Attached files

file filename
EX-10.1 - MEMBERSHIP INTEREST PURCHASE AGREEMENT, DATED AS OF JULY 1, 2015 - Alpha Natural Resources, Inc.anr-201563010qexhibit101.htm
EX-95 - MINE SAFETY DISCLOSURE EXHIBIT - Alpha Natural Resources, Inc.anr-2015630x10qexhibit95.htm
EX-31.(A) - CERTIFICATION PURSUANT TO RULE 13A-14(A) UNDER THE SECURITIES EXCHANGE ACT - Alpha Natural Resources, Inc.anr-2015630x10qexhibit31a.htm
EX-32.(A) - CERTIFICATION PURSUANT TO 18 USC 1350 - Alpha Natural Resources, Inc.anr-2015630x10qexhibit32a.htm
EX-31.(B) - CERTIFICATION PURSUANT TO RULE 13A-14(A) UNDER THE SECURITIES EXCHANGE ACT - Alpha Natural Resources, Inc.anr-2015630x10qexhibit31b.htm
EX-32.(B) - CERTIFICATION PURSUANT TO 18 USC 1350 - Alpha Natural Resources, Inc.anr-2015630x10qexhibit32b.htm
EX-12.1 - COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES - Alpha Natural Resources, Inc.anr-201563010qexhibit121.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 June 30, 2015

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.
 
o Large accelerated filer
x 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 July 31, 2015 - 222,511,210



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
June 30,
 
Six Months Ended
June 30,
 
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
Coal revenues
$
674,068

 
$
919,253

 
$
1,400,135

 
$
1,872,073

Freight and handling revenues
79,739

 
116,338

 
179,898

 
250,540

Other revenues
11,260

 
18,507

 
27,023

 
43,258

Total revenues
765,067

 
1,054,098

 
1,607,056

 
2,165,871

Costs and expenses:
 
 
 
 
 
 
 
Cost of coal sales (exclusive of items shown separately below)
713,111

 
827,948

 
1,464,435

 
1,724,532

Freight and handling costs
79,739

 
116,338

 
179,898

 
250,540

Other expenses
6,376

 
6,691

 
11,361

 
21,885

Depreciation, depletion and amortization
170,700

 
191,072

 
329,131

 
391,367

Amortization of acquired intangibles, net
7,472

 
9,464

 
19,917

 
18,743

Selling, general and administrative expenses (exclusive of depreciation, depletion and amortization shown separately above)
27,353

 
43,757

 
52,315

 
84,954

Asset impairment and restructuring
238,606

 
2,590

 
242,726

 
12,089

Goodwill impairment

 
308,651

 

 
308,651

Total costs and expenses
1,243,357

 
1,506,511

 
2,299,783

 
2,812,761

Loss from operations
(478,290
)
 
(452,413
)
 
(692,727
)
 
(646,890
)
Other income (expense):
 
 
 
 
 
 
 
Interest expense
(72,386
)
 
(71,012
)
 
(149,092
)
 
(135,974
)
Interest income
619

 
540

 
1,279

 
1,156

Gain (loss) on early extinguishment of debt

 
(218
)
 
364,153

 
(2,022
)
Gain on sale of equity method investment

 

 

 
250,331

Miscellaneous income, net
2,332

 
958

 
1,862

 
2,114

Total other income (expense), net
(69,435
)
 
(69,732
)
 
218,202

 
115,605

Loss before income taxes
(547,725
)
 
(522,145
)
 
(474,525
)
 
(531,285
)
Income tax benefit (expense)
79,535

 
9,518

 
74,546

 
(37,040
)
Net loss
$
(468,190
)
 
$
(512,627
)
 
$
(399,979
)
 
$
(568,325
)
Basic loss per common share
$
(2.11
)
 
$
(2.32
)
 
$
(1.80
)
 
$
(2.57
)
Diluted loss per common share
$
(2.11
)
 
$
(2.32
)
 
$
(1.80
)
 
$
(2.57
)
Weighted average shares - basic
222,371,939

 
221,376,721

 
222,080,002

 
221,266,066

Weighted average shares - diluted
222,371,939

 
221,376,721

 
222,080,002

 
221,266,066

    

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
June 30,
 
Six Months Ended
June 30,
 
2015
 
2014
 
2015
 
2014
Net loss
$
(468,190
)
 
$
(512,627
)
 
$
(399,979
)
 
$
(568,325
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Amortization of and adjustments to employee benefit costs, net of income tax of ($30,062) and $2,814, and ($30,623) and $3,158 for the three and six months ended June 30, 2015 and 2014, respectively
49,792

 
(4,162
)
 
50,711

 
(4,716
)
Settlement of cash flow hedges, net of income tax of ($100) and $439, and ($166) and $1,039 for the three and six months ended June 30, 2015 and 2014, respectively
159

 
(667
)
 
265

 
(1,577
)
Change in fair value of marketable securities, net of income tax of $2,063 and ($15,353), and $194 and ($35,707) for the three and six months ended June 30, 2015 and 2014, respectively
(3,288
)
 
23,320

 
(309
)
 
54,235

Total other comprehensive income, net of tax
46,663

 
18,491

 
50,667

 
47,942

Total comprehensive loss
$
(421,527
)
 
$
(494,136
)
 
$
(349,312
)
 
$
(520,383
)

See accompanying Notes to Condensed Consolidated Financial Statements.
ALPHA NATURAL RESOURCES INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Amounts in thousands, except share and per share data)
 
June 30,
2015
 
December 31,
2014
 
(Unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
698,236

 
$
741,186

Trade accounts receivable, net
254,288

 
314,015

Inventories, net
237,466

 
237,945

Short-term investments
416,722

 
405,169

Prepaid expenses and other current assets
149,809

 
177,999

Total current assets
1,756,521

 
1,876,314

Property, equipment and mine development costs, net
1,262,460

 
1,425,667

Owned and leased mineral rights and land (net of accumulated depletion of $1,355,037 and $1,265,901, respectively)
6,608,042

 
6,916,307

Other acquired intangibles (net of accumulated amortization of $402,221 and $378,413, respectively)
73,362

 
97,169

Other non-current assets
270,298

 
324,009

Total assets
$
9,970,683

 
$
10,639,466

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
3,690,391

 
$
178,251

Trade accounts payable
184,522

 
216,098

Accrued expenses and other current liabilities
533,103

 
615,200

Total current liabilities
4,408,016

 
1,009,549

Long-term debt
34,439

 
3,622,837

Pension and postretirement medical benefit obligations
1,166,958

 
1,236,986

Asset retirement obligations
582,608

 
538,008

Deferred income taxes
729,034

 
773,466

Other non-current liabilities
409,889

 
471,820

Total liabilities
7,330,944

 
7,652,666

 
 
 
 
Commitments and Contingencies (Note 19)
 
 
 
Stockholders’ Equity
 
 
 
Preferred stock - par value $0.01, 10.0 million shares authorized, none issued

 

Common stock - par value $0.01, 600.0 million shares authorized, 235.1 million issued and 222.5 million outstanding at June 30, 2015 and 233.7 million issued and 221.6 million outstanding at December 31, 2014
2,351

 
2,337

Additional paid-in capital
8,213,778

 
8,211,122

Accumulated other comprehensive loss
(241,034
)
 
(291,701
)
Treasury stock, at cost: 12.6 million and 12.1 million shares at June 30, 2015 and December 31, 2014, respectively
(273,617
)
 
(273,198
)
Accumulated deficit
(5,061,739
)
 
(4,661,760
)
Total stockholders’ equity
2,639,739

 
2,986,800

Total liabilities and stockholders’ equity
$
9,970,683

 
$
10,639,466


See accompanying Notes to Condensed Consolidated Financial Statements.

2


ALPHA NATURAL RESOURCES INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(Amounts in thousands)
 
Six Months Ended
June 30,
 
2015
 
2014
Operating activities:
 
 
 
Net loss
$
(399,979
)
 
$
(568,325
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation, depletion, accretion and amortization
399,885

 
447,802

Amortization of acquired intangibles, net
19,917

 
18,743

Mark-to-market adjustments for derivatives
3,442

 
(4,010
)
Stock-based compensation
2,319

 
11,997

Goodwill impairment

 
308,651

Asset impairment and restructuring
242,726

 
12,089

Employee benefit plans, net
26,293

 
28,047

(Gain) loss on early extinguishment of debt
(364,153
)
 
2,022

Gain on sale of equity method investment

 
(250,331
)
Gain on sales of marketable equity securities
(3,380
)
 

Deferred income taxes
(75,285
)
 
41,761

Other, net
5,199

 
8,980

Changes in operating assets and liabilities:
 
 
 
Trade accounts receivable, net
58,197

 
(19,622
)
Inventories, net
(4,361
)
 
(10,198
)
Prepaid expenses and other current assets
(7,775
)
 
76,102

Other non-current assets
1,646

 
8,145

Trade accounts payable
(35,257
)
 
28,242

Accrued expenses and other current liabilities
(89,551
)
 
(345,589
)
Pension and postretirement medical benefit obligations
(17,066
)
 
(18,549
)
Asset retirement obligations
(19,948
)
 
(25,989
)
Other non-current liabilities
(19,162
)
 
(20,977
)
Net cash used in operating activities
(276,293
)
 
(271,009
)
Investing activities:
 
 
 
Capital expenditures
(66,451
)
 
(82,833
)
Purchases of investments
(379,687
)
 
(333,497
)
Sales of investments
413,404

 
298,180

Proceeds from exchange of equity method investment, net

 
96,732

Proceeds from sale of property, plant and equipment
7,986

 
3,271

Net cash used in investing activities
(24,748
)
 
(18,147
)
Financing activities:
 
 
 
Proceeds from borrowings on long-term debt
658,646

 
500,000

Principal repayments of long-term debt
(379,509
)
 
(34,431
)
Principal repayments of capital lease obligations
(12,992
)
 
(8,574
)
Debt issuance and modification costs
(6,815
)
 
(16,494
)
Common stock repurchases
(420
)
 
(1,162
)
Other
(819
)
 
(1,326
)
Net cash provided by financing activities
258,091

 
438,013

Net (decrease) increase in cash and cash equivalents
(42,950
)
 
148,857

Cash and cash equivalents at beginning of period
741,186

 
619,644

Cash and cash equivalents at end of period
$
698,236

 
$
768,501

Supplemental disclosure of non-cash investing and financing activities:
Accrued capital expenditures
$
28,837

 
$
20,260


See accompanying Notes to Condensed Consolidated Financial Statements.

3


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

(1) Chapter 11 Reorganization Filings

Business

Alpha Natural Resources, Inc. and its consolidated subsidiaries (the “Company” or “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.

Chapter 11 Reorganization Filings

On August 3, 2015 (the “Petition Date”), Alpha Natural Resources, Inc. and each of its wholly-owned domestic subsidiaries other than ANR Second Receivables Funding LLC (together with the Company, the “Debtors”) filed voluntary petitions for relief (the “Bankruptcy Filing”) under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Eastern District of Virginia (the “Bankruptcy Court”), thereby commencing the Chapter 11 cases captioned as In re Alpha Natural Resources, Inc., et al., Case No. 15‑33895 (Bankr. E.D. Va.). The Company’s foreign subsidiaries (collectively, the “Non-Filing Entities”) were not part of the Bankruptcy Filing. The Debtors will continue to operate their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court. The Non-Filing Entities will continue to operate in the ordinary course of business.

The Bankruptcy Filing is intended to permit the Debtors to restructure their debts and reorganize their businesses while under the various protections afforded by the Bankruptcy Code. The Company’s goal is to develop and implement a plan of reorganization that meets the standards for confirmation under the Bankruptcy Code. Confirmation of a plan of reorganization could materially alter the classifications and amounts reported in the Company’s consolidated financial statements, which do not give effect to any adjustments to the carrying values of assets or amounts of liabilities that might be necessary as a consequence of a confirmation of a plan of reorganization or other arrangement or the effect of any operational changes that may be implemented.

Operation and Implication of the Bankruptcy Filing

Under Section 362 of the Bankruptcy Code, the filing of voluntary bankruptcy petitions by the Debtors automatically stayed most actions against the Debtors, including most actions to collect indebtedness incurred prior to the Petition Date or to exercise control over the Debtors’ property. Accordingly, although the Bankruptcy Filing triggered defaults and acceleration of repayment obligations for substantially all of the Debtors’ debt obligations, and also triggered defaults under various other contracts, creditors are stayed from taking any actions as a result of such defaults. Absent an order of the Bankruptcy Court, substantially all of the Debtors’ pre-petition liabilities are subject to compromise and settlement pursuant to a confirmed plan of reorganization. As a result of the Bankruptcy Filing, the realization of assets and the satisfaction of liabilities are subject to uncertainty. The Debtors, operating as debtors-in-possession under the Bankruptcy Code, may, subject to approval of the Bankruptcy Court, sell or otherwise dispose of assets and liquidate, compromise or settle liabilities for amounts other than those reflected in the consolidated financial statements. Further, a confirmed plan of reorganization or other arrangement may materially change the amounts and classifications in the Company’s consolidated financial statements.

On the Petition Date, the Debtors filed a number of motions with the Bankruptcy Court generally designed to stabilize their operations and make the transition into Chapter 11 as seamless as possible. Certain of these motions seek authority from the Bankruptcy Court for the Debtors to make payments upon, or otherwise honor, certain pre-petition obligations (e.g., obligations related to certain employee wages, salaries and benefits and certain vendors and other providers essential to the Debtors' businesses). On the Petition Date, the Debtors also filed applications and motions, as applicable, seeking approval of the proposed retention of certain legal and financial professionals to advise them in connection with the Bankruptcy Filing and certain other professionals to provide services and advice in the ordinary course of business, which motions and applications will be considered by the Bankruptcy Court at a future hearing. From time to time, the Debtors may seek Bankruptcy Court approval to retain additional professionals.

Description of Financing

4



The Debtors also filed a motion (the “DIP Motion”) seeking authorization to use cash collateral and to approve financing (the “DIP Financing”) under a debtor-in-possession financing agreement (the “DIP Credit Agreement”) with certain lenders, including certain of the Debtors’ prepetition lenders to provide additional liquidity in the Debtors’ chapter 11 cases. The proposed DIP Financing pending before the Bankruptcy Court for approval consists of (i) a term loan not to exceed $300,000, secured by substantially all of the assets of the Debtors, which would be used to fund operations and to cash collateralize certain existing letters of credit (the “DIP Term Loan Facility”), (ii) a term letter of credit facility in an amount up to $100,000 (the “DIP Term LC Facility”), and (iii) a bonding facility in an amount up to $100,000 (which may be increased with the consent of certain of the lenders) (the “DIP Bonding Facility”). The DIP Bonding Facility, if approved, would provide the Debtors the ability to satisfy bonding requests by governmental agencies under state reclamation laws in the form of either an allowed “superpriority” administrative expense claim under Section 364 of the Bankruptcy Code in the chapter 11 cases, or the posting of a cash collateralized letter of credit.

To the extent the DIP Credit Agreement is approved by the Bankruptcy Court and becomes effective by its terms, the DIP Credit Agreement would allow the Debtors, on a single occasion, to request the addition to the DIP Financing of an asset based revolving credit facility having aggregate commitments not to exceed $200,000 (a “Future DIP ABL Facility”). Any Future DIP ABL Facility would have the same maturity date as the DIP Term Loan Facility and liquidity would be made available thereunder based on eligibility criteria and borrowing base calculations (including advance rates and reserves) as set forth therein. The Future DIP ABL Facility would include such other customary terms and conditions as are agreed by the parties, and the effectiveness of the Future DIP ABL Facility would be subject to documentation of an amendment to the DIP Credit Agreement, the entry of an appropriate order of the Bankruptcy Court approving the facility, and other customary conditions precedent.

The DIP Financing also contemplates a last-out letter of credit replacement facility in an aggregate undrawn amount of approximately $192,000 (the “DIP LC Roll-Up Facility”). The letters of credit under the DIP LC Roll-Up Facility, if approved, would be used to “roll-up” certain letters of credit that were outstanding under the Debtors’ existing prepetition secured credit facility as of the Petition Date. In the DIP Motion, the Debtors have sought authorization from the Bankruptcy Court to enter into the DIP LC Roll-Up Facility, subject to court approval and documentation.
    
The DIP Financing has not been approved by the Bankruptcy Court at this time, and the Debtors’ ability to access liquidity under the DIP Financing is subject to Bankruptcy Court approval. Additionally, the proposed terms of the DIP Financing set forth herein may change prior to any approval by the Bankruptcy Court. There can be no certainty that the Bankruptcy Court will approve the DIP Financing.

Plan of Reorganization

For the Debtors to emerge successfully from Chapter 11, they must obtain the Bankruptcy Court’s approval of a plan of reorganization, which will enable them to transition from Chapter 11 into ordinary course operations as reorganized entities outside of bankruptcy. A plan of reorganization determines the rights and treatment of claims of various creditors and security holders, and is subject to the ultimate outcome of negotiations and Bankruptcy Court decisions ongoing through the date on which the plan of reorganization is confirmed.

Although the Debtors' goal is to file a plan of reorganization, they may determine that it is in the best interests of their Chapter 11 estates and stakeholders to seek Bankruptcy Court approval of a sale of all or a portion of their assets pursuant to Section 363 of the Bankruptcy Code (or to seek confirmation of a plan of reorganization providing for such a sale or other arrangement).

The Debtors intend to propose a plan of reorganization on or prior to the applicable date required under the Bankruptcy Code, as the same may be extended with approval of the Bankruptcy Court. The Debtors presently expect that any proposed plan of reorganization will provide, among other things, for mechanisms for the settlement of claims against the Debtors’ estates, treatment of the Debtors' existing equity and debt holders, and certain corporate governance and administrative matters pertaining to the reorganized Debtors. A proposed plan of reorganization filed with the Bankruptcy Court likely will incorporate provisions arising out of the Debtors' discussions with their creditors and other interested parties, and likely will be further revised thereafter in response to creditor claims and objections, the requirements of the Bankruptcy Code or the direction or orders of the Bankruptcy Court. There can be no assurance that the Debtors will be able to secure approval for their proposed plan of reorganization from the Bankruptcy Court.

Going Concern


5


The Company incurred a net loss for the years ended 2014, 2013 and, 2012 and had an accumulated deficit as of December 31, 2014 and 2013. To improve the Company’s performance and address market challenges, the Company is developing a strategic plan for the ongoing operation of the Company’s business. Successful implementation of the Company’s plan, however, is subject to numerous risks and uncertainties. In addition, the increasingly challenging market and regulatory conditions under which the Company operates have negatively impacted the Company’s results of operations and cash flows and may continue to do so in the future. These factors raise substantial doubt about the Company’s ability to continue as a going concern within the next 12 months.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern and contemplate the realization of assets and the satisfaction of liabilities in the normal course of business. The Company’s ability to continue as a going concern is contingent upon the Company’s ability to comply with the financial and other covenants contained in the DIP Credit Agreement, the Bankruptcy Court’s approval of the Debtors' plan of reorganization and the reorganized Debtors' ability to successfully implement their plan and obtain any necessary exit financing, among other factors. As a result of the Bankruptcy Filing, the realization of assets and the satisfaction of liabilities are subject to uncertainty. While operating as debtors-in-possession under Chapter 11, the Debtors may sell or otherwise dispose of or liquidate assets or settle liabilities, subject to the approval of the Bankruptcy Court or as otherwise permitted in the ordinary course of business (and subject to restrictions and mandatory prepayment provisions contained in the DIP Credit Agreement), for amounts other than those reflected in the accompanying consolidated financial statements. Further, the Debtors' plan of reorganization could materially change the amounts and classifications of assets and liabilities reported in the consolidated financial statements. The accompanying consolidated financial statements do not include any adjustments related to the recoverability and classification of assets or the amounts and classification of liabilities or any other adjustments that might be necessary should the Company be unable to continue as a going concern or as a consequence of the Bankruptcy Filing.

(2) 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 six months ended June 30, 2015 are not necessarily indicative of the results to be expected for the year ending December 31, 2015 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, 2014.

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 7, 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-03, Interest - Imputation of Interest (“ASU 2015-03”). The standard requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with debt discounts or premiums. ASU 2015-03 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. Early adoption was permitted and the Company adopted ASU 2015-03 during the three months ended March 31, 2015. Amounts reported as of December 31, 2014 have been reclassed to conform to the current year presentation. See Note 11.

(3) Asset Impairment and Restructuring


6

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

U.S. GAAP requires that long-lived asset groups that are held and used should be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset groups might not be recoverable. During the
three months ended June 30, 2015, given significant weakening in coal markets combined with the additional idling of coal mines, the Company determined that indicators of impairment were present for its coal related long-lived asset groups and performed impairment tests as of June 1, 2015. The impairment testing indicated that undiscounted cash flows were less than the carrying value for certain asset groups. The Company estimated the fair value of these asset groups generally using a discounted cash flow analysis utilizing market-participant assumptions. The carrying values of these asset groups exceeded their fair value and accordingly, the Company recorded asset impairment charges totaling $228,222 of which $227,698 was recorded for asset groups in our Eastern Coal Operations and $524 was recorded for an asset group in the Company's All Other category. The asset impairment charges reduced the carrying values of mineral reserves by $209,802 and property, plant and equipment by $18,420. The asset impairments established a new cost basis on which future depreciation, depletion and amortization will be based.

During the three and six months ended June 30, 2015, the Company recorded severance expenses of $4,458 and $8,578, respectively. Additionally, the Company recorded impairment expenses of $5,926 related to certain other non-current assets during the three and six months ended June 30, 2015.

The Company recorded severance expenses of $1,664 and $2,398, and impairment expenses of $926 and $9,723 related to certain other non-current assets within the Company’s All Other category during the three and six months ended June 30, 2014, respectively. Additionally, the Company recorded other expenses of ($32) during the six months ended June 30, 2014.

(4) Accumulated Other Comprehensive Income (Loss)

The following table summarizes the changes to accumulated other comprehensive income (loss) during the six months ended June 30, 2015 and 2014:

Balance December 31, 2014
 
Other comprehensive
income (loss) before reclassifications
 
Amounts reclassified
from accumulated other comprehensive income (loss)
 
Balance
June 30, 2015
Employee benefit costs
$
(291,118
)
 
$
50,737

 
$
(26
)
 
$
(240,407
)
Cash flow hedges
(400
)
 

 
265

 
(135
)
Available-for-sale marketable securities
(183
)
 
1,768

 
(2,077
)
 
(492
)

$
(291,701
)
 
$
52,505

 
$
(1,838
)
 
$
(241,034
)

 
Balance December 31, 2013
 
Other comprehensive
income (loss) before reclassifications
 
Amounts reclassified
from accumulated other comprehensive income (loss)
 
Balance
June 30, 2014
Employee benefit costs
$
(59,102
)
 
$
(3,603
)
 
$
(1,113
)
 
$
(63,818
)
Cash flow hedges
1,941

 

 
(1,577
)
 
364

Available-for-sale marketable securities
13

 
54,236

 
(1
)
 
54,248

 
$
(57,148
)
 
$
50,633

 
$
(2,691
)
 
$
(9,206
)

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 six months ended June 30, 2015 and 2014:


7

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 June 30, 2015
 
Three Months Ended June 30, 2014
 
 
 
Employee benefit costs:
 
 
 
 
 
     Amortization of actuarial loss
$
790

 
$
35

 
(1) 
     Amortization of prior service credit
(1,356
)
 
(939
)
 
(1) 
     Other
(933
)
 

 
(1) 
Total before income tax
(1,499
)
 
(904
)
 
 
Tax benefit
554

 
345

 
Income tax benefit (expense)
Total, net of tax
$
(945
)
 
$
(559
)
 
 
 
 
 
 
 
 
Cash flow hedges:


 
 
 

     Commodity swaps-coal
$

 
$
(1,087
)
 
Coal revenues
     Commodity swaps-diesel fuel
259

 
(19
)
 
Cost of coal sales
Total before income tax
259

 
(1,106
)
 

Tax (expense) benefit
(100
)
 
439

 
Income tax benefit (expense)
Total, net of tax
$
159

 
$
(667
)
 



 
 
 

Available-for-sale marketable securities:


 
 
 

     Realized losses
$
(3,380
)
 
$

 
Interest income, Miscellaneous income, net
Tax benefit
1,303

 

 
Income tax benefit (expense)
Total, net of tax
$
(2,077
)
 
$

 



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
Six Months Ended June 30, 2015
 
Six Months Ended June 30, 2014
 
 
 
Employee benefit costs:
 
 
 
 
 
     Amortization of actuarial loss
$
3,651

 
$
92

 
(1) 
     Amortization of prior service credit
(2,737
)
 
(1,894
)
 
(1) 
     Other
(933
)
 

 
(1) 
Total before income tax
(19
)
 
(1,802
)
 
 
Tax (expense) benefit
(7
)
 
689

 
Income tax benefit (expense)
Total, net of tax
$
(26
)
 
$
(1,113
)
 
 
 
 
 
 
 
 
Cash flow hedges:
 
 
 
 
 
     Commodity swaps-coal
$

 
$
(2,240
)
 
Coal revenues
     Commodity swaps-diesel fuel
431

 
(376
)
 
Cost of coal sales
Total before income tax
431

 
(2,616
)
 
 
Tax (expense) benefit
(166
)
 
1,039

 
Income tax benefit (expense)
Total, net of tax
$
265

 
$
(1,577
)
 
 
 
 
 
 
 
 
Available-for-sale marketable securities:
 
 
 
 
 
     Realized losses
$
(3,380
)
 
$
(1
)
 
Interest income, Miscellaneous income, net
Tax benefit
1,303

 

 
Income tax benefit (expense)
Total, net of tax
$
(2,077
)
 
$
(1
)
 
 

(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 17.

(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 2.375% convertible senior notes due 2015 (the “2.375% Convertible Notes”) which were outstanding until April 15, 2015 when the notes matured and the outstanding principal amount was repaid, the 3.25% convertible senior notes due 2015 issued by Alpha Appalachia Holdings, Inc. (the “3.25% Convertible Notes”), the Company’s 3.75% convertible senior notes due 2017 (the “3.75% Convertible Notes”), and the Company’s outstanding 4.875% convertible senior notes due 2020 (the “4.875% Convertible Notes”). The 2.375% Convertible Notes (matured and repaid as of April 15, 2015), 3.25% Convertible Notes, 3.75% Convertible Notes, and 4.875% 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, and the effect is dilutive. 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:

9

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

 
June 30,
2015
 
December 31,
2014
Raw coal
$
35,051

 
$
38,301

Saleable coal
128,021

 
121,590

Materials, supplies and other, net
74,394

 
78,054

Total inventories, net
$
237,466

 
$
237,945


(7) Investments

Short-term investments consist of certificates of deposit of $51,864 and $25,451 as of June 30, 2015 and December 31, 2014, respectively, and short-term marketable securities. During the three months ended March 31, 2014, the Company agreed to transfer its 50% interest in Alpha Shale JV to Rice Energy Inc. (“Rice Energy”) in exchange for 9,523,810 shares of Rice Energy common stock and $100,000 of cash. The exchange resulted in a gain of $250,331 in the first quarter of 2014.

Short-term marketable securities consisted of the following:
 
June 30, 2015
 
 
 
Unrealized
 
 
 
Cost
 
Gain
 
Loss
 
Fair value
Short-term marketable securities:
 
 
 
 
 
 
 
U.S. treasury and agency securities (a)
$
63,762

 
$
11

 
$
(3
)
 
$
63,770

Corporate debt securities (a)
301,218

 
14

 
(144
)
 
301,088

Total short-term marketable securities
$
364,980

 
$
25

 
$
(147
)
 
$
364,858

 
 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
Unrealized
 
 
 
Cost
 
Gain
 
Loss
 
Fair value
Short-term marketable securities:
 
 
 
 
 
 
 
U.S. treasury and agency securities (a)
$
80,087

 
$
13

 
$
(7
)
 
$
80,093

Corporate debt securities (a)
299,751

 
5

 
(131
)
 
299,625

Total short-term marketable securities
$
379,838

 
$
18

 
$
(138
)
 
$
379,718

(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:
 
June 30, 2015
 
 
 
Unrealized
 
 
 
Cost
 
Gain
 
Loss
 
Fair value
Long-term marketable securities:
 
 
 
 
 
 
 
Corporate equity securities (a)
$
84,339

 
$

 
$
(683
)
 
$
83,656

Mutual funds held in Rabbi Trust (b)
6,931

 
5,054

 
(2,005
)
 
9,980

Total long-term marketable securities
$
91,270

 
$
5,054

 
$
(2,688
)
 
$
93,636

 
 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
Unrealized
 
 
 
Cost
 
Gain
 
Loss
 
Fair value
Long-term marketable securities:
 
 
 
 
 
 
 
Corporate equity securities (a)
$
127,001

 
$

 
$
(181
)
 
$
126,820

Mutual funds held in rabbi trust (b)
7,433

 
4,661

 
(1,987
)
 
10,107

Total long-term marketable securities
$
134,434

 
$
4,661

 
$
(2,168
)
 
$
136,927


10

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

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

(8) Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following:
 
June 30,
2015
 
December 31,
2014
Prepaid insurance
$
13,504

 
$
11,445

Insurance and indemnification receivables (1)
5,381

 
41,283

Notes and other receivables
13,137

 
6,771

Deferred income taxes - current
54,711

 
54,451

Deferred long wall move expenses
13,370

 
9,309

Refundable income taxes
9,598

 
13,532

Prepaid freight
13,195

 
20,417

Deposits
16,662

 
8,834

Other prepaid expenses
10,251

 
11,957

Total prepaid expenses and other current assets
$
149,809

 
$
177,999

(1) 
See Note 10.

(9) Property, Equipment and Mine Development Costs, net

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

 
June 30,
2015
 
December 31,
2014
Plant and mining equipment
$
3,307,951

 
$
3,351,521

Mine development
260,131

 
281,594

Office equipment, software and other
49,800

 
49,784

Construction in progress
43,572

 
64,212

Total property, equipment and mine development costs
3,661,454

 
3,747,111

Less accumulated depreciation and amortization
2,398,994

 
2,321,444

Total property, equipment and mine development costs, net
$
1,262,460

 
$
1,425,667


During the six months ended June 30, 2015, the Company incurred impairment charges which reduced the carrying values of property, plant, and equipment by $18,420. See Note 3.

(10) Accrued Expenses and Other Current Liabilities
 
Accrued expenses and other current liabilities 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)

 
June 30,
2015
 
December 31,
2014
Wages and employee benefits
$
91,564

 
$
111,627

Current portion of asset retirement obligations
98,702

 
102,493

Taxes other than income taxes
100,202

 
108,504

Interest payable
38,365

 
45,612

Current portion of postretirement medical benefit obligations
46,076

 
46,678

Deferred revenue
12,894

 
27,488

Litigation (1)
11,556

 
51,280

Transportation contract-related obligations
51,275

 
9,635

Other
82,469

 
111,883

Total accrued expenses and other current liabilities
$
533,103

 
$
615,200

(1) The Company has recorded related receivables of $5,381 and $41,283 from insurance coverage and indemnifications in prepaid expenses and other current assets as of June 30, 2015 and December 31, 2014, respectively.
 
(11) Long-Term Debt

Long-term debt consisted of the following:
 
June 30,
2015
 
December 31,
2014
2.375% convertible senior notes due 2015
$

 
$
44,458

3.25% convertible senior notes due 2015
109,201

 
109,201

3.75% convertible senior notes due 2017
262,683

 
345,000

9.75% senior notes due 2018
392,584

 
500,000

6.00% senior notes due 2019
576,874

 
800,000

4.875% convertible senior notes due 2020
276,740

 
345,000

7.50% senior secured second lien notes due 2020
713,647

 
500,000

Term loan due 2020
610,937

 
614,062

6.25% senior notes due 2021
584,929

 
700,000

Revolving credit facility (1)
445,000

 

Other
48,205

 
61,344

Debt discount
(214,690
)
 
(121,295
)
Debt issuance costs
(81,280
)
 
(96,682
)
Total long-term debt
3,724,830

 
3,801,088

Less current portion
(3,690,391
)
 
(178,251
)
Long-term debt, net of current portion
$
34,439

 
$
3,622,837

(1) 
$137,292 of this amount matures on June 30, 2016, and $307,708 of this amount matures on September 30, 2017.


Revolving Credit Facility Draw

The Company is party to the Fifth Amended and Restated Credit Agreement, dated September 24, 2014, by and among the Company, the lenders party thereto and Citicorp North America, Inc., as administrative agent and collateral agent (the “Credit Agreement”). During the three months ended June 30, 2015, the Company borrowed $445,000 under the revolving credit facility of the Credit Agreement. Approximately $137,292 of this amount carries an interest rate of 5.25% and originally matured on June 30, 2016, which is the expiration date of the revolving credit facility commitments of the associated lenders. The remaining approximately $307,708 in borrowings carries an interest rate of 6.25% and originally matured on September 30, 2017, which is the maturity date of the revolving credit facility. See below regarding the effects of the Bankruptcy Filings on these borrowings.

12

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


Acceleration of Debt Obligations; Automatic Stay

In connection with the Bankruptcy Filing and noncompliance with the terms of the Company’s debt instruments and borrowing arrangements, including its Fifth Amended and Restated Credit Agreement, the accompanying condensed consolidated balance sheet as of June 30, 2015 reflects the reclassification of $3,424,023 of the Company’s outstanding long-term debt, net of debt discount and issuance costs, to current liabilities. The Bankruptcy Filing constituted an event of default that accelerated the obligations of the Company and certain of its affiliates under the following debt instruments:

Fifth Amended and Restated Credit Agreement dated as of September 24, 2014 by and among Alpha Natural Resources, Inc., as Borrower, the Lenders party thereto, the Issuing Banks party thereto and Citicorp North America, Inc., as Administrative Agent and as Collateral Agent (as of the Petition Date, outstanding letters of credit of approximately $191,168, revolving facility borrowings in an aggregate principal amount of $445,000 and term loan borrowings in an aggregate principal amount of $610,937, plus accrued and unpaid interest thereon);

Indenture dated as of May 20, 2014 by and among Alpha Natural Resources, Inc., Wilmington Trust, National Association, as Trustee and Wilmington Trust, National Association, as Collateral Agent governing 7.50% Senior Secured Second Lien Notes due 2020 (aggregate principal amount as of the Petition Date of $500,000 plus accrued and unpaid interest thereon);

Indenture dated as of March 23, 2015 by and among Alpha Natural Resources, Inc., Wilmington Trust, National Association, as Trustee and Wilmington Trust, National Association as Series B Collateral Agent governing 7.50% Senior Secured Second Lien Notes due 2020 (Series B) (aggregate principal amount as of the Petition Date of $213,647 plus accrued and unpaid interest thereon);

Base Senior Indenture dated as of August 12, 2008 by and among Massey Energy Company and the Guarantors Party thereto and Wilmington Trust Company, as Trustee;

First Supplemental Indenture dated as of August 12, 2008 to Base Senior Indenture dated as of August 12, 2008, by and among Massey Energy Company and the Guarantors party thereto and Wilmington Trust Company, as Trustee, governing 3.25% Convertible Senior Notes due 2015 (aggregate principal amount as of the Petition Date of $109,201 plus accrued and unpaid interest thereon);

Base Indenture dated as of June 1, 2011 by and among Alpha Natural Resources, Inc. and Union Bank, N.A., as Trustee;

Supplemental Indenture No. 1 dated as of June 1, 2011 to Base Indenture dated as of June 1, 2011, by and among Alpha Natural Resources, Inc. and Union Bank, N.A., as Trustee, governing 6.00% Senior Notes due 2019 and 6.25% Senior Notes due 2021 (aggregate principal amounts as of the Petition Date of $576,874 of 6.00% Senior Notes due 2019 and $584,929 of 6.25% Senior Notes due 2021, plus, in each case, accrued and unpaid interest thereon);

Supplemental Indenture No. 3 dated as of October 11, 2012 to Base Indenture dated as of June 1, 2011, by and among Alpha Natural Resources, Inc. and Union Bank, N.A., as Trustee, governing 9.75% Senior Notes due 2018 (aggregate principal amount as of the Petition Date of $392,584 plus accrued and unpaid interest thereon);

Supplemental Indenture No. 4 dated as of May 13, 2013 to Base Indenture dated as of June 1, 2011, by and among Alpha Natural Resources, Inc. and Union Bank, N.A., as Trustee, governing 3.75% Convertible Senior Notes due 2017 (aggregate principal amount as of the Petition Date of $262,683 plus accrued and unpaid interest thereon);

Supplemental Indenture No. 5 dated as of December 18, 2013 to Base Indenture dated as of June 1, 2011, by and among Alpha Natural Resources, Inc. and Union Bank, N.A., as Trustee, governing 4.875% Convertible Senior Notes due 2020 (aggregate principal amount as of the Petition Date of $276,740 plus accrued and unpaid interest thereon).

Pursuant to the Bankruptcy Code, the Bankruptcy Filing automatically stayed most actions against the Debtors, including most actions to collect indebtedness incurred prior to the Bankruptcy Filing or to exercise control over the Debtors’ property.

13

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

Accordingly, although the Bankruptcy Filing triggered defaults under the debt instruments listed above, creditors are stayed from taking action as a result of these defaults.

Repurchase of Senior Notes and Issuance of 7.50% Senior Secured Second Lien Notes due 2020

During the three months ended March 31, 2015, the Company entered into a series of privately negotiated transactions in which it repurchased $223,126 principal amount of its 6.00% senior notes due 2019, $115,071 principal amount of its 6.25% senior notes due 2021, $107,416 principal amount of its 9.75% senior notes due 2018, $82,317 principal amount of its 3.75% Convertible Notes, and $68,260 principal amount of its 4.875% Convertible Notes and issued $213,647 principal amount of its 7.50% senior secured second lien notes due 2020. The transactions resulted in net cash paid of $144,942 during the three months ended March 31, 2015 and the Company recognized a gain on early extinguishment of debt of $364,153. The Company received $26,663 on April 1, 2015 that was an outstanding receivable as of March 31, 2015 related to the issuance of the 7.50% senior secured second lien notes due 2020, resulting in net cash paid of $118,279 for the transactions. The 7.50% senior secured second lien notes have identical terms to the 7.50% senior secured second lien notes that were issued in May 2014.

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

During the three and six months ended June 30, 2014, the Company completed the repurchase of approximately $2,832 and $21,431, respectively, of its outstanding 2.375% Convertible Notes and approximately $2,930 and $18,981, respectively, of its outstanding 3.25% Convertible Notes and recorded a loss on early extinguishment of debt of $218 and $2,022, respectively.

In April 2015, the 2.375% Convertible Notes matured and the Company paid $44,458 to retire the remaining outstanding principal balance.

(12) Asset Retirement Obligations

The following table summarizes the changes in asset retirement obligations for the six months ended June 30, 2015:
Total asset retirement obligations at December 31, 2014
$
640,501

Accretion for the period
40,476

Revisions in estimated cash flows
20,281

Expenditures for the period
(19,948
)
Total asset retirement obligations at June 30, 2015
$
681,310

Less current portion
(98,702
)
Long-term portion
$
582,608

    
(13) Other Non-current Liabilities
 
Other non-current liabilities consisted of the following:


14

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

 
June 30,
2015
 
December 31,
2014
Self insured workers’ compensation obligations
$
140,869

 
$
137,824

Black lung obligations
139,108

 
144,894

Below-market and other contract-related obligations, net
58,937

 
109,908

Deferred revenue
25,195

 
23,021

Other
45,780

 
56,173

Total other non-current liabilities
$
409,889

 
$
471,820


(14) 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.

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 current debt at fair value as of June 30, 2015 and long-term debt at fair value as of December 31, 2014, respectively.


June 30, 2015

Carrying
Amount
(1)
 
Total Fair
Value
 
Quoted Prices
in Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
3.25% convertible senior notes due 2015
$
109,060

 
$
40,950

 
$
40,950

 
$

 
$

3.75% convertible senior notes due 2017
230,919

 
21,671

 
21,671

 

 

9.75% senior notes due 2018
387,497

 
26,499

 
26,499

 

 

6.00% senior notes due 2019
570,274

 
46,505

 
46,505

 

 

4.875% convertible senior notes due 2020
217,572

 
19,372

 
19,372

 

 

7.50% senior secured second lien notes due 2020
568,036

 
174,139

 
174,139

 

 

Term loan due 2020
574,879

 
460,158

 

 
460,158

 

6.25% senior notes due 2021
576,842

 
40,685

 
40,685

 

 

Revolving credit facility
445,000

 
408,356

 

 
408,356

 

Long-term debt
$
3,680,079

 
$
1,238,335

 
$
369,821

 
$
868,514

 
$



December 31, 2014

Carrying
Amount
(1)
 
Total Fair
Value
 
Quoted Prices
in Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
2.375% convertible senior notes due 2015
$
43,462

 
$
43,368

 
$
43,368

 
$

 
$

3.25% convertible senior notes due 2015
108,225

 
104,014

 
104,014

 

 

3.75% convertible senior notes due 2017
295,544

 
172,500

 
172,500

 

 

9.75% senior notes due 2018
492,129

 
233,430

 
233,430

 

 

6.00% senior notes due 2019
789,679

 
240,000

 
240,000

 

 

4.875% convertible senior notes due 2020
265,874

 
125,494

 
125,494

 

 

7.50% senior secured second lien notes due 2020
488,974

 
320,000

 
320,000

 

 

Term loan due 2020
570,361

 
499,424

 

 
499,424

 

6.25% senior notes due 2021
689,504

 
208,950

 
208,950

 

 

Long-term debt
$
3,743,752

 
$
1,947,180

 
$
1,447,756

 
$
499,424

 
$

(1) 
Net of debt discounts and debt issuance costs.

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 June 30, 2015 and December 31, 2014, 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 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.

15

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

 
June 30, 2015
 
Total Fair
Value
 
Quoted Prices
in Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Financial assets (liabilities):
 
 
 
 
 
 
 
Certificates of deposit
$
51,864

 
$
51,864

 
$

 
$

U.S. treasury and agency securities
$
63,770

 
$
63,770

 
$

 
$

Mutual funds held in Rabbi Trust
$
9,980

 
$
9,980

 
$

 
$

Corporate equity securities
$
83,656

 
$
83,656

 
$

 
$

Corporate debt securities
$
301,088

 
$

 
$
301,088

 
$

Forward coal sales
$
865

 
$

 
$
865

 
$

Commodity swaps
$
(16,456
)
 
$

 
$
(16,456
)
 
$


 
December 31, 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):
 
 
 
 
 
 
 
Certificates of deposit
$
25,451

 
$
25,451

 
$

 
$

U.S. treasury and agency securities
$
80,093

 
$
80,093

 
$

 
$

Mutual funds held in Rabbi Trust
$
10,107

 
$
10,107

 
$

 
$

Corporate equity securities
$
126,820

 
$
126,820

 
$

 
$

Corporate debt securities
$
299,625

 
$

 
$
299,625

 
$

Forward coal sales
$
760

 
$

 
$
760

 
$

Commodity swaps
$
(23,614
)
 
$

 
$
(23,614
)
 
$


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, Certificates of Deposit, 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 which could result in different estimates of fair value.
 

16

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, annually, when applicable.

Commodity Swaps - On an annual basis, 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. On an interim basis, the fair values of commodity swaps are estimated using broker statement valuations.

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 terms, maturities and risk.

Revolving Credit Facility - The fair value of the outstanding portion of the revolving credit facility was derived by discounting to present value the future expected cash flows. The discount rate was derived using the interest rate that similarly-secured debt instruments, within the Company’s debt profile, were yielding in observable market transactions on June 30, 2015.


17

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

(15) Derivative Financial Instruments
  
Forward Contracts

In some instances, the Company manages price risk for indexed coal sales and purchases through the use of coal hedge 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 4% of cost of coal sales for the six months ended June 30, 2015. The Company is subject to the risk of price volatility for this commodity and as a part of its risk management strategy, the Company has entered 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 June 30, 2015, the Company had swap agreements outstanding to hedge the variable cash flows related to 68% and 37% of anticipated diesel fuel usage for the remaining six months of 2015 and calendar year 2016, respectively. The average fixed price for these diesel fuel swaps is $2.49 per gallon and $2.28 per gallon for the remaining six months of 2015 and calendar year 2016, respectively. All cash flows associated with derivative instruments are classified as operating cash flows in the Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2015 and 2014.

The following tables present the fair values and location of the Company’s derivative instruments within the Condensed Consolidated Balance Sheets:
 
 
 
Asset Derivatives
Derivatives not designated as
cash flow hedging instruments
Statement of Financial Position Location
 
June 30,
2015
 
December 31,
2014
Commodity swaps
Prepaid expenses and other current assets
 
$

 
$
429

Forward coal sales
Prepaid expenses and other current assets
 
865

 
760

Total asset derivatives
 
 
$
865

 
$
1,189


 
 
 
Liability Derivatives
Derivatives not designated as
cash flow hedging instruments
Statement of Financial Position Location
 
June 30,
2015
 
December 31,
2014
Commodity swaps
Other non-current liabilities
 
$
1,924

 
$
3,022

Commodity swaps
Accrued expenses and other current liabilities
 
14,532

 
21,021

Total liability derivatives
 
 
$
16,456

 
$
24,043


The following tables present the gains and losses from derivative instruments for the six months ended June 30, 2015 and 2014 and their location within the Condensed Consolidated Financial Statements:

Derivatives designated as
cash flow hedging instruments
 
Gain (loss) reclassified
from accumulated other
comprehensive income (loss) to earnings
 
2015
 
2014
Commodity swaps (1) (2)
 
$
(265
)
 
$
1,577


18

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

(1) 
Amounts included in cost of coal sales and coal revenues in the Condensed Consolidated Statements of Operations.
(2) 
Net of tax.

Derivatives not designated as
cash flow hedging instruments
 
Gain (loss) recorded in earnings
 
Three Months Ended June 30,
 
Six Months Ended
June 30,
 
2015
 
2014
 
2015
 
2014
Forward coal sales (1)
 
$
(256
)
 
$
(572
)
 
$
105

 
$
1,804

Forward coal purchases (1)
 

 
16

 

 

Commodity swaps (2)
 
(1,339
)
 
3,806

 
(3,547
)
 
2,206

 
 
$
(1,595
)
 
$
3,250

 
$
(3,442
)
 
$
4,010

(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 $135, net of tax, to earnings.

(16) Income Taxes

For the six months ended June 30, 2015, the Company recorded income tax benefit of $74,546 on a loss before income taxes of $474,525. The income tax benefit differs from the expected statutory amount primarily due to an increase in the valuation allowance. For the six months ended June 30, 2014, the Company recorded income tax expense of $37,040 on a loss before income taxes of $531,285. The income tax expense differs from the expected statutory amount primarily due to an increase in the valuation allowance and non-deductible goodwill impairment expense.

As a result of generating a loss before income taxes during the six months ended June 30, 2015, the Company recorded an increase of $108,297 to its deferred tax asset valuation allowance. 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 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 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.

(17) 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 cost (credit) are as follows:

19

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
June 30,
 
Six Months Ended
June 30,
 
2015
 
2014
 
2015
 
2014
Interest cost
$
7,578

 
$
9,577

 
$
15,126

 
$
15,605

Expected return on plan assets
(8,691
)
 
(10,264
)
 
(17,409
)
 
(17,603
)
Amortization of net actuarial loss
523

 
89

 
1,062

 
89

Loss on settlement
702

 

 
702

 

Net periodic benefit cost (credit)
$
112

 
$
(598
)
 
$
(519
)
 
$
(1,909
)

Components of Net Periodic Costs of Other Postretirement Benefit Plans

The components of net periodic benefit cost are as follows:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2015
 
2014
 
2015
 
2014
Service cost
$
1,808

 
$
2,158

 
$
4,624

 
$
5,842

Interest cost
9,727

 
10,962

 
20,067

 
21,446

Amortization of prior service credit
(1,609
)
 
(939
)
 
(3,245
)
 
(1,894
)
Amortization of net actuarial (gain) loss
(34
)
 

 
1,947

 

Gain on curtailment
(1,665
)
 

 
(1,665
)
 

Net periodic benefit cost
$
8,227

 
$
12,181

 
$
21,728

 
$
25,394


Components of Net Periodic Costs of Black Lung

The components of net periodic benefit cost are as follows:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2015
 
2014
 
2015
 
2014
Service cost
$
433

 
$
382

 
$
987

 
$
1,076

Interest cost
1,453

 
1,875

 
3,068

 
3,599

Expected return on plan assets
(75
)
 
(92
)
 
(151
)
 
(116
)
Amortization of prior service cost
253

 

 
508

 

Amortization of net actuarial (gain) loss
301

 
(54
)
 
642

 
3

Loss on curtailment
30

 

 
30

 

Net periodic benefit cost
$
2,395

 
$
2,111

 
$
5,084

 
$
4,562


The Company idled mining operations during the six months ended June 30, 2015, which resulted in corresponding reductions to the workforce. In connection with these reductions, the Company remeasured its obligations under its retiree medical and black lung obligations. The discount rate was also updated for the retiree medical and black lung plans. The remeasured discount rates for the retiree medical and black lung plans are 4.15% and 4.12%, respectively. As a result, the Company reduced its liabilities retiree medical and black lung obligations by $30,598 and $4,863, respectively, with an offset recorded in accumulated other comprehensive income (loss).

(18) Stock-Based Compensation Awards

The Amended and Restated 2012 Long-Term Incentive Plan is currently authorized for the issuance of awards of up to 13,100,000 shares of common stock, and as of June 30, 2015, 4,314,987 shares of common stock were available for grant under the plan.


20

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

During the six months ended June 30, 2015, the Company awarded certain of its executives and key employees 3,460,612 time-based restricted share units under its existing stock plans. Additionally, during the six months ended June 30, 2015, the Company awarded certain of its executives and key employees 9,942,699 time-based restricted cash units which are accounted for as liability awards and subject to variable accounting. The Company’s liability for all outstanding liability awards totaled $469 as of June 30, 2015.

The time-based units granted during the six months ended June 30, 2015, subject to continued employment, cliff vest after two or three years from grant (with accelerated vesting upon a change of control and certain retirement scenarios).

At June 30, 2015, 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 $2,728 and $7,811 for the three months ended June 30, 2015 and 2014, respectively. Stock-based compensation expense totaled $2,319 and $13,921 for the six months ended June 30, 2015 and 2014, respectively. For the three months ended June 30, 2015 and 2014, $2,279 and $5,935, respectively, of stock-based compensation expense was reported as selling, general and administrative expenses, and $449 and $1,876, respectively, of stock-based compensation expense was recorded as cost of coal sales. For the six months ended June 30, 2015 and 2014, $624 and $10,264, respectively, of stock-based compensation expense was reported as selling, general and administrative expenses, and $1,695 and $3,657, respectively, of stock-based compensation expense was recorded as cost of coal sales. There was a decrease in stock compensation expense for the three months ended March 31, 2015 related to the forfeiture of awards for an executive who left the company in January 2015.

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 six months ended June 30, 2015 and 2014, the Company repurchased 418,361 and 220,465, respectively, of common shares from employees at an average price paid per share of $1.00 and $5.27, respectively.

(19) 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 also has obligations under certain coal transportation agreements that contain minimum quantities to be shipped each year.

 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.
 
(c) Guarantees and Financial Instruments with Off-Balance Sheet Risk

21

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

 
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. As of June 30, 2015, we had outstanding surety bonds with a total face amount of $366,574 to secure various obligations and commitments and we had self bonding guarantees in the amount of $673,927.

The Company’s use of self-bonding guarantees requires it to maintain compliance with certain financial ratios. On May 26, 2015, Alpha Coal West, Inc., a wholly-owned direct subsidiary of the Company was notified by the Wyoming Department of Environmental Quality Division (“LQD”) that the LQD believes neither the Company nor Alpha Coal West, Inc. qualifies under the self-bonding program in the state. The Company has appealed this assessment. As of June 30, 2015, the Company believes that it was not in compliance with the financial ratios required by each of the jurisdictions in which it utilizes self-bonding. The Company nonetheless plans to pursue all available alternatives to permit the continued use of self-bonding. In the event that our self-bonding capacity or additional surety bonds become unavailable or our surety bond providers require additional collateral, however, we would seek to secure our obligations with letters of credit, cash deposits or other suitable forms of collateral. Our failure to maintain, or inability to acquire, surety bonds or to provide a suitable alternative would have a material adverse effect on our liquidity. These failures could result from a variety of factors including lack of availability, higher cost or unfavorable market terms of new surety bonds, and the exercise by third-party surety bond issuers of their right to refuse to renew the surety.

As of June 30, 2015, as collateral for various obligations and commitments, we had $173,703 of letters of credit in place under our Fifth Amended and Restated Credit Agreement and $102,791 of letters of credit in place under our accounts receivable securitization 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.


22

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 (income) expense, net of expected insurance recoveries, associated with litigation-related reserves of $2,107 and ($17,980) during the three months ended June 30, 2015 and 2014, respectively.

Chapter 11 Filing

On August 3, 2015, Alpha Natural Resources, Inc. and each of its wholly-owned domestic subsidiaries other than ANR Second Receivables Funding LLC filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code. See Note 1 for additional information. As a result of the Bankruptcy Filing, much of the pending litigation against the Debtors is stayed. Subject to certain exceptions and approval by the Bankruptcy Court, no party can take further actions to recover pre-petition claims against the Debtors.
 
UBB Explosion and Related Investigations and Litigation
 
On April 5, 2010, prior to the acquisition of Massey Energy Company by the Company (the “Massey Acquisition”), an explosion occurred at Massey’s Upper Big Branch (“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. The Company cannot predict whether or not any individual will become subject to possible criminal and civil penalties or enforcement actions as a result of these investigations. 

The UBB mine was idled in order to accommodate these investigations. 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.

Non-Prosecution Agreement

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 did 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.
Wrongful Death and Personal Injury Suits

23

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

Twenty of the twenty-nine families of the deceased miners filed wrongful death suits against Massey and certain of its subsidiaries in West Virginia, in Boone County Circuit Court and Wyoming County Circuit Court. In addition, two seriously injured employees 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 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. 
 
Through mediation ordered by the Boone County Circuit Court, the Company reached agreements to settle with all twenty-nine families of the deceased miners, the two employees who were seriously injured and thirty-nine employees who filed lawsuits for emotional distress or personal injuries. The settlements reached with the families of the deceased miners were approved by the court, and the other settlements did not require court approval.

On April 5, 2012, the family of one of the deceased miners filed a class action suit in Boone County Circuit Court, purportedly on behalf of the families that settled their claims prior to the mediation, alleging fraudulent inducement into a contract, naming as defendants Massey, the Company and certain of its subsidiaries, the Company’s CEO and the Company’s Board of Directors.
On June 17, 2013 and August 29, 2013, two complaints were filed in Boone County Circuit Court alleging personal injury claims relating to the UBB explosion. In July 2014, the Circuit Court granted the Company’s motion to dismiss in one of the two cases. The second motion was denied in October 2014.

On July 17, 2013, 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, which defendants moved to dismiss. In October 2013, the court granted defendants’ motion to dismiss the complaint with prejudice. The plaintiffs appealed this dismissal order. In September 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 October 22, 2014, the District Court entered an order dismissing the plaintiffs’ complaint without prejudice and terminating all pending motions as moot.

Plaintiffs filed a new complaint on November 7, 2014. Defendants subsequently filed a motion to dismiss and plaintiffs filed a motion for leave to file a surreply memorandum. On April 6, 2015, the District Court granted the defendants’ motion to dismiss, and the plaintiffs filed a notice of appeal with the Court of Appeals for the Fourth Circuit, which is now reviewing the parties’ initial briefs.

Delaware Chancery Court Derivative Suit
 
In a case filed on April 23, 2010 in Delaware Chancery Court, In re Massey Energy Company Derivative and Class Action Litigation (“In re Massey”), a number of purported former Massey stockholders (the “Delaware Plaintiffs”) allege, purportedly on behalf of Massey, that certain former Massey directors and officers breached their fiduciary duties by failing to monitor and oversee Massey’s employees, allegedly resulting in fines against Massey and the explosion at UBB, and by wasting corporate assets by paying allegedly excessive and inflated amounts to former Massey Chairman and Chief Executive Officer Don L. Blankenship as part of his retirement package. The Delaware Plaintiffs also allege, on behalf of a purported class of former Massey stockholders, that certain former Massey directors breached their fiduciary duties by agreeing to the Massey Acquisition. The Delaware Plaintiffs allege that defendants breached their fiduciary duties by failing to secure the best price possible, by failing to secure any downside protection for the acquisition consideration, and by purportedly eliminating the possibility of a superior proposal by agreeing to a “no shop” provision and a termination fee. In addition, the Delaware Plaintiffs allege that defendants agreed to the Massey Acquisition to eliminate the liability that defendants faced on the Delaware Plaintiffs’ derivative claims. Finally, the Delaware Plaintiffs allege that defendants failed to fully disclose all material information necessary for Massey stockholders to cast an informed vote on the Massey Acquisition.

The Delaware Plaintiffs also name the Company and Mountain Merger Sub, Inc. (“Merger Sub”), the Company’s wholly-owned subsidiary created for purposes of effecting the Massey Acquisition, which, at the effective time of the Massey Acquisition, was merged with and into Massey, as defendants. The Delaware Plaintiffs allege that the Company and Merger Sub aided and abetted the former Massey directors’ alleged breaches of fiduciary duty and agreed to orchestrate the Massey Acquisition for the purpose of eliminating the former Massey directors’ potential liability on the derivative claims. Two

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

additional putative class actions were brought against Massey, certain former Massey directors and officers, the Company and Merger Sub in the Delaware Court of Chancery following the announcement of the Massey Acquisition, which were consolidated for all purposes with In re Massey in February 2011.

The Delaware Plaintiffs seek an award against each defendant for restitution and/or compensatory damages, plus pre-judgment interest; an order establishing a litigation trust to preserve the derivative claims asserted in the complaint; and an award of costs, disbursements and reasonable allowances for fees incurred in this action. The Delaware Plaintiffs also sought to enjoin consummation of the Massey Acquisition. The court denied their motion for a preliminary injunction in May 2011.
 
In June 2011, Massey moved to dismiss the Delaware Plaintiffs’ derivative claims on the ground that the Delaware Plaintiffs, as former Massey stockholders, lacked the legal right to pursue those claims, and the Company and Alpha Appalachia Merger Sub moved to dismiss the purported class action claim against them for failure to state a claim upon which relief may be granted. In June 2011, certain former Massey director and officer defendants moved to dismiss the derivative claims and filed answers to the remaining direct claims.
 
In September 2011, the parties submitted a Stipulation Staying Proceedings, which stayed the matter until March 2012, without prejudice to the parties’ right to seek an extension or a termination of the stay by application to the court. The court approved the stipulation and entered the stay that same day. The court extended the stay several times and the most recent stay expired on October 31, 2014.

On October 17, 2014, the Delaware Plaintiffs filed an amended complaint which maintains claims against Massey and certain former Massey directors and officers but no longer asserts claims against the Company or Mountain Merger Sub, Inc. Defendants moved to dismiss on December 5, 2014, and the motion remains pending.

West Virginia State Court Derivative Suit
In a case filed on April 15, 2010 in West Virginia state court, three purported former Massey stockholders (the “West Virginia Plaintiffs”) allege, purportedly on behalf of Massey, that certain former Massey directors and officers breached their fiduciary duties by failing to monitor and oversee Massey’s employees, allegedly resulting in fines against Massey and the explosion at UBB. The West Virginia Plaintiffs seek an award against each defendant and in favor of Massey for the amount of damages sustained by Massey as a result of defendants’ alleged breaches of fiduciary duty and an award to the West Virginia Plaintiffs of the costs and disbursements of the action, including reasonable attorneys’ fees, accountants’ and experts’ fees, costs, and expenses.

In May 2011, the West Virginia Plaintiffs moved for leave to amend their complaint to add Alpha and Merger Sub as additional defendants and to add claims allegedly arising out of the then-proposed Massey Acquisition. In their proposed amended complaint, the West Virginia Plaintiffs allege that certain former Massey directors breached their fiduciary duties by failing to obtain the highest price reasonably available for Massey and by failing to disclose material information to Massey’s then-stockholders in connection with the stockholder vote on the Massey Acquisition. The West Virginia Plaintiffs also allege that Massey, Merger Sub and the Company aided and abetted the former Massey directors’ breaches of fiduciary duty. The West Virginia Plaintiffs further allege that certain former Massey directors wasted corporate assets by failing to maintain sufficient internal controls over Massey’s safety and environmental reporting; failing to properly consider the interests of Massey and its stockholders, including the value of the derivative claims asserted by the West Virginia Plaintiffs in the Massey Acquisition; failing to conduct proper supervision; paying undeserved incentive compensation to certain Massey executive directors, particularly former Massey Chairman and CEO Don L. Blankenship during Massey’s alleged years of noncompliance with safety regulations and more recently as part of Blankenship’s retirement package; incurring millions of dollars in fines due to safety and environmental violations; and incurring potentially hundreds of millions of dollars of legal liability and/or legal costs to defend defendants’ allegedly unlawful actions. Finally, the West Virginia Plaintiffs’ proposed amended complaint alleges that certain former Massey directors were unjustly enriched by their compensation as directors.

In June 2011, the defendants moved to dismiss the West Virginia Plaintiffs’ original complaint, or, alternatively, to stay the case in favor of In re Massey, described above. Defendants also filed an opposition to the West Virginia Plaintiffs’ motion to amend. In November 2013, the court denied the West Virginia Plaintiffs’ motion to amend and granted defendants’ motion to dismiss. The West Virginia Plaintiffs appealed the denial of motion to amend and dismissal to the Supreme Court of Appeals of West Virginia, which remanded the action to the Circuit Court. On November 20, 2014, the Circuit Court entered an order dismissing the suit with prejudice as to the individual defendants and nominal defendant Massey Energy Company (n/k/a Alpha

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

Appalachia Holdings, Inc.). On December 22, 2014, plaintiffs appealed the order to the West Virginia Supreme Court of Appeals, and the appeal remains pending.

Advancement Action

On February 5, 2015, Donald Blankenship, former Massey Chief Executive Officer and Chairman of the Massey Board of Directors, filed an action in Delaware Chancery Court against Alpha and its affiliate Alpha Appalachia Holdings, Inc. (“Alpha Appalachia”) to contest the decision to terminate further advancement of legal fees for Mr. Blankenship in connection with his pending criminal trial in the Southern District of West Virginia. On May 28, 2015, the Court found that Alpha and Alpha Appalachia must continue to advance Mr. Blankenship’s legal fees. A final order was filed on June 5, 2015.

Mine Water Discharge Suits

Selenium Suits

Various affiliates of the Company were previously parties to suits alleging violations of the affiliates’ water discharge permits with regard to selenium. Each of these matters has been settled. These settlements involved immaterial payments by the Company affiliates and undertakings regarding compliance over time with applicable discharge limits.

Other Matters

On December 31, 2012 and January 2, 2013, two separate environmental groups filed citizen’s suits in federal court in the Western District of Pennsylvania against Emerald Coal Resources, L.P., and other of the Company’s subsidiaries, alleging violations of the terms of the subsidiaries’ water discharge permits. The first of these cases was voluntarily dismissed by the plaintiffs in January 2013 and the second case was closed by the Court in June 2014.

On March 27, 2013, the Company’s subsidiary Alex Energy, Inc. (“Alex Energy”) was served with a complaint from the Sierra Club and others alleging improper discharges by Alex Energy into Spruce Run and Road Fork of Robinson Creek in Nicholas County, West Virginia. This case was voluntarily dismissed in July 2014.

Nicewonder Litigation

Affiliated Construction Trades Foundation Litigation

In December 2004, prior to the Company’s acquisition of Nicewonder in October 2005, the Affiliated Construction Trades Foundation (“ACTF”), a division of the West Virginia State Building and Construction Trades Council, brought an action against the West Virginia Department of Transportation, Division of Highways (“WVDOH”) and Nicewonder Contracting, Inc. (“NCI”), which became the Company’s wholly-owned indirect subsidiary as a result of the Nicewonder acquisition, in the Circuit Court of Kanawha County, West Virginia, which was removed to the United States District Court for the Southern District of West Virginia (the “ACTF Litigation”). The plaintiff sought a declaration that the contract between NCI and the State of West Virginia related to NCI’s road construction project for the Red Jacket section of the King Coal Highway (the “Red Jacket Contract”) was illegal as a violation of applicable West Virginia and federal competitive bidding and prevailing wage laws.
 
On September 30, 2009, the District Court issued an order that dismissed for lack of standing all of ACTF’s claims under federal law and remanded the remaining state claims to the Circuit Court of Kanawha County, West Virginia for resolution. On May 7, 2010, the Circuit Court of Kanawha County entered summary judgment in favor of NCI. On June 22, 2011, the West Virginia Supreme Court of Appeals reversed the Circuit Court order granting summary judgment in favor of NCI, and remanded the case back to the Circuit Court for further proceedings. Following remand, ACTF filed a motion for summary judgment, which the Circuit Court denied on November 9, 2011. ACTF challenged the order denying its summary judgment motion to the West Virginia Supreme Court of Appeals.

On June 21, 2012, the West Virginia Supreme Court of Appeals issued an opinion finding that ACTF had standing to pursue its claims and remanded the case back to the Circuit Court of Kanawha County, West Virginia for further proceedings.


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

A settlement between NCI and ACTF was agreed upon in early January 2013, prior to the January 14, 2013 trial date, and the Circuit Court subsequently dismissed the case as to NCI, with prejudice. The Company did not incur any out-of-pocket expenditures in connection with that settlement.

A bench trial proceeded among the remaining parties to the ACTF Litigation and, on February 26, 2013, the Circuit Court of Kanawha County entered an order that ruled against WVDOH in finding that the Red Jacket Contract, as well as the awarding and implementation of that contract, were in violation of West Virginia law because the Red Jacket Contract did not contain a provision whereby WVDOH required payment by NCI of statutory prevailing wages to employees; and WVDOH did not conduct a public bidding process before awarding the Red Jacket Contract to NCI. The time to appeal the order has passed without an appeal having been filed, and the order has become final.

NCI Employee Litigation

On February 7, 2013, the Company received notice of a putative class action lawsuit against NCI filed in the Circuit Court of Mingo County, West Virginia by a former NCI employee (the “NCI Employee Litigation”). The plaintiff in the NCI Employee Litigation is represented by the same attorney who represented the plaintiff in the ACTF Litigation, and the complaint’s allegations raise issues similar to those in the ACTF Litigation and arise from the same Red Jacket Contract that was at issue in the ACTF Litigation. The Company believes that NCI has meritorious defenses to the claims asserted in the NCI Employee Litigation.

NCI filed its answer to the complaint in the NCI Employee Litigation on March 4, 2013. On April 23, 2013, the Circuit Court of Kanawha County, West Virginia, granted NCI’s motion to transfer and entered an agreed order transferring the NCI Employee Litigation from the Circuit Court of Mingo County to the Circuit Court of Kanawha County.

On November 14, 2013, the Circuit Court of Kanawha County granted NCI’s Motion to Certify Questions of Law to the Supreme Court of Appeals of West Virginia, but on June 17, 2014, the Supreme Court declined to review the submitted questions in the absence of a more developed factual record in the lower court. Proceedings in the Circuit Court of Kanawha County, West Virginia therefore resumed. The Circuit Court has scheduled the trial for April 25-29 and May 2-6, 2016.

On October 14, 2014, NCI filed and served a third party complaint against WVDOH seeking a declaration of rights and obligations of the parties. Specifically, the complaint seeks a determination as to whether NCI is entitled to indemnification for any liability it may incur in the NCI Employee Litigation. The complaint also seeks a declaration that the Red Jacket Contract obligates WVDOH to enter into a supplemental agreement with NCI to reimburse NCI for any additional costs incurred, or to be incurred, as a result of the changes to the Red Jacket Contract arising from the February 26, 2013 order entered against WVDOH in the ACTF Litigation, including without limitation any costs and expenses incurred, or to be incurred, by NCI related to the wage and benefit rates for work on the project, including to the extent any such additional costs, damages, statutory penalties, and/or attorney fees are awarded against NCI in the NCI Employee Litigation. WVDOH moved to dismiss the third party complaint on grounds of sovereign immunity and exclusive jurisdiction of the West Virginia Court of Claims.

On February 20, 2015, the Circuit Court of Kanawha County held a hearing on pending matters, including the WVDOH motion to dismiss the third party complaint filed against it by NCI and ruled from the bench that it would grant WVDOH’s motion to dismiss NCI’s third party complaint and thereby dismiss WVDOH from this action. A formal written dismissal order was entered on March 31, 2015. The Company is reviewing this development and evaluating its options.

Fluor Litigation

Alpha Appalachia and certain of its subsidiaries were parties to a number of lawsuits and other legal proceedings related to certain non-coal businesses (the “Prior Business”) previously conducted by its former affiliate Fluor Corporation. Under the terms of the Distribution Agreement entered into by Alpha Appalachia and Fluor as of November 30, 2000 in connection with the spin-off of Fluor by Massey, Fluor agreed to indemnify Massey with respect to all such legal proceedings and assumed defense of the proceedings.

In January 2015, Fluor entered into a settlement agreement with plaintiffs of these proceedings, settling the pending cases on behalf of itself, Alpha Appalachia and its Alpha Appalachia’s subsidiaries. This settlement was funded by Fluor. The Company expects that Fluor will continue to indemnify the Alpha entities with respect to any similar cases not covered by the settlement or that may be asserted in the future.

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ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENT