marketable securities
$
374,626

 
$
8

 
$
(106
)
 
$
374,528

 
 
 
 
 
 
 
 
 
December 31, 2013
 
 
 
Unrealized
 
 
 
Cost
 
Gain
 
Loss
 
Fair value
Short-term marketable securities:
 
 
 
 
 
 
 
U.S. treasury and agency securities(a)
$
81,484

 
$
17

 
$
(4
)
 
$
81,497

Corporate debt securities(a)
255,567

 
49

 
(44
)
 
255,572

Total short-term marketable securities
$
337,051

 
$
66

 
$
(48
)
 
$
337,069

(a) 
Unrealized gains and losses are recorded as a component of stockholders’ equity.

Long-term marketable securities included in other non-current assets, consisted of the following:

11

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

 
September 30, 2014
 
 
 
Unrealized
 
 
 
Cost
 
Gain
 
Loss
 
Fair value
Long-term marketable securities:
 
 
 
 
 
 
 
Corporate equity securities (a)
$
134,589

 
$
35,890

 
$

 
$
170,479

Mutual funds held in Rabbi Trust(b)
7,384

 
4,160

 
(1,725
)
 
9,819

Total long-term marketable securities
$
141,973

 
$
40,050

 
$
(1,725
)
 
$
180,298

 
 
 
 
 
 
 
 
 
December 31, 2013
 
 
 
Unrealized
 
 
 
Cost
 
Gain
 
Loss
 
Fair value
Long-term marketable securities:
 
 
 
 
 
 
 
Mutual funds held in rabbi trust(b)
$
7,261

 
$
3,637

 
$
(1,568
)
 
$
9,330

(a) 
Unrealized gains and losses are recorded as a component of stockholders’ equity.
(b) 
Unrealized gains and losses are recorded in current period earnings.

(8)     Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following:
 
September 30, 2014
 
December 31, 2013
Prepaid insurance
$
14,988

 
$
12,273

Insurance and indemnification receivables (1)
124,176

 
195,228

Notes and other receivables
14,255

 
10,381

Deferred income taxes - current
39,287

 
118,757

Deferred long wall move expenses
12,559

 
10,766

Refundable income taxes
7,483

 
19,708

Derivative financial instruments
3,554

 
8,898

Prepaid freight
23,346

 
26,445

Deposits
9,002

 
13,671

Other prepaid expenses
15,775

 
23,066

Total prepaid expenses and other current assets
$
264,425

 
$
439,193

(1) See Note 10.

(9)    Property, Equipment and Mine Development Costs

Property, equipment and mine development costs consisted of the following:

 
September 30, 2014
 
December 31, 2013
Plant and mining equipment
$
3,626,191

 
$
3,731,282

Mine development
316,002

 
299,334

Office equipment, software and other
49,882

 
61,000

Construction in progress
61,195

 
62,457

Total property, equipment and mine development costs
4,053,270

 
4,154,073

Less accumulated depreciation and amortization
2,525,107

 
2,355,425

Total property, equipment and mine development costs, net
$
1,528,163

 
$
1,798,648


12

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)


(10)     Accrued Expenses and Other Current Liabilities
 
Accrued expenses and other current liabilities consisted of the following:
 
September 30, 2014
 
December 31, 2013
Wages and employee benefits
$
117,295

 
$
117,561

Current portion of asset retirement obligations
84,632

 
70,851

Taxes other than income taxes
105,479

 
123,361

Freight
9,423

 
4,650

Current portion of self insured workers’ compensation obligations
14,189

 
14,189

Interest payable
78,060

 
22,321

Current portion of postretirement medical benefit obligations
46,678

 
46,678

Deferred revenue
40,573

 
41,250

Litigation (1)
129,060

 
447,214

Other
77,920

 
90,620

Total accrued expenses and other current liabilities
$
703,309

 
$
978,695

(1) The Company has recorded related receivables of $124,176 and $195,228 from insurance coverage and indemnifications in prepaid expenses and other current assets as of September 30, 2014 and December 31, 2013, respectively.
 
(11)    Long-Term Debt

Long-term debt consisted of the following:
 
September 30, 2014
 
December 31, 2013
6.25% senior notes due 2021
$
700,000

 
$
700,000

7.50% senior secured second lien notes due 2020
500,000

 

6.00% senior notes due 2019
800,000

 
800,000

9.75% senior notes due 2018
500,000

 
500,000

Term loan due 2020
615,625

 
620,313

4.875% convertible senior notes due 2020
345,000

 
345,000

3.75% convertible senior notes due 2017
345,000

 
345,000

3.25% convertible senior notes due 2015
109,201

 
128,182

2.375% convertible senior notes due 2015
44,458

 
65,889

Other
60,777

 
73,305

Debt discount
(128,140
)
 
(150,086
)
Total long-term debt
3,891,921

 
3,427,603

Less current portion
(176,945
)
 
(29,169
)
Long-term debt, net of current portion
$
3,714,976

 
$
3,398,434


Repurchases of 2.375% and 3.25% Convertible Senior Notes due 2015

During the nine months ended September 30, 2014, the Company completed the repurchase of approximately $21,431 of its outstanding 2.375% convertible senior notes due 2015 and approximately $18,981 of its outstanding 3.25% convertible senior notes due 2015 and recorded a loss on early extinguishment of debt of $2,022.

Accounts Receivable Securitization Facility


13

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

On September 19, 2014, ANR Second Receivables Funding, LLC (“ANR Second Receivables Funding”), a special purpose indirect subsidiary of Alpha Natural Resources, Inc. (the “Company”), entered into a Credit and Security Agreement (the “A/R Facility”) with General Electric Capital Corporation, as a lender, a swing line lender, an LC Lender (as defined therein) and the administrative agent, and Webster Business Credit Corporation, as an LC Lender and as a Lender, and certain financial institutions from time to time parties thereto, as Lenders (as defined therein). Under the A/R Facility, ANR Second Receivables Funding may borrow cash from the Lenders or cause the LC Lenders to issue letters of credit, on a revolving basis, in an amount up to $200,000, subject to certain limitations set forth therein. The funding pursuant to the A/R Facility is available through the earlier of September 19, 2018 or 90 days prior to the earliest scheduled maturity date of: (1) the Company’s Fourth Amended and Restated Credit Agreement, dated as of May 22, 2013, as amended from time to time (the “Fourth Amended and Restated Credit Agreement”), with Citicorp North America, Inc. and all other parties thereto from time to time, as such maturity date may be amended from time to time in a manner that meets the requirements set forth in the A/R Facility (which requirements were met by the Amendment described below under the caption “Fifth Amended and Restated Credit Agreement”), (2) any successor to, or replacement of, the Fourth Amended and Restated Credit Agreement meeting the requirements set forth in the A/R Facility, or (3) the earliest scheduled maturity date of any obligations for Indebtedness (as defined therein) (a) maturing after December 31, 2015, and (b) having an outstanding principal balance in excess of $100,000 on such 90th day.

The obligations of the Lenders to make cash advances and of the LC Lenders to issue letters of credit pursuant to the A/R Facility are secured by certain trade receivables owned by ANR Second Receivables Funding. The receivables are originated by Alpha Coal Sales Co., LLC (“Alpha Coal Sales”), an indirect subsidiary of the Company and the sole member of ANR Second Receivables Funding, as sales agent on behalf of certain operating subsidiaries of the Company, and arise from the fulfillment of customer contracts entered into by Alpha Coal Sales. The A/R Facility provides that a specified percentage of billed and unbilled receivables meeting certain criteria are eligible to be counted for purposes of determining the amount of financing available to ANR Second Receivables Funding, subject to customary limits and reserves, including limits and reserves based on a dilution rate (calculated using factors including whether any portion of the receivable was reduced, canceled or written-off or is subject to dispute, offset, counterclaim or other defense), a loss rate and certain obligor and payment characteristics of the receivables. On each transfer date during the term of the A/R Facility, Alpha Coal Sales will sell and/or contribute receivables to ANR Second Receivables Funding. Alpha Coal Sales will service those receivables on behalf of ANR Second Receivables Funding and may be required to repurchase receivables in the event of a breach of certain representations or warranties made pursuant to the A/R Facility.

The Lenders and the LC Lenders will be entitled to receive interest payments with respect to the outstanding amount of each advance (including letter of credit participations) made or maintained under the A/R Facility by each Lender or LC Lender during each applicable settlement period. In addition, ANR Second Receivables Funding will pay General Electric Capital Corporation a fee as administrative agent. Certain other fees and expenses are payable to the participating financial institutions. Collections on the receivables, as well as amounts required to remain on deposit in certain accounts under the A/R Facility, will be available to pay the interest, fees and expenses, as well as to collateralize the letters of credit, if required under the A/R Facility, and repay principal on cash advances.

The A/R Facility and related documents contain affirmative, negative and financial covenants customary for financings of this type, including restrictions related to, among other things, liens, payments, merger or consolidation and amendments to the contracts pursuant to which the receivables were originated. The A/R Facility includes termination events customary for facilities of this type (with typical grace periods, where applicable), including, among other things, breaches of covenants, inaccuracies of representations and warranties, bankruptcy and insolvency events, changes in the rate of default, delinquency or dilution of the receivables above specified levels, failure to comply with a springing fixed charge coverage ratio which is only applicable when certain borrowing capacity ratios have been reached, occurrence of a change of control and existence of material judgments. A termination event would permit the administrative agent to terminate the program and enforce any and all rights under the A/R Facility and certain agreements related thereto. Additionally, the A/R Facility contains cross-default provisions, which would allow the administrative agent to terminate the program in the event of non-payment of other material indebtedness when due, and any other event which results in the acceleration of the maturity of material indebtedness.

Although the Lenders and the LC Lenders bear the risk of non-payment by any obligor of the receivables, the Company has agreed to guarantee the performance of its subsidiaries, other than ANR Second Receivables Funding, under the A/R Facility and agreements related to the A/R Facility for the benefit of the Lenders and the LC Lenders.


14

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

As of September 30, 2014, there were no letters of credit outstanding, no cash borrowing transactions had taken place and $200,000 was available under the A/R Facility.

Fifth Amended and Restated Credit Agreement

On September 24, 2014, the Company entered into an amendment agreement (the “Amendment”), pursuant to which certain terms of the Fourth Amended and Restated Credit Agreement were amended and the Fourth Amended and Restated Credit Agreement was restated in its entirety (as amended and restated, the “Fifth Amended and Restated Credit Agreement”). The Amendment, among other things:

extends the maturity of approximately 75% of previous revolving credit facility commitments (the “Extended Maturity Revolver Facility Commitments”) from June 30, 2016 to September 30, 2017, with the remaining approximately 25%, or $276,000, of revolving credit facility commitments expiring, as previously, on June 30, 2016;
reduces the amount of the Extended Maturity Revolver Facility Commitments by 25% to $618,000 and provides for an increase in the interest rate payable to holders of the Extended Maturity Revolver Facility Commitments on borrowings under the revolving credit facility, effective as of the date of the Amendment; and
makes other changes to the Fourth Amended and Restated Credit Agreement, including eliminating the interest coverage financial covenant previously scheduled to apply starting in the first quarter of 2016, extending the minimum liquidity covenant through September 30, 2017, accelerating the date by which certain real property is added as collateral and adding provisions to facilitate future extensions and refinancing under the Fifth Amended and Restated Credit Agreement.

Amendment No. 2 to the Fourth Amended and Restated Credit Agreement

On May 7, 2014, the Company entered into an amendment (“Amendment No. 2”) to the Fourth Amended and Restated Credit Agreement dated as of May 22, 2013, which was amended on October 2, 2013 by Amendment No. 1 thereto, (as amended, the “Credit Agreement”) with the lenders party thereto, the issuing banks party thereto, Citicorp North America, Inc., as administrative agent and as collateral agent, and all other parties thereto from time to time. The principal changes to the Credit Agreement effected by the Amendment No. 2 to the Fourth Amended and Restated Credit Agreement include the following: suspending the interest coverage ratio until the first quarter of 2016, replacing the senior secured leverage ratio with a first lien senior secured leverage ratio, reducing the size of the restricted payment basket, extending the minimum liquidity covenant through the end of 2015, increasing by $400,000 the amount of additional debt permitted to be incurred either pursuant to the “accordion” feature of the Credit Agreement or a notes offering, and requiring the first $800,000 of additional debt incurred pursuant to the accordion or a notes offering (including the debt represented by the 7.50% senior secured second lien notes due 2020 issued in May 2014) to be unsecured debt or second lien secured debt.

The terms of the Credit Agreement (i) restrict the ability of the Company and its subsidiaries to make investments, loans and acquisitions, incur additional indebtedness, and pay dividends on its capital stock or redeem, repurchase or retire its capital stock; and (ii) require the Company to provide additional collateral consisting of receivables to secure the obligations under the Credit Agreement when not used to secure a permitted receivables facility.

Indenture and New Senior Secured Second Lien Notes

On May 20, 2014, Alpha, certain of Alpha’s wholly owned domestic subsidiaries, as guarantors (collectively, the “Guarantors”), and Wilmington Trust, National Association (“Wilmington Trust”), as trustee, entered into an indenture (the “Indenture”) governing Alpha’s newly issued 7.50% senior secured second lien notes due 2020 (the “New Secured Notes”) at 100% of par value. The New Secured Notes will pay interest semiannually in arrears on February 1 and August 1 of each year, beginning on February 1, 2015, at a rate of 7.50% per year, and will mature on August 1, 2020.

The New Secured Notes are guaranteed by each of Alpha’s current and future wholly owned domestic subsidiaries that guarantee Alpha’s obligations under the Credit Agreement. The New Secured Notes are Alpha’s senior secured obligations, ranking equal in right of payment with all of Alpha’s existing and future indebtedness that is not subordinated in right of payment to the New Secured Notes; secured by a second priority lien on Alpha’s assets that secure Alpha’s indebtedness under the Credit Agreement, and thus effectively junior to Alpha’s indebtedness that is permitted to be secured by first priority liens on the collateral securing the New Secured Notes, including indebtedness under the Credit Agreement, and to indebtedness

15

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

secured by assets that are not part of the collateral securing the New Secured Notes, in each case to the extent of the value of the assets securing such indebtedness; senior in right of payment to all of Alpha’s future debt that is subordinated in right of payment to the New Secured Notes; and structurally subordinated to any existing and future indebtedness and other liabilities of any non-guarantor subsidiary.
    
Alpha may redeem the New Secured Notes, in whole or in part, at any time prior to August 1, 2016, at a price equal to 100% of the aggregate principal amount of the New Secured Notes plus a “make-whole” premium, plus accrued and unpaid interest, if any, to, but not including, the applicable redemption date. In addition, Alpha may redeem up to 35% of the aggregate principal amount of the New Secured Notes with the net cash proceeds from certain equity offerings, at any time prior to August 1, 2016 at a redemption price equal to 107.5% of the aggregate principal amount of the New Secured Notes, plus accrued and unpaid interest, if any, to, but not including, the applicable redemption date if at least 65% of the aggregate principal amount of New Secured Notes issued under the Indenture remains outstanding after the redemption. Alpha may also redeem the New Secured Notes, in whole or in part, at any time on or after August 1, 2016, at the redemption prices specified in the Indenture, plus accrued and unpaid interest, if any, to, but not including, the applicable redemption date.

Upon the occurrence of a change of control repurchase event with respect to the New Secured Notes, unless Alpha has exercised its right to redeem the New Secured Notes, Alpha will be required to offer to repurchase each holder’s New Secured Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to, but not including, the date of repurchase.

The Indenture contains covenants that limit, among other things, Alpha’s ability to:

incur, or permit its subsidiaries to incur, additional debt;
issue, or permit its subsidiaries to issue, certain types of stock;
pay dividends on its or its subsidiaries’ capital stock or repurchase its capital stock;
make certain investments;
enter into certain types of transactions with affiliates;
incur liens on certain assets to secure debt;
limit dividends or other payments by its restricted subsidiaries to it and its other restricted subsidiaries;
consolidate, merge or sell all or substantially all of its assets; and
make certain payments on its or its subsidiaries’ subordinated debt.

These covenants are subject to a number of important qualifications and exceptions. These covenants may not apply at any time after the New Secured Notes are assigned a credit grade rating of at least BB+ (stable) from Standard & Poor’s Ratings Services and of at least Ba1 (stable) from Moody’s Investors Service, Inc.

(12)    Asset Retirement Obligations

The following table summarizes the changes in asset retirement obligations for the nine months ended September 30, 2014:
Total asset retirement obligations at December 31, 2013
$
799,426

Accretion for the period
42,268

Sites added during the period
1,569

Revisions in estimated cash flows
8,073

Expenditures for the period
(43,225
)
Total asset retirement obligations at September 30, 2014
$
808,111

Less current portion
(84,632
)
Long-term portion
$
723,479


(13)    Fair Value of Financial Instruments and Fair Value Measurements

The estimated fair values of financial instruments are determined based on relevant market information. These estimates involve uncertainty and cannot be determined with precision.


16

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

The carrying amounts for cash and cash equivalents, trade accounts receivable, net, prepaid expenses and other current assets, trade accounts payable, and accrued expenses and other current liabilities approximate fair value due to the short maturity of these instruments.

The following tables set forth by level, within the fair value hierarchy, the Company’s long-term debt at fair value as of September 30, 2014 and December 31, 2013, respectively.


September 30, 2014

Carrying
Amount
 
Total Fair
Value
 
Quoted Prices
in Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
6.25% senior notes due 2021
$
700,000

 
$
421,260

 
$
421,260

 
$

 
$

7.50% senior secured second lien notes due 2020
500,000

 
452,500

 
452,500

 

 

6.00% senior notes due 2019
800,000

 
472,000

 
472,000

 

 

9.75% senior notes due 2018(1)
497,488

 
373,950

 
373,950

 

 

Term loan due 2020(2)
613,107

 
601,217

 

 
601,217

 

4.875% convertible senior notes due 2020(3)
270,658

 
204,309

 
204,309

 

 

3.75% convertible senior notes due 2017(4)
299,241

 
250,643

 
250,643

 

 

3.25% convertible senior notes due 2015(5)
107,814

 
106,624

 
106,624

 

 

2.375% convertible senior notes due 2015(6)
42,836

 
43,018

 
43,018

 

 

Total long-term debt
$
3,831,144

 
$
2,925,521

 
$
2,324,304

 
$
601,217

 
$



December 31, 2013

Carrying
Amount
 
Total Fair
Value
 
Quoted Prices
in Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
6.25% senior notes due 2021
$
700,000

 
$
602,000

 
$
602,000

 
$

 
$

6.00% senior notes due 2019
800,000

 
694,872

 
694,872

 

 

9.75% senior notes due 2018(1)
496,547

 
560,250

 
560,250

 

 

Term loan due 2020(2)
617,460

 
617,291

 

 
617,291

 

4.875% convertible senior notes due 2020(3)
264,283

 
372,606

 
372,606

 

 

3.75% convertible senior notes due 2017(4)
290,219

 
360,956

 
360,956

 

 

3.25% convertible senior notes due 2015(5)
125,142

 
126,904

 
126,904

 

 

2.375% convertible senior notes due 2015(6)
60,647

 
65,882

 
65,882

 

 

Total long-term debt
$
3,354,298

 
$
3,400,761

 
$
2,783,470

 
$
617,291

 
$

(1) 
Net of debt discount of $2,512 and $3,453 as of September 30, 2014 and December 31, 2013, respectively.
(2) 
Net of debt discount of $2,518 and $2,853 as of September 30, 2014 and December 31, 2013, respectively.
(3) 
Net of debt discount of $74,342 and $80,717 as of September 30, 2014 and December 31, 2013, respectively.
(4) 
Net of debt discount of $45,759 and $54,781 as of September 30, 2014 and December 31, 2013, respectively.
(5) 
Net of debt discount of $1,387 and $3,040 as of September 30, 2014 and December 31, 2013, respectively.
(6) 
Net of debt discount of $1,622 and $5,242 as of September 30, 2014 and December 31, 2013, respectively.

The following tables set forth by level, within the fair value hierarchy, the Company’s financial and non-financial assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2014 and December 31, 2013, respectively. Financial and non-financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair

17

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

value measurement requires judgment, and may affect the determination of fair value for assets and liabilities and their placement within the fair value hierarchy levels.

 
September 30, 2014
 
Total Fair
Value
 
Quoted Prices
in Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Financial assets (liabilities):
 
 
 
 
 
 
 
U.S. treasury and agency securities
$
59,517

 
$
59,517

 
$

 
$

Mutual funds held in Rabbi Trust
$
9,819

 
$
9,819

 
$

 
$

Corporate equity securities
$
170,479

 
$
170,479

 
$

 
$

Corporate debt securities
$
315,011

 
$

 
$
315,011

 
$

Forward coal sales
$
1,247

 
$

 
$
1,247

 
$

Commodity swaps
$
(2,828
)
 
$

 
$
(2,828
)
 
$


 
December 31, 2013
 
Total Fair
Value
 
Quoted Prices
in Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Financial assets (liabilities):
 
 
 
 
 
 
 
U.S. treasury and agency securities
$
81,497

 
$
81,497

 
$

 
$

Mutual funds held in Rabbi Trust
$
9,330

 
$
9,330

 
$

 
$

Corporate debt securities
$
255,572

 
$

 
$
255,572

 
$

Forward coal sales
$
(398
)
 
$

 
$
(398
)
 
$

Commodity swaps
$
10,403

 
$

 
$
10,403

 
$


The following methods and assumptions were used to estimate the fair values of the assets and liabilities in the tables above. 

Level 1 Fair Value Measurements

U.S. Treasury and Agency Securities, Corporate Equity Securities and Mutual Funds Held in Rabbi Trust - The fair value is based on observable market data.

6.25% senior notes due 2021, 7.50% senior secured second lien notes due 2020, 6.00% senior notes due 2019, 9.75% senior notes due 2018 (collectively, the Senior Notes), 4.875% Convertible Notes, 3.75% Convertible Notes, 2.375% Convertible Notes, and 3.25% Convertible Notes (collectively, the Convertible Notes) - The fair value is based on observable market data.

Level 2 Fair Value Measurements

Corporate Debt Securities - The fair values of the Company’s corporate debt securities are obtained from a third-party pricing service provider. The fair values provided by the pricing service provider are estimated using pricing models, where the inputs to those models are based on observable market inputs including credit spreads and broker-dealer quotes, among other inputs. The Company classifies the prices obtained from the pricing services within Level 2 of the fair value hierarchy because the underlying inputs are directly observable from active markets. However, the pricing models used entail a certain amount of subjectivity and therefore differing judgments in how the underlying inputs are modeled could result in different estimates of fair value.
 

18

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

Forward Coal Sales - The fair values of the forward coal sale contracts were estimated using discounted cash flow calculations based upon actual contract prices and forward commodity price curves. The curves were obtained from independent pricing services reflecting broker market quotes. The fair values are adjusted for counter-party credit risk, when applicable.

Commodity Swaps - The fair values of commodity swaps are estimated using valuation models which include assumptions about commodity prices based on those observed in the underlying markets. The fair values are adjusted for counter-party credit risk, when applicable.

Term Loan due 2020 - The fair value of the term loan due 2020 is estimated based on market rates of interest offered for debt of similar maturities.

(14)    Derivative Financial Instruments
  
Forward Contracts

The Company manages price risk for coal sales and purchases through the use of coal supply agreements. The Company evaluates each of its coal sales and coal purchase forward contracts to determine whether they meet the definition of a derivative and if so, whether they qualify for the normal purchase normal sale (“NPNS”) exception. For those contracts that do meet the definition of a derivative, certain contracts also qualify for the NPNS exception based on management’s intent and ability to physically deliver or take physical delivery of the coal. Contracts that meet the definition of a derivative and do not qualify for the NPNS exception are accounted for at fair value and, accordingly, the Company includes the unrealized gains and losses in current period earnings or losses.

Swap Agreements

Commodity Swaps

The Company uses diesel fuel in its production process and incurs significant expenses for its purchase. Diesel fuel expenses represented approximately 6% of cost of coal sales for the nine months ended September 30, 2014. The Company is subject to the risk of price volatility for this commodity and as a part of its risk management strategy, the Company enters into swap agreements with financial institutions to mitigate the risk of price volatility for diesel fuel. The terms of the swap agreements allow the Company to pay a fixed price and receive a floating price, which provides a fixed price per unit for the volume of purchases being hedged. As of September 30, 2014, the Company had swap agreements outstanding to hedge the variable cash flows related to 34% and 41% of anticipated diesel fuel usage for the remaining three months of 2014 and calendar year 2015, respectively. The average fixed price for these diesel fuel swaps is $2.87 per gallon and $2.76 per gallon for the remaining three months of 2014 and calendar year 2015, respectively. All cash flows associated with derivative instruments are classified as operating cash flows in the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013.

The Company enters into coal sales agreements for steam coal with customers outside of the U.S. A portion of these steam coal contracts contain clauses that tie the price of the coal to be sold to the API-2 Coal Index. As part of the Company’s overall risk management strategy, the Company may enter into swap agreements with financial institutions to mitigate the risk of price volatility for its coal sales that are tied to the API-2 Coal Index. The terms of the swap agreements allow the Company to receive a fixed price and pay a floating price, which provides a fixed price per ton of coal, excluding transportation and other variable items that are included in the total price of the coal. As of September 30, 2014, the Company had swap agreements outstanding for approximately 65 tons of coal at an average price of $88.56.

The following tables present the fair values and location of the Company’s derivative instruments within the Condensed Consolidated Balance Sheets:

19

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

 
 
 
Asset Derivatives
Derivatives not designated as
cash flow hedging instruments
Statement of Financial Position Location
 
September 30,
2014
 
December 31,
2013
Commodity swaps
Prepaid expenses and other current assets
 
$
2,307

 
$
8,898

Commodity swaps
Other non-current assets
 

 
1,772

Forward coal sales
Prepaid expenses and other current assets
 
1,247

 

Total asset derivatives
 
 
$
3,554

 
$
10,670


 
 
 
Liability Derivatives
Derivatives not designated as
cash flow hedging instruments
Statement of Financial Position Location
 
September 30,
2014
 
December 31,
2013
Commodity swaps
Other non-current liabilities
 
$
838

 
$
31

Commodity swaps
Accrued expenses and other current liabilities
 
4,297

 
236

Forward coal sales
Accrued expenses and other current liabilities
 

 
398

Total liability derivatives
 
 
$
5,135

 
$
665


The following tables present the gains and losses from derivative instruments for the nine months ended September 30, 2014 and 2013 and their location within the Condensed Consolidated Financial Statements:

Derivatives designated as
cash flow hedging instruments
 
Gain reclassified
from accumulated other
comprehensive income (loss) to earnings
 
Loss recorded
in accumulated other
comprehensive income (loss)
 
2014
 
2013
 
2014
 
2013
Commodity swaps(1) (3)
 
$
1,981

 
$
3,094

 
$

 
$
(909
)
Commodity options(2) (3)
 

 
(68
)
 

 
(63
)
 
 
$
1,981

 
$
3,026

 
$

 
$
(972
)
(1) 
For the nine months ended September 30, 2014, amounts included in cost of coal sales and coal revenues in the Condensed Consolidated Statements of Operations. For the nine months ended September 30, 2013, amounts included in cost of coal sales, other revenues and coal revenues in the Condensed Consolidated Statements of Operations.
(2) 
Amounts are recorded in other revenues in the Condensed Consolidated Statements of Operations.
(3) 
Net of tax.

Derivatives not designated as
cash flow hedging instruments
 
Gain (loss) recorded in earnings
 
Three Months Ended September 30,
 
Nine Months Ended
September 30,
 
2014
 
2013
 
2014
 
2013
Forward coal sales(1)
 
$
(159
)
 
$
(5,149
)
 
$
1,645

 
$
(6,354
)
Forward coal purchases(1)
 

 
(4
)
 

 
4

Commodity swaps(2)
 
(8,491
)
 
5,340

 
(6,286
)
 
5,038

 
 
$
(8,650
)
 
$
187

 
$
(4,641
)
 
$
(1,312
)
(1) 
Amounts are recorded as a component of other revenues in the Condensed Consolidated Statements of Operations.
(2) 
Amounts are recorded as a component of coal revenues, cost of coal sales and other expenses in the Condensed Consolidated Statements of Operations.

Unrealized gains and losses recorded in accumulated other comprehensive income (loss) are reclassified to income or loss as the financial swaps settle and the Company purchases the underlying items that are being hedged. During the next twelve months, the Company expects to reclassify approximately $84, net of tax, to earnings.

(15)    Income Taxes

20

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)


A reconciliation of the statutory federal income tax benefit at 35% to the actual income tax benefit is as follows:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2014
 
2013
 
2014
 
2013
Federal statutory income tax benefit
$
(80,119
)
 
$
(210,482
)
 
$
(266,069
)
 
$
(372,306
)
Increases (reductions) in taxes due to:
 
 
 
 
 
 
 
Percentage depletion allowance
(3,593
)
 
(7,062
)
 
(22,566
)
 
(27,909
)
State taxes, net of federal tax impact
(7,506
)
 
(9,151
)
 
(9,247
)
 
(19,190
)
State statutory tax rate change, net of federal tax impact

 
(2,524
)
 

 
(2,524
)
Non-deductible fines and penalties
613

 
1,253

 
2,174

 
12,472

Non-deductible goodwill impairment

 
88,585

 
108,028

 
88,585

Reversal of reserves for uncertain tax positions

 

 
(8,090
)
 

Change in valuation allowance
43,655

 
(5,070
)
 
181,258

 
2,614

Other, net
3,012

 
1,314

 
7,614

 
9,236

Income tax benefit
$
(43,938
)
 
$
(143,137
)
 
$
(6,898
)
 
$
(309,022
)

Under ASC 740-270, “Income Taxes - Interim Reporting”, a company should calculate an estimated annual effective tax rate and apply the estimated tax rate to the year-to-date operating results. If a company is unable to make a reliable estimate of the annual effective tax rate, then the actual effective tax rate for the year-to-date period should be used as the best estimate of the annual effective tax rate (the “discrete method”). For the three and nine months ended September 30, 2014, the Company concluded that the use of the discrete method was more appropriate than the estimated annual effective tax rate method due to the sensitivity of the change in valuation allowance resulting from changes in deferred tax balances and their related reversal timing.

The Company recorded an increase of $43,655 and $181,258 to its deferred tax asset valuation allowance during the three and nine months ended September 30, 2014, respectively. The change in valuation allowance results from an increase in net operating losses and other deferred tax assets for which the Company is unable to support realization. The Company currently is relying primarily on the reversal of taxable temporary differences, along with consideration of taxable income via carryback to prior years, and tax planning strategies to support the realization of deferred tax assets. The Company updates its assessment regarding the realizability of its deferred tax assets including scheduling the reversal of its deferred tax liabilities each quarter to determine the amount of valuation allowance needed. Scheduling the reversal of deferred tax asset and liability balances requires judgment and estimation. The Company believes the deferred tax liabilities relied upon as future taxable income in its assessment will reverse in the same period and jurisdiction and are of the same character as the temporary differences giving rise to the deferred tax assets that will be realized. The valuation allowance recorded represents the portion of deferred tax assets for which the Company is unable to support realization through the methods described above. The Company has concluded that it is more likely than not that the remaining deferred tax assets, net of valuation allowances, are realizable.

During the quarter ended June 30, 2014, the Company settled audits with the Internal Revenue Service for the 2009 and 2010 tax years. As a result, the Company determined that particular uncertain tax positions were deemed to be effectively settled, resulting in a decrease in unrecognized tax benefits of $26,020 and the recording of an income tax benefit of $8,090. The settlement of the audits resulted in no material impact on cash paid for income taxes.

(16)    Employee Benefit Plans

The Company sponsors or participates in several benefit plans for its employees, including postretirement health care and life insurance, defined benefit and defined contribution pension plans, and provides black lung benefits.

Components of Net Periodic Pension Costs

The components of net periodic benefit credits are as follows:

21

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2014
 
2013
 
2014
 
2013
Interest cost
$
7,802

 
$
8,220

 
$
23,407

 
$
22,673

Expected return on plan assets
(8,802
)
 
(10,001
)
 
(26,405
)
 
(28,145
)
Amortization of net actuarial loss
45

 
205

 
134

 
712

Loss on settlement

 

 

 
58

Net periodic benefit credit
$
(955
)
 
$
(1,576
)
 
$
(2,864
)
 
$
(4,702
)

Components of Net Periodic Costs of Other Postretirement Benefit Plans

The components of net periodic benefit costs are as follows:

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2014
 
2013
 
2014
 
2013
Service cost
$
2,920

 
$
3,329

 
$
8,762

 
$
10,612

Interest cost
10,723

 
10,183

 
32,169

 
29,799

Amortization of prior service credit
(947
)
 
(955
)
 
(2,841
)
 
(2,864
)
Amortization of net actuarial loss

 
410

 

 
2,871

Net periodic benefit cost
$
12,696

 
$
12,967

 
$
38,090

 
$
40,418


Components of Net Periodic Costs of Black Lung

The components of net periodic benefit costs are as follows:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2014
 
2013
 
2014
 
2013
Service cost
$
539

 
$
657

 
$
1,615

 
$
2,076

Interest cost
1,800

 
1,691

 
5,399

 
4,825

Expected return on plan assets
(59
)
 
(30
)
 
(175
)
 
(46
)
Amortization of net actuarial loss
2

 
162

 
5

 
780

Net periodic benefit cost
$
2,282

 
$
2,480

 
$
6,844

 
$
7,635


In connection with the announcement of certain changes for non union employees to the Company's retiree medical plan and the announcement of production curtailments at certain mines during the three months ended September 30, 2014, the Company remeasured its obligations under its retiree medical plan and its black lung obligations. The discount rates for each plan were updated. The weighted average discount rate for each of the plans remeasured was 4.18%. As a result, the Company increased its liabilities for its retiree medical plan and black lung obligations by $18,033 and $11,155, respectively, with an offset recorded in accumulated other comprehensive income (loss).

(17)    Stock-Based Compensation Awards

On May 22, 2014, the Company's stockholders approved the Amended and Restated 2012 Long-Term Incentive Plan (the “2012 LTIP”). The principal purpose of the 2012 LTIP is to advance the interests of the Company and its stockholders by providing incentives to certain eligible persons who contribute significantly to the strategic and long-term performance objectives and growth of the Company. On May 22, 2014, the Company's stockholders approved an additional 3,100,000 shares of common stock for issuance under the 2012 LTIP Plan. The 2012 LTIP Plan is currently authorized for the issuance of awards of up to 13,100,000 shares of common stock, and as of September 30, 2014, 4,141,434 shares of common stock were available for grant under the plan.

22

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)


During the nine months ended September 30, 2014, the Company awarded certain of its executives and key employees 1,411,824 time-based restricted share units and 1,378,486 performance-based restricted share units under its existing stock plans. Additionally, during the nine months ended September 30, 2014, the Company also awarded certain of its executives and key employees 2,077,491 time-based restricted cash units and 1,378,486 performance-based restricted cash units which are accounted for as liability awards and subject to variable accounting. The liability for these awards totaled $1,424 as of September 30, 2014.

The time-based units vest, subject to continued employment, ratably over three years or cliff vest after three years (with accelerated vesting upon a change of control and certain retirement scenarios). The performance-based units cliff vest after three years, subject to continued employment and the satisfaction of the performance criteria (with accelerated vesting upon a change of control and certain retirement scenarios). The performance-based units have the potential to be distributed from 0% to 200% of the awarded amount, depending on the actual results versus the pre-established performance criteria over the three-year period.

At September 30, 2014, the Company had three types of stock-based awards outstanding: restricted share units (both time-based and performance-based), restricted cash units (both time-based and performance based), and stock options. Stock-based compensation expense totaled $7,249 and $5,762 for the three months ended September 30, 2014 and 2013, respectively. Stock-based compensation expense totaled $21,170 and $18,360 for the nine months ended September 30, 2014 and 2013, respectively. For the three months ended September 30, 2014 and 2013, approximately 82% and 73%, respectively, of stock-based compensation expense was reported as selling, general and administrative expenses and the remainder was recorded as cost of coal sales. For each of the nine months ended September 30, 2014 and 2013, approximately 77% of stock-based compensation expense was reported as selling, general and administrative expenses and the remainder was recorded as cost of coal sales.

The Company is authorized to repurchase common shares from employees (upon the election by the employee) to satisfy the employees’ minimum statutory tax withholdings upon the vesting of restricted stock and restricted share units (both time-based and performance-based). Shares that are repurchased to satisfy the employees’ minimum statutory tax withholdings are recorded in treasury stock at cost. During the nine months ended September 30, 2014 and 2013, the Company repurchased 280,502 and 165,709, respectively, of common shares from employees at an average price paid per share of $4.96 and $8.16, respectively.

(18)    Commitments and Contingencies

(a) General

Estimated losses from loss contingencies are accrued by a charge to income when information available indicates that it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. If a loss contingency is not probable or reasonably estimable, disclosure of the loss contingency is made in the consolidated financial statements when it is at least reasonably possible that a loss may be incurred and that the loss could be material.

(b) Commitments and Contingencies

Commitments

The Company leases coal mining and other equipment under long-term capital and operating leases with varying terms. In addition, the Company leases mineral interests and surface rights from land owners under various terms and royalty rates.

The Company has obligations for a federal coal lease, which contains an estimated 222,000 tons of proven and probable coal reserves in the Powder River Basin. The annual installments of $42,130 in the period from 2014 through 2015 are due each November until the obligation is satisfied.

The Company also has obligations under certain coal transportation agreements that contain minimum quantities to be shipped each year. Minimum amounts due under these contracts for 2015, 2016, 2017, 2018 and beyond are $25,584, $59,111, $17,540, $12,930 and $279,254, respectively.
 

23

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

Contingencies
 
Extensive regulation of the impacts of mining on the environment and of maintaining workplace safety, and related litigation, has had or may have a significant effect on the Company’s costs of production and results of operations. Further regulations, legislation or litigation in these areas may also cause the Company’s sales or profitability to decline by increasing costs or by hindering the Company’s ability to continue mining at existing operations or to permit new operations.

During the normal course of business, contract-related matters arise between the Company and its customers. When a loss related to such matters is considered probable and can reasonably be estimated, the Company records a liability. During the first quarter of 2013, the Company recorded a gain of ($55,454) in other expenses in the Condensed Consolidated Statement of Operations related to the resolution of a contract-related matter.
 
(c) 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, performance or surety bonds, and other guarantees and indemnities related to the obligations of affiliated entities which are not reflected in the Company’s Condensed Consolidated Balance Sheets. The Company is self bonded with respect to certain performance obligations, including reclamation, for $637,913. Management does not expect any material losses to result from these guarantees or other off-balance sheet financial instruments.
 
Letters of Credit
 
As of September 30, 2014, the Company had $178,284 of letters of credit outstanding under its revolving credit facility.

(d) Legal Proceedings
The Company’s legal proceedings range from cases brought by a single plaintiff to purported class actions. These legal proceedings, as well as governmental examinations, involve various business units and a variety of claims including, but not limited to, contract disputes, personal injury claims, property damage claims (including those resulting from blasting, trucking and flooding), environmental and safety issues, and employment matters. While some matters pending against the Company or its subsidiaries specify the damages claimed by the plaintiffs, many seek an unquantified amount of damages or are at very early stages of the legal process. Even when the amount of damages claimed against the Company or its subsidiaries is stated, (i) the claimed amount may be exaggerated or unsupported; (ii) the claim may be based on a novel legal theory or involve a large number of parties; (iii) there may be uncertainty as to the likelihood of a class being certified or the ultimate size of the class; (iv) there may be uncertainty as to the outcome of pending appeals or motions; and/or (v) there may be significant factual issues to be resolved. As a result, the Company may be unable to estimate a range of possible loss for matters that have not yet progressed sufficiently through discovery and development of important factual information and legal issues. Other matters have progressed sufficiently that the Company is able to estimate a range of possible loss. Accordingly, for those legal proceedings and governmental examinations disclosed below as to which a loss is reasonably possible in future periods and for which the Company is able to estimate a range of possible loss, the current estimated range is up to $100,000 in excess of the accrued liability (if any) related to those matters. This aggregate range represents the Company’s estimate of additional possible loss in excess of the accrued liability (if any) with respect to these matters and net of third party indemnification arrangements (if any, other than insurance) as described below related to those matters, based on currently available information, including any damages claimed by the plaintiffs, and is subject to significant judgment and a variety of assumptions and inherent uncertainties. For example, at the time of making an estimate, the Company may have only preliminary, incomplete, or inaccurate information about the facts underlying a claim; its assumptions about the future rulings of the court or other tribunal on significant issues, or the behavior and incentives of adverse parties, regulators, indemnitors or co-defendants, may prove to be wrong; and the outcomes it is attempting to predict are often not amenable to the use of statistical or other quantitative analytical tools. In addition, from time to time an outcome may occur that the Company had not accounted for in its estimate because it had considered that outcome to be remote. Furthermore, as noted above, the aggregate range does not include any matters for which the Company is not able to estimate a range of possible loss. Accordingly, the estimated aggregate range of possible loss does not represent the Company’s maximum loss exposure. The legal proceedings and governmental examinations underlying the estimated range will change from time to time, and actual results may vary significantly from the current estimate. The Company intends to defend these legal proceedings vigorously, litigating or settling cases where in the Company’s judgment it would be in the best interest of shareholders to do so.


24

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

For purposes of FASB ASC Topic 450 (“ASC 450”), an event is “reasonably possible” if “the chance of the future event or events occurring is more than remote but less than likely” and an event is “remote” if “the chance of the future event or events occurring is slight.” ASC 450 requires accrual for a liability when it is (a) “probable that one or more future events will occur confirming the fact of loss” and (b) “the amount of loss can be reasonably estimated.” If a range of loss is estimated, the best estimate within the range is required to be accrued. If no amount within the range is a better estimate, the minimum amount of the range is required to be accrued.
 
The Company evaluates, on a quarterly basis, developments in legal proceedings and governmental examinations that could cause an increase or decrease in the amount of the reserves previously recorded. Excluding fees paid to external legal counsel, the Company recognized expense, net of expected insurance recoveries, associated with litigation-related reserves of $184 and $116,552 during the three months ended September 30, 2014 and 2013, respectively.
 
Federal Securities Class Actions

Upper Big Branch (UBB) Purported Securities Class Action
 
On April 29, 2010 and May 28, 2010, two purported class actions that were subsequently consolidated into one case were brought against, among others, Massey, now the Company’s subsidiary Alpha Appalachia Holdings, Inc. (“Alpha Appalachia”), in the United States District Court for the Southern District of West Virginia (the “Court”) in connection with alleged violations of the federal securities laws. The lead plaintiffs allege, purportedly on behalf of a class of former Massey stockholders, that (i) Massey and certain former Massey directors and officers violated Section 10(b) of the Securities and Exchange Act of 1934, as amended, (the “Exchange Act”), and Rule 10b-5 thereunder by intentionally misleading the market about the safety of Massey’s operations and that (ii) Massey’s former officers violated Section 20(a) of the Exchange Act by virtue of their control over persons alleged to have committed violations of Section 10(b) of the Exchange Act. The lead plaintiffs sought a determination that this action was a proper class action; certification as class representatives; an award of compensatory damages in an amount to be proven at trial, including interest thereon; and an award of reasonable costs and expenses, including counsel fees and expert fees.
 
On February 16, 2011, the lead plaintiffs moved to partially lift the statutory discovery stay imposed under the Private Securities Litigation Reform Act of 1995. On March 3, 2011, the United States moved to intervene and to stay discovery until the completion of criminal proceedings allegedly arising from the same facts that allegedly give rise to this action. On July 9, 2012, the court entered an order maintaining the stay of discovery until the earlier of either the completion of the United States’ criminal investigation of the UBB explosion or January 15, 2013. The court extended the stay several times.
 
On April 25, 2011, the defendants moved to dismiss the operative complaint. On March 27, 2012, the court denied the defendants’ motion to dismiss. On July 16, 2012, the Company filed its answer to the consolidated amended class action complaint.

In October and December 2013, the parties participated in mediation. In December 2013, the parties reached agreement on all material terms of settlement, including a cash payment of $265,000. In February 2014, the parties reached agreement on definitive settlement documentation, subject to court approval, and on February 5, 2014, the lead plaintiffs moved the court for preliminary approval of the settlement. On February 19, 2014, the Court entered an order preliminarily approving the settlement subject to a final determination following a settlement hearing on June 4, 2014. On February 25, 2014, pursuant to the terms of the settlement, the Company made an initial payment of $30,000 into an escrow account and on June 3, 2014, the Company deposited the remaining $235,000 of the settlement amount into the escrow account. The Company received approximately $70,000 of insurance proceeds in connection with the settlement. On June 4, 2014, the Court entered an order approving the settlement and dismissed the class action with prejudice.
Emerald Purported Securities Class Action

On July 13, 2012, a purported class action brought on behalf of a putative class of former Massey stockholders was filed in Boone County, West Virginia Circuit Court. The complaint asserts claims under the Securities Act of 1933, as amended, against the Company and certain of its officers and current and former directors, and generally asserts that the defendants made false statements about the Company’s Emerald mine in its public filings associated with the acquisition of Massey by the Company (the “Massey Acquisition”). The plaintiff seeks, among other relief, an award of compensatory damages in an amount to be proven at trial.

25

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)


On August 16, 2012, the defendants removed the case to the United States District Court for the Southern District of West Virginia. On August 30, 2012, the plaintiff filed a motion to remand the case back to the Circuit Court of Boone County, West Virginia. On September 13, 2012, the defendants filed an opposition to the plaintiff’s motion to remand.

The defendants filed a motion to dismiss the action on October 19, 2012, and the plaintiff filed an opposition to that motion on November 2, 2012. On November 5, 2012, the federal court remanded the case back to the Boone County Circuit Court (without ruling on the pending motion to dismiss). The plaintiff filed an amended complaint in the Boone County Circuit Court on February 6, 2013. The defendants filed motions to dismiss the amended complaint on March 22, 2013 and March 29, 2013. On March 27, 2014, the Boone County Circuit Court held a hearing regarding the motions to dismiss. The motions remain pending.
On April 25, 2014, the named plaintiff in the West Virginia Circuit Court action described above filed a second complaint in Greene County, Pennsylvania, Court of Common Pleas, again asserting claims under the Securities Act of 1933, as amended, against the Company and certain of its officers and current and former directors, and generally asserts that the defendants made false statements about the Company’s Emerald mine in its public filings associated with the Massey Acquisition. The plaintiff seeks, among other relief, an award of compensatory damages in an amount to be proven at trial.

UBB Explosion and Related Investigations and Litigation
 
On April 5, 2010, before the Massey Acquisition by the Company, an explosion occurred at the UBB mine, resulting in the deaths of twenty-nine miners. The Federal Mine Safety and Health Administration (“MSHA”), the Office of Miner’s Health, Safety, and Training of the State of West Virginia (“State”), and the Governor’s Independent Investigation Panel (“GIIP”) initiated investigations into the cause of the UBB explosion and related issues. Additionally, the United States Attorney for the Southern District of West Virginia (the “Office”) commenced a grand jury investigation. The GIIP published its final report on May 19, 2011; MSHA released its final report on December 6, 2011; and the State released its final report on February 23, 2012.
 
On December 6, 2011, the Company, the Office and the United States Department of Justice entered into a Non-Prosecution Agreement (the “Agreement”) resolving the criminal investigation against Massey and its affiliates relating to the UBB explosion and other health and safety related issues at Massey, and the Company also reached a comprehensive settlement with MSHA resolving outstanding civil citations, violations, and orders related to MSHA’s investigation arising from the UBB explosion and other non-UBB related matters involving legacy Massey entities prior to the Massey Acquisition. The Agreement does not resolve individual responsibilities related to the UBB explosion.
 
Under the terms of the Agreement and MSHA settlement, the Company agreed to pay outstanding MSHA fines, and agreed to invest in additional measures designed to improve miner health and safety, provide restitution to the families of the fallen miners and two individuals injured in the UBB explosion, and create a charitable organization to research mine safety. The Company further agreed to cooperate fully with all governmental agencies in all continuing investigations and prosecutions against any individuals that arise out of the UBB explosion and related conduct described in the Agreement until such investigations and prosecutions are concluded.
 
On February 10, 2014, the Company announced that it had fully complied with the terms of the Agreement and that the Office and the United States Department of Justice had closed the Agreement.
The Company cannot predict the outcome of these investigations, including whether or not any individual will become subject to possible criminal and civil penalties or enforcement actions. In order to accommodate these investigations, the UBB mine was initially idled. On April 20, 2012, the Company was authorized by regulatory authorities to close the UBB mine permanently, and on June 19, 2012, the sealing of the mine was completed.

On June 28, 2012, sixteen individuals who claim to have been injured in the UBB explosion filed a petition in the United States District Court for the Southern District of West Virginia to amend or set aside the Agreement. On July 27, 2012, Alpha and Alpha Appalachia filed a motion to dismiss. The injury claims of those sixteen individuals were separately settled in August 2012, and on August 29, 2012, the court ordered that the action be dismissed and stricken from the docket.


26

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in thousands except share and per share data)

On October 19, 2012, the administrators for the estates of three miners who died in the UBB explosion filed an action against Alpha and Alpha Appalachia in the United States District Court for the Southern District of West Virginia claiming they are entitled to “criminal restitution” under the Agreement and amended the complaint on January 23, 2013. On May 10, 2013, the court dismissed the amended complaint. The plaintiffs filed an appeal of the dismissal with the United States Court of Appeals for the Fourth Circuit on June 5, 2013. On October 18, 2013, the Court of Appeals dismissed the appeal for lack of jurisdiction.

On July 17, 2013, the same plaintiffs filed another complaint seeking “criminal restitution” under the Agreement, which defendants moved to dismiss on August 12, 2013. On October 30, 2013, the court granted defendants’ motion to dismiss the complaint with prejudice. The plaintiffs appealed this dismissal order.

On September 17, 2014, the Court of Appeals determined that the plaintiffs had failed to establish that the District Court had jurisdiction over the case. Accordingly, the Court of Appeals vacated the District Court’s dismissal of the case and remanded the case with instructions to dismiss the case without prejudice for lack of jurisdiction. On September 22, 2014, the plaintiffs filed a motion to amend the July 17, 2013 complaint, which is currently pending before the District Court.

Wrongful Death and Personal Injury Suits
 
Twenty of the twenty-nine families of the deceased miners filed wrongful death suits against Massey and certain of its subsidiaries in Boone County Circuit Court and Wyoming County Circuit Court. In addition, as of July 19, 2013, two seriously injured employees had filed personal injury claims against Massey and certain of its subsidiaries in Boone County Circuit Court seeking damages for physical injuries and/or alleged psychiatric injuries, and thirty-nine employees had filed lawsuits against Massey and certain of its subsidiaries in Boone County Circuit Court and Wyoming County Circuit Court alleging emotional distress or personal injuries due to their proximity to the explosion. On April 19, 2012, the Company filed a motion to transfer the Wyoming County lawsuits to Boone County.

On October 19, 2011, the Boone County Circuit Court ordered that the cases pending before it be mediated by a panel of three mediators. These mediations are, per order of the court, strictly confidential. The Company reached agreements to settle with all twenty-nine families of the deceased miners as well as the two employees who were seriously injured. The settlements reached with the families of the deceased miners have received court approval. The settlements relating to the two serious injuries did not require court approval.

On May 4, 2012, the Boone County Circuit Court ordered that the remaining personal injury and emotional distress claims continue to be mediated through July 6, 2012. Until that date, a stay was in place for all remaining cases until further order from the court. The stay was lifted on July 6, 2012 but mediation was ordered to continue. On July 20, 2012, the stay was rein